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

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended March 31, 2020

 

or

 

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

 

Commission File Number: 0-24649

 

Picture 1

 

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Kentucky

 

61-0862051

(State of other jurisdiction of incorporation or organization)

 

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

 

 

601 West Market Street, Louisville, Kentucky

 

40202

(Address of principal executive offices)

 

(Zip Code)

 

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

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 April 30, 2020,  was 18,696,620 and 2,199,851.

 

 

 

 

 

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.

68

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk.

101

 

 

 

Item 4. 

Controls and Procedures.

101

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings.

101

 

 

 

Item 1A. 

Risk Factors.

102

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds.

104

 

 

 

Item 6. 

Exhibits.

105

 

 

 

 

SIGNATURES

106

 

2

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

CARES Act

 

Coronavirus Aid, Relief, and Economic Security Act of 2020

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

TDR

 

Troubled Debt Restructuring

The Captive

 

Republic Insurance Services, Inc.

TPS

 

Trust Preferred Securities

TRS

 

Tax Refund Solutions segment

TRUP

 

TPS Investment

Warehouse

 

Warehouse Lending segment

3

Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2020

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

316,263

 

$

385,303

 

Available-for-sale debt securities, at fair value (amortized cost of $531,974  in 2020 and $467,122 in 2019, allowance for credit losses of $126 in 2020 and $0 in 2019)

 

 

543,859

 

 

471,355

 

Held-to-maturity debt securities (fair value of $59,725 in 2020 and $63,156 in 2019, allowance for credit losses of $171 in 2020 and $0 in 2019)

 

 

61,664

 

 

62,531

 

Equity securities with readily determinable fair value

 

 

2,807

 

 

3,188

 

Mortgage loans held for sale, at fair value

 

 

39,384

 

 

19,224

 

Consumer loans held for sale, at fair value

 

 

3,431

 

 

598

 

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

 

 

12,089

 

 

11,646

 

Loans (loans carried at fair value of $827 in 2020 and $998 in 2019)

 

 

4,515,599

 

 

4,433,151

 

Allowance for credit losses

 

 

(70,431)

 

 

(43,351)

 

Loans, net

 

 

4,445,168

 

 

4,389,800

 

Federal Home Loan Bank stock, at cost

 

 

38,900

 

 

30,831

 

Premises and equipment, net

 

 

44,215

 

 

46,196

 

Right-of-use assets

 

 

34,349

 

 

35,206

 

Goodwill

 

 

16,300

 

 

16,300

 

Other real estate owned

 

 

85

 

 

113

 

Bank owned life insurance

 

 

66,822

 

 

66,433

 

Other assets and accrued interest receivable

 

 

96,697

 

 

81,595

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

5,722,033

 

$

5,620,319

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

1,300,891

 

$

1,033,379

 

Interest-bearing

 

 

2,770,566

 

 

2,752,629

 

Total deposits

 

 

4,071,457

 

 

3,786,008

 

 

 

 

 

 

 

 

 

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

 

 

126,080

 

 

167,617

 

Operating lease liabilities

 

 

35,537

 

 

36,530

 

Federal Home Loan Bank advances

 

 

572,500

 

 

750,000

 

Subordinated note

 

 

41,240

 

 

41,240

 

Other liabilities and accrued interest payable

 

 

91,173

 

 

74,680

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

4,937,987

 

 

4,856,075

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities (Footnote 9)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, no par value

 

 

 —

 

 

 —

 

Class A Common Stock and Class B Common Stock, no par value

 

 

4,890

 

 

4,907

 

Additional paid in capital

 

 

141,928

 

 

142,068

 

Retained earnings

 

 

628,397

 

 

614,171

 

Accumulated other comprehensive income

 

 

8,831

 

 

3,098

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

784,046

 

 

764,244

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

5,722,033

 

$

5,620,319

 

 

See accompanying footnotes to consolidated financial statements.

 

4

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)  

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2020

 

2019

 

INTEREST INCOME:

 

 

 

 

 

 

 

Loans, including fees

 

$

77,513

 

$

76,828

 

Taxable investment securities

 

 

2,783

 

 

3,591

 

Federal Home Loan Bank stock and other

 

 

863

 

 

2,214

 

Total interest income

 

 

81,159

 

 

82,633

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

 

 

6,302

 

 

6,748

 

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

 

 

119

 

 

421

 

Federal Home Loan Bank advances

 

 

1,648

 

 

2,730

 

Subordinated note

 

 

352

 

 

435

 

Total interest expense

 

 

8,421

 

 

10,334

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

72,738

 

 

72,299

 

Credit loss expense

 

 

22,760

 

 

17,231

 

NET INTEREST INCOME AFTER CREDIT LOSS EXPENSE

 

 

49,978

 

 

55,068

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

3,136

 

 

3,303

 

Net refund transfer fees

 

 

15,823

 

 

17,100

 

Mortgage banking income

 

 

4,795

 

 

1,539

 

Interchange fee income

 

 

2,552

 

 

2,757

 

Program fees

 

 

2,624

 

 

1,074

 

Increase in cash surrender value of bank owned life insurance

 

 

389

 

 

382

 

Net gains on other real estate owned

 

 

 3

 

 

130

 

Other

 

 

1,247

 

 

1,132

 

Total noninterest income

 

 

30,569

 

 

27,417

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

26,622

 

 

25,076

 

Occupancy and equipment, net

 

 

6,846

 

 

6,584

 

Communication and transportation

 

 

1,289

 

 

1,161

 

Marketing and development

 

 

833

 

 

1,102

 

FDIC insurance expense

 

 

 —

 

 

448

 

Bank franchise tax expense

 

 

2,506

 

 

2,496

 

Data processing

 

 

2,539

 

 

2,096

 

Interchange related expense

 

 

1,076

 

 

1,315

 

Supplies

 

 

452

 

 

484

 

Other real estate owned and other repossession expense

 

 

18

 

 

46

 

Legal and professional fees

 

 

1,237

 

 

886

 

Other

 

 

3,551

 

 

3,815

 

Total noninterest expense

 

 

46,969

 

 

45,509

 

 

 

 

 

 

 

 

 

INCOME  BEFORE INCOME TAX EXPENSE

 

 

33,578

 

 

36,976

 

INCOME TAX EXPENSE

 

 

6,881

 

 

7,460

 

NET INCOME

 

$

26,697

 

$

29,516

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.29

 

$

1.42

 

Class B Common Stock

 

 

1.17

 

 

1.29

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.28

 

$

1.41

 

Class B Common Stock

 

 

1.16

 

 

1.28

 

 

 

 

 

 

 

 

 

 

See accompanying footnotes to consolidated financial statements.

 

5

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

 

 

 

 

 

 

 

 

Net income

 

$

26,697

 

$

29,516

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

 

(161)

 

 

(69)

 

Reclassification amount for net derivative losses realized in income

 

 

29

 

 

(19)

 

Change in unrealized gain on AFS debt securities

 

 

7,777

 

 

3,659

 

Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings

 

 

 1

 

 

(33)

 

Total other comprehensive income before income tax

 

 

7,646

 

 

3,538

 

Tax effect

 

 

(1,913)

 

 

(744)

 

Total other comprehensive income, net of tax

 

 

5,733

 

 

2,794

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

32,430

 

$

32,310

 

 

See accompanying footnotes to consolidated financial statements.

 

6

Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

    

Class A

    

Class B

    

    

 

    

Additional

    

    

 

    

Other

    

Total

 

 

 

Shares

 

Shares

 

 

 

 

Paid In

 

Retained

 

Comprehensive

 

Stockholders’

 

(in thousands, except per share data)

 

Outstanding

 

Outstanding

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2020

 

18,737

 

2,206

 

$

4,907

 

$

142,068

 

$

614,171

 

$

3,098

 

$

764,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for adoption of ASU 2016-13

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(4,291)

 

 

 —

 

 

(4,291)

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

26,697

 

 

 —

 

 

26,697

 

Net change in accumulated other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,733

 

 

5,733

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares ($0.286 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(5,358)

 

 

 —

 

 

(5,358)

 

Class B Shares ($0.260 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(572)

 

 

 —

 

 

(572)

 

Stock options exercised, net of shares withheld

 

 2

 

 —

 

 

 1

 

 

(43)

 

 

 —

 

 

 —

 

 

(42)

 

Conversion of Class B to Class A Common Shares

 

 6

 

(6)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Repurchase of Class A Common Stock

 

(86)

 

 —

 

 

(20)

 

 

(582)

 

 

(2,250)

 

 

 —

 

 

(2,852)

 

Net change in notes receivable on Class A Common Stock

 

 —

 

 —

 

 

 —

 

 

30

 

 

 —

 

 

 —

 

 

30

 

Deferred compensation - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors

 

 4

 

 —

 

 

 —

 

 

79

 

 

 —

 

 

 —

 

 

79

 

Designated key employees

 

 —

 

 —

 

 

 —

 

 

143

 

 

 —

 

 

 —

 

 

143

 

Employee stock purchase plan - Class A Common Stock

 

 5

 

 —

 

 

 1

 

 

154

 

 

 —

 

 

 —

 

 

155

 

Stock-based awards - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance stock units

 

18

 

 —

 

 

 —

 

 

(200)

 

 

 —

 

 

 —

 

 

(200)

 

Restricted stock

 

 1

 

 —

 

 

 1

 

 

187

 

 

 —

 

 

 —

 

 

188

 

Stock options

 

 —

 

 —

 

 

 —

 

 

92

 

 

 —

 

 

 —

 

 

92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2020

 

18,687

 

2,200

 

$

4,890

 

$

141,928

 

$

628,397

 

$

8,831

 

$

784,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

    

Class A

    

Class B

    

    

 

    

Additional

    

    

 

    

Other

    

Total

 

 

 

Shares

 

Shares

 

 

 

 

Paid In

 

Retained

 

Comprehensive

 

Stockholders’

 

(in thousands, except per share data)

 

Outstanding

 

Outstanding

 

Amount

 

Capital

 

Earnings

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

 

18,675

 

2,213

 

$

4,900

 

$

141,018

 

$

545,013

 

$

(997)

 

$

689,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for adoption of ASU 2016-02

 

 —

 

 —

 

 

 —

 

 

 —

 

 

126

 

 

 —

 

 

126

 

Net income

 

 

 

 

 —

 

 

 —

 

 

29,516

 

 

 

 

29,516

 

Net change in accumulated other comprehensive income

 

 

 

 

 —

 

 

 —

 

 

 

 

2,794

 

 

2,794

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares ($0.264 per share)

 

 

 —

 

 

 

 

 

 

(4,933)

 

 

 

 

(4,933)

 

Class B Shares ($0.240 per share)

 

 

 —

 

 

 

 

 

 

(531)

 

 

 

 

(531)

 

Repurchase of Class A Common Stock

 

(8)

 

 —

 

 

(1)

 

 

(376)

 

 

(2)

 

 

 

 

(379)

 

Net change in notes receivable on Class A Common Stock

 

 

 —

 

 

 —

 

 

(34)

 

 

 

 

 

 

(34)

 

Deferred compensation - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors

 

 5

 

 —

 

 

 —

 

 

65

 

 

 —

 

 

 —

 

 

65

 

Designated key employees

 

 —

 

 —

 

 

 —

 

 

168

 

 

 —

 

 

 —

 

 

168

 

Employee stock purchase plan - Class A Common Stock

 

 3

 

 —

 

 

 —

 

 

121

 

 

 —

 

 

 —

 

 

121

 

Stock-based awards - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance stock units

 

23

 

 

 

 —

 

 

(57)

 

 

 

 

 

 

(57)

 

Restricted stock

 

 —

 

 

 

 —

 

 

180

 

 

 —

 

 

 

 

180

 

Stock options

 

 —

 

 —

 

 

 —

 

 

121

 

 

 

 

 

 

121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2019

 

18,698

 

2,213

 

$

4,899

 

$

141,206

 

$

569,189

 

$

1,797

 

$

717,091

 

 

See accompanying footnotes to consolidated financial statements.

 

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

26,697

 

$

29,516

 

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

 

 

 

 

 

 

 

Net accretion (amortization) on investment securities

 

 

330

 

 

(8)

 

Net accretion on loans and amortization of core deposit intangible and operating lease components

 

 

(799)

 

 

(596)

 

Unrealized (gains) losses on equity securities with readily determinable fair value

 

 

381

 

 

(289)

 

Depreciation of premises and equipment

 

 

2,549

 

 

2,263

 

Amortization of mortgage servicing rights

 

 

585

 

 

322

 

Impairment of mortgage servicing rights

 

 

100

 

 

 —

 

Credit loss expense for on-balance sheet exposures

 

 

22,760

 

 

17,231

 

Credit loss expense for off-balance sheet exposures

 

 

102

 

 

 —

 

Net gain on sale of mortgage loans held for sale

 

 

(4,805)

 

 

(1,260)

 

Origination of mortgage loans held for sale

 

 

(125,273)

 

 

(40,714)

 

Proceeds from sale of mortgage loans held for sale

 

 

109,918

 

 

39,632

 

Net gain on sale of consumer loans held for sale

 

 

(2,337)

 

 

(1,405)

 

Origination of consumer loans held for sale

 

 

(195,121)

 

 

(146,087)

 

Proceeds from sale of consumer loans held for sale

 

 

194,182

 

 

147,466

 

Net gain realized on sale of other real estate owned

 

 

(3)

 

 

(130)

 

Impairment of premises held for sale

 

 

 —

 

 

66

 

Deferred compensation expense - Class A Common Stock

 

 

222

 

 

233

 

Stock-based awards expense- Class A Common Stock

 

 

280

 

 

244

 

Net gain on sale of bank premises and equipment

 

 

(353)

 

 

 

Increase in cash surrender value of bank owned life insurance

 

 

(389)

 

 

(382)

 

Net change in other assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

900

 

 

(28)

 

Accrued interest payable

 

 

635

 

 

536

 

Other assets

 

 

(7,381)

 

 

(2,026)

 

Other liabilities

 

 

4,998

 

 

(297)

 

Net cash provided by operating activities

 

 

28,178

 

 

44,287

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchases of available-for-sale debt securities

 

 

(138,894)

 

 

 —

 

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

 

 

73,716

 

 

48,775

 

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

 

 

690

 

 

600

 

Net change in outstanding warehouse lines of credit

 

 

(132,996)

 

 

(90,092)

 

Net change in other loans

 

 

50,510

 

 

(63,922)

 

Proceeds from redemption of Federal Home Loan Bank stock

 

 

931

 

 

2,102

 

Purchase of Federal Home Loan Bank stock

 

 

(9,000)

 

 

 —

 

Proceeds from sales of other real estate owned

 

 

31

 

 

229

 

Proceeds from sale of bank premises and equipment

 

 

894

 

 

 —

 

Net purchases of premises and equipment

 

 

(1,109)

 

 

(1,036)

 

Net cash used in investing activities

 

 

(155,227)

 

 

(103,344)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net change in deposits

 

 

285,449

 

 

318,171

 

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

 

 

(41,537)

 

 

(9,822)

 

Payments of Federal Home Loan Bank advances

 

 

(602,500)

 

 

(520,000)

 

Proceeds from Federal Home Loan Bank advances

 

 

425,000

 

 

270,000

 

Repurchase of Class A Common Stock

 

 

(2,852)

 

 

(379)

 

Net proceeds from Class A Common Stock purchased through employee stock purchase plan

 

 

155

 

 

121

 

Net proceeds from Class A Common Stock options exercised and PSUs awarded

 

 

(242)

 

 

 —

 

Cash dividends paid

 

 

(5,464)

 

 

(4,996)

 

Net cash provided by financing activities

 

 

58,009

 

 

53,095

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(69,040)

 

 

(5,962)

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

385,303

 

 

351,474

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

316,263

 

$

345,512

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

7,786

 

$

9,798

 

Income taxes

 

 

465

 

 

387

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL NONCASH DISCLOSURES:

 

 

 

 

 

 

 

Transfers from loans to real estate acquired in settlement of loans

 

$

 —

 

$

155

 

Right-of-use assets recorded

 

 

626

 

 

40,104

 

Allowance for credit losses recorded upon adoption of ASC 326

 

 

7,241

 

 

 —

 

 

See accompanying footnotes to consolidated financial statements.

 

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Table of Contents

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

 

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

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

 

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

 

As of March 31, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.

 

The Company’s financial statements at and for the three months ended March 31, 2020 were impacted by the COVID-19 pandemic. 

 

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

 

·

Footnote 2 “Investment Securities”

·

Footnote 4 “Loans and Allowance for Credit Losses”

·

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

·

Footnote 17 “Subsequent Events”

 

9

Table of Contents

Core Bank

 

Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 2020, Republic had 42 full-service banking centers and two LPOs with locations as follows:

 

Kentucky — 28

Metropolitan Louisville — 18

Central Kentucky — 7

Georgetown — 1

Lexington — 5

Shelbyville — 1

Northern Kentucky — 3

Covington — 1

Crestview Hills — 1

Florence — 1

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 8*

Metropolitan Cincinnati, Ohio — 2

Metropolitan Nashville, Tennessee — 3*


*Includes one LPO

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

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:

o

there is no recourse to the taxpayer, 

o

no negative credit reporting on the taxpayer, and

o

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. Credit loss expense on EAs are estimated when advances are made, with credit loss expense for all expected EA losses made in the first quarter of each year. Unpaid EAs are charged off by June 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged off loans.

 

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

 

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

 

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Table of Contents

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

 

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

 

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

 

·

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

 

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

 

·

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

 

·

RCS installment loan products – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment loan product across the U.S. using a third-party service provider. As part of the program, the Bank sold 100% of the balances generated through the program back to its third-party service provider approximately 21 days after origination. During the second quarter of 2018, the Bank and its third-party service provider suspended the origination of new loans and the sale of unsold loans through this program. Since program suspension in 2018, the Bank has carried all unsold loans under this program as “held for investment” on its balance sheet and has continued to wind down those balances. Additionally, loans under this program are carried at fair value under a fair value option on the Bank’s balance sheet with the portfolio marked to market monthly. Approximately $827,000 of balances remained held for investment under this program as of March 31, 2020.

 

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

 

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Table of Contents

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

 

 

Recently Adopted Accounting Standards

 

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

 

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

 

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

 

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

 

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

 

When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower “expected” threshold for loss recognition versus a higher “probable” threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts.

 

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

 

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Table of Contents

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 less-impactful ASUs were also adopted by the Company during the three months ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

ASU. No.

    

Topic

    

Nature of Update

    

Date Adopted

    

Method of Adoption

    

Financial Statement Impact

2017-04

 

Intangibles - Goodwill and Other (Topic 350)

 

This ASU simplifies goodwill impairment testing by eliminating Step 2 from the goodwill impairment test. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the 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.

 

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.

 

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Table of Contents

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

 

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

 

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

 

For the Company’s AFS corporate bond, the Company uses PD and LGD data to estimate an ACLS in lieu of the aforementioned cash flow analysis.

 

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

 

Accrued interest on AFS debt securities totaled $1 million at March 31, 2020 and is excluded from the ACLS.  Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet.

 

Allowance for Credit Losses on Held-to-Maturity Securities —  The Company measures expected credit losses on HTM debt securities on a collective basis by major security type.  Accrued interest receivable on HTM debt securities totaled $248,000 at March 31, 2020 and is excluded from the ACLS. Accrued interest on HTM debt securities is presented as a component of other assets on the Company’s balance sheet.

 

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

 

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

 

LoansThe Bank’s financing receivables consist primarily of loans and lease financing receivables (together referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the ACLL. Amortized cost is the principal balance outstanding, net of premiums and discounts, and deferred loan fees and costs. Accrued interest on loans, which is excluded from the ACLL, totaled $10 million at March 31, 2020 and was reported as a component of other assets on the Company’s balance sheet.

 

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

 

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Table of Contents

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 LoansThe 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:

 

·

Non-accretable discount assigned by the Bank

·

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

·

Nonaccrual status when purchased

·

Past due 30 days or more when purchased

·

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

·

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 uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

 

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

 

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

 

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Table of Contents

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

 

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

 

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

 

For additional discussion regarding loans modified due to the COVID-19 pandemic, see Footnote 17 “Subsequent Events” in this section of the filing.

 

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

 

The ACLC is recorded as a component of other liabilities on the Company’s balance sheet.  Credit loss expense resulting from Provisions to the ACLC are recorded on the Company’s income statement as component of other noninterest expense.

 

 

 

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Table of Contents

 

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

March 31, 2020 (in thousands)

 

Cost

 

Gains

 

Losses

 

Credit Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

167,249

 

$

2,043

 

$

 —

 

$

 —

 

$

169,292

Private label mortgage backed security

 

 

1,963

 

 

1,286

 

 

 —

 

 

 —

 

 

3,249

Mortgage backed securities - residential

 

 

288,781

 

 

8,943

 

 

(2)

 

 

 —

 

 

297,722

Collateralized mortgage obligations

 

 

60,395

 

 

306

 

 

(820)

 

 

 —

 

 

59,881

Corporate bonds

 

 

10,000

 

 

 —

 

 

(259)

 

 

(126)

 

 

9,615

Trust preferred security

 

 

3,586

 

 

514

 

 

 —

 

 

 —

 

 

4,100

Total available-for-sale debt securities

 

$

531,974

 

$

13,092

 

$

(1,081)

 

$

(126)

 

$

543,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

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

March 31, 2020 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

Credit Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities - residential

 

$

103

 

$

 5

 

$

 —

 

$

108

 

$

 —

Collateralized mortgage obligations

 

 

16,277

 

 

44

 

 

(275)

 

 

16,046

 

 

 —

Corporate bonds

 

 

44,993

 

 

 —

 

 

(1,887)

 

 

43,106

 

 

(171)

Obligations of state and political subdivisions

 

 

462

 

 

 3

 

 

 —

 

 

465

 

 

 —

Total held-to-maturity debt securities

 

$

61,835

 

$

52

 

$

(2,162)

 

$

59,725

 

$

(171)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

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 months ended March 31, 2020 and 2019, there were no gains or losses on sales or calls of AFS debt securities.

 

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Table of Contents

Debt Securities by Contractual Maturity

 

The amortized cost and fair value of debt securities by contractual maturity at March 31, 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

 

March 31, 2020 (in thousands)

 

Cost

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

5,000

 

$

5,005

 

$

5,105

 

$

5,100

 

Due from one year to five years

 

 

172,249

 

 

173,902

 

 

35,400

 

 

33,929

 

Due from five years to ten years

 

 

 —

 

 

 —

 

 

4,950

 

 

4,542

 

Due beyond ten years

 

 

3,586

 

 

4,100

 

 

 —

 

 

 —

 

Private label mortgage backed security

 

 

1,963

 

 

3,249

 

 

 —

 

 

 —

 

Mortgage backed securities - residential

 

 

288,781

 

 

297,722

 

 

103

 

 

108

 

Collateralized mortgage obligations

 

 

60,395

 

 

59,881

 

 

16,277

 

 

16,046

 

Total debt securities

 

$

531,974

 

$

543,859

 

$

61,835

 

$

59,725

 

 

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 March 31, 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

 

March 31, 2020 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities - residential

 

$

 —

 

$

 —

 

$

532

 

$

(2)

 

$

532

 

$

(2)

 

Collateralized mortgage obligations

 

 

31,536

 

 

(769)

 

 

5,946

 

 

(51)

 

 

37,482

 

 

(820)

 

Total available-for-sale debt securities

 

$

31,536

 

$

(769)

 

$

6,478

 

$

(53)

 

$

38,014

 

$

(822)

 

 

 

 

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 March 31, 2020, the Bank’s security portfolio consisted of 176 securities, 39 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 March 31, 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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Table of Contents

Mortgage Backed Securities and Collateralized Mortgage Obligations

 

At March 31, 2020, with the exception of the $3.2 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 March 31, 2020 and December 31, 2019, there were gross unrealized losses of $822,000 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 $3.2 million at March 31, 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 table below presents a rollforward for the three months ended March 31, 2020 of the ACLS on AFS and HTM debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACLS Rollforward

 

 

 

Three Months Ended March 31, 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

 

 

120

 

 

 —

 

 

 —

 

 

171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 —

 

$

51

 

$

246

 

$

 —

 

$

 —

 

$

297

 

The Company recorded Provisions to the ACLS on its AFS and HTM corporate bonds during the three months ended March 31, 2020 based on higher PD and LGD estimates on these bonds resulting from economic concerns from the COVID-19 pandemic.

 

There were no HTM debt securities on nonaccrual or past due over 89 days as of March 31, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of March 31, 2020.

 

There were no HTM debt securities considered collateral dependent as of March 31, 2020.

 

20

Table of Contents

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)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

154,592

 

$

229,700

 

Fair value

 

 

154,501

 

 

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

 

March 31, 2020 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

$

 —

 

$

294

 

$

 —

 

$

294

 

Community Reinvestment Act mutual fund

 

 

2,500

 

 

13

 

 

 —

 

 

2,513

 

Total equity securities with readily determinable fair values

 

$

2,500

 

$

307

 

$

 —

 

$

2,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

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

 

 

21

Table of Contents

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 March 31, 2020

    

Three Months Ended March 31, 2019

 

(in thousands)

 

Realized

 

Unrealized

 

Total

 

Realized

 

Unrealized

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

$

 —

 

$

(420)

 

$

(420)

 

$

 —

 

$

252

 

$

252

 

Community Reinvestment Act mutual fund

 

 

 —

 

 

39

 

 

39

 

 

 —

 

 

37

 

 

37

 

Total equity securities with readily determinable fair value

 

$

 —

 

$

(381)

 

$

(381)

 

$

 —

 

$

289

 

$

289

 

 

 

 

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 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

 

 

 

March 31, 

 

(in thousands)

 

2020

    

2019

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

598

 

$

 —

 

Origination of consumer loans held for sale

 

 

47,186

 

 

 —

 

Proceeds from the sale of consumer loans held for sale

 

 

(45,728)

 

 

 —

 

Net gain (loss) recognized on consumer loans held for sale

 

 

1,375

 

 

 —

 

Balance, end of period

 

$

3,431

 

$

 —

 

 

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

    

 

 

March 31, 

 

(in thousands)

 

2020

    

2019

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

11,646

 

$

12,838

 

Origination of consumer loans held for sale

 

 

147,935

 

 

146,087

 

Proceeds from the sale of consumer loans held for sale

 

 

(148,454)

 

 

(147,466)

 

Net gain on sale of consumer loans held for sale

 

 

962

 

 

1,405

 

Balance, end of period

 

$

12,089

 

$

12,864

 

 

 

22

Table of Contents

 

 

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

 

The composition of the loan portfolio follows:

 

 

 

 

 

 

 

 

 

(in thousands)

   

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Owner occupied

 

$

916,526

 

$

949,568

 

Nonowner occupied

 

 

256,492

 

 

258,803

 

Commercial real estate

 

 

1,320,790

 

 

1,303,000

 

Construction & land development

 

 

163,396

 

 

159,702

 

Commercial & industrial

 

 

445,947

 

 

477,236

 

Lease financing receivables

 

 

12,676

 

 

14,040

 

Home equity

 

 

282,809

 

 

293,186

 

Consumer:

 

 

 

 

 

 

 

Credit cards

 

 

15,608

 

 

17,836

 

Overdrafts

 

 

758

 

 

1,522

 

Automobile loans

 

 

46,837

 

 

52,923

 

Other consumer

 

 

74,965

 

 

68,115

 

Total Traditional Banking

 

 

3,536,804

 

 

3,595,931

 

Warehouse lines of credit*

 

 

850,454

 

 

717,458

 

Total Core Banking

 

 

4,387,258

 

 

4,313,389

 

 

 

 

 

 

 

 

 

Republic Processing Group*:

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

Easy Advances

 

 

26,242

 

 

 —

 

Other TRS loans

 

 

373

 

 

14,365

 

Republic Credit Solutions

 

 

101,726

 

 

105,397

 

Total Republic Processing Group

 

 

128,341

 

 

119,762

 

 

 

 

 

 

 

 

 

Total loans**

 

 

4,515,599

 

 

4,433,151

 

Allowance for credit losses

 

 

(70,431)

 

 

(43,351)

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

4,445,168

 

$

4,389,800

 


*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)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Contractually receivable

 

$

4,513,602

 

$

4,432,351

 

Unearned income

 

 

(1,065)

 

 

(1,139)

 

Unamortized premiums

 

 

315

 

 

366

 

Unaccreted discounts

 

 

(1,072)

 

 

(2,534)

 

Net unamortized deferred origination fees and costs

 

 

3,819

 

 

4,107

 

Carrying value of loans

 

$

4,515,599

 

$

4,433,151

 

 

 

23

Table of Contents

Credit Quality Indicators

 

The Company’s loan segments as of March 31, 2020 remain unchanged from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The following tables include loans by segment and risk 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Loans

 

Revolving Loans

 

 

 

 

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

 

Amortized

 

Converted

 

 

 

 

As of March 31, 2020

 

2020

 

2019

 

2018

 

2017

 

Prior

 

Cost Basis

 

to Term

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate owner occupied:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

23,146

 

$

188,769

 

$

124,184

 

$

98,440

 

$

453,447

 

$

 —

 

$

 —

 

$

887,986

 

Special Mention

 

 

 —

 

 

 —

 

 

48

 

 

1,633

 

 

10,600

 

 

 —

 

 

 —

 

 

12,281

 

Substandard

 

 

 —

 

 

1,411

 

 

1,034

 

 

637

 

 

13,177

 

 

 —

 

 

 —

 

 

16,259

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

23,146

 

$

190,180

 

$

125,266

 

$

100,710

 

$

477,224

 

$

 —

 

$

 —

 

$

916,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate nonowner occupied:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

14,855

 

$

76,380

 

$

55,846

 

$

52,775

 

$

54,902

 

$

 —

 

$

 —

 

$

254,758

 

Special Mention

 

 

300

 

 

 —

 

 

 —

 

 

 —

 

 

160

 

 

 —

 

 

 —

 

 

460

 

Substandard

 

 

 —

 

 

539

 

 

 —

 

 

 —

 

 

735

 

 

 —

 

 

 —

 

 

1,274

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

15,155

 

$

76,919

 

$

55,846

 

$

52,775

 

$

55,797

 

$

 —

 

$

 —

 

$

256,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

50,641

 

$

342,515

 

$

207,300

 

$

226,233

 

$

437,149

 

$

 —

 

$

42,451

 

$

1,306,289

 

Special Mention

 

 

 —

 

 

75

 

 

179

 

 

 —

 

 

3,211

 

 

 —

 

 

 —

 

 

3,465

 

Substandard

 

 

3,139

 

 

2,163

 

 

 —

 

 

1,234

 

 

4,500

 

 

 —

 

 

 —

 

 

11,036

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

53,780

 

$

344,753

 

$

207,479

 

$

227,467

 

$

444,860

 

$

 —

 

$

42,451

 

$

1,320,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

24,748

 

$

71,146

 

$

37,365

 

$

12,654

 

$

14,951

 

$

 —

 

$

 —

 

$

160,864

 

Special Mention

 

 

 —

 

 

2,339

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,339

 

Substandard

 

 

 —

 

 

193

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

193

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

24,748

 

$

73,678

 

$

37,365

 

$

12,654

 

$

14,951

 

$

 —

 

$

 —

 

$

163,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

44,110

 

$

199,316

 

$

57,324

 

$

56,537

 

$

67,784

 

$

16,792

 

$

 —

 

$

441,863

 

Special Mention

 

 

1,378

 

 

 —

 

 

 —

 

 

 —

 

 

58

 

 

640

 

 

 —

 

 

2,076

 

Substandard

 

 

133

 

 

490

 

 

185

 

 

 —

 

 

334

 

 

866

 

 

 —

 

 

2,008

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

45,621

 

$

199,806

 

$

57,509

 

$

56,537

 

$

68,176

 

$

18,298

 

$

 —

 

$

445,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

663

 

$

5,196

 

$

2,169

 

$

3,396

 

$

1,252

 

$

 —

 

$

 —

 

$

12,676

 

Special Mention

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Substandard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

663

 

$

5,196

 

$

2,169

 

$

3,396

 

$

1,252

 

$

 —

 

$

 —

 

$

12,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

280,340

 

$

 —

 

$

280,340

 

Special Mention

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

128

 

 

 —

 

 

128

 

Substandard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,341

 

 

 —

 

 

2,341

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

282,809

 

$

 —

 

$

282,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

9,803

 

$

51,461

 

$

32,963

 

$

13,685

 

$

13,904

 

$

15,768

 

$

 —

 

$

137,584

 

Special Mention

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13

 

 

 —

 

 

 —

 

 

13

 

Substandard

 

 

 —

 

 

40

 

 

62

 

 

206

 

 

263

 

 

 —

 

 

 —

 

 

571

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

9,803

 

$

51,501

 

$

33,025

 

$

13,891

 

$

14,180

 

$

15,768

 

$

 —

 

$

138,168

 

 

24

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving Loans

 

Revolving Loans

 

 

 

 

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year (Continued)

 

Amortized

 

Converted

 

 

 

 

As of March 31, 2020

 

2020

 

2019

 

2018

 

2017

 

Prior

 

Cost Basis

 

to Term

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

850,454

 

$

 —

 

$

850,454

 

Special Mention

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Substandard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

850,454

 

$

 —

 

$

850,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TRS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

26,242

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

184

 

$

 —

 

$

26,426

 

Special Mention

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Substandard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

189

 

 

 —

 

 

189

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

26,242

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

373

 

$

 —

 

$

26,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RCS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

3,600

 

$

10,357

 

$

4,137

 

$

1,878

 

$

18,541

 

$

62,607

 

$

 —

 

$

101,120

 

Special Mention

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Substandard

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

606

 

 

 —

 

 

606

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

3,600

 

$

10,357

 

$

4,137

 

$

1,878

 

$

18,541

 

$

63,213

 

$

 —

 

$

101,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass or not rated

 

$

197,808

 

$

945,140

 

$

521,288

 

$

465,598

 

$

1,061,930

 

$

1,226,145

 

$

42,451

 

$

4,460,360

 

Special Mention

 

 

1,678

 

 

2,414

 

 

227

 

 

1,633

 

 

14,042

 

 

768

 

 

 —

 

 

20,762

 

Substandard

 

 

3,272

 

 

4,836

 

 

1,281

 

 

2,077

 

 

19,009

 

 

4,002

 

 

 —

 

 

34,477

 

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Grand Total

 

$

202,758

 

$

952,390

 

$

522,796

 

$

469,308

 

$

1,094,981

 

$

1,230,915

 

$

42,451

 

$

4,515,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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. 

 

25

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 March 31, 

 

 

 

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

 

$

447

 

$

(27)

 

$

39

 

$

9,387

 

 

$

6,035

 

$

(255)

 

$

(17)

 

$

38

 

$

5,801

Nonowner occupied

 

 

 

1,737

 

 

148

 

 

278

 

 

 —

 

 

 2

 

 

2,165

 

 

 

1,662

 

 

130

 

 

(72)

 

 

 —

 

 

1,720

Commercial real estate

 

 

 

10,486

 

 

273

 

 

2,151

 

 

 —

 

 

471

 

 

13,381

 

 

 

10,030

 

 

203

 

 

 —

 

 

 2

 

 

10,235

Construction & land development

 

 

 

2,152

 

 

1,447

 

 

937

 

 

 —

 

 

 —

 

 

4,536

 

 

 

2,555

 

 

(112)

 

 

 —

 

 

 —

 

 

2,443

Commercial & industrial

 

 

 

2,882

 

 

(1,318)

 

 

974

 

 

 —

 

 

 3

 

 

2,541

 

 

 

2,873

 

 

360

 

 

 —

 

 

 2

 

 

3,235

Lease financing receivables

 

 

 

147

 

 

 —

 

 

(14)

 

 

 —

 

 

 —

 

 

133

 

 

 

158

 

 

(8)

 

 

 —

 

 

 —

 

 

150

Home equity

 

 

 

2,721

 

 

1,652

 

 

842

 

 

 —

 

 

75

 

 

5,290

 

 

 

3,477

 

 

(157)

 

 

(13)

 

 

30

 

 

3,337

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

1,020

 

 

33

 

 

22

 

 

(106)

 

 

 9

 

 

978

 

 

 

1,140

 

 

65

 

 

(150)

 

 

24

 

 

1,079

Overdrafts

 

 

 

1,169

 

 

 —

 

 

(122)

 

 

(344)

 

 

55

 

 

758

 

 

 

1,102

 

 

19

 

 

(294)

 

 

65

 

 

892

Automobile loans

 

 

 

612

 

 

(7)

 

 

(79)

 

 

(8)

 

 

28

 

 

546

 

 

 

724

 

 

38

 

 

 —

 

 

 6

 

 

768

Other consumer

 

 

 

550

 

 

307

 

 

(93)

 

 

(37)

 

 

112

 

 

839

 

 

 

591

 

 

(94)

 

 

(66)

 

 

81

 

 

512

Total Traditional Banking

 

 

 

28,205

 

 

6,734

 

 

5,343

 

 

(522)

 

 

794

 

 

40,554

 

 

 

30,347

 

 

189

 

 

(612)

 

 

248

 

 

30,172

Warehouse lines of credit

 

 

 

1,794

 

 

 —

 

 

332

 

 

 —

 

 

 —

 

 

2,126

 

 

 

1,172

 

 

225

 

 

 —

 

 

 —

 

 

1,397

Total Core Banking

 

 

 

29,999

 

 

6,734

 

 

5,675

 

 

(522)

 

 

794

 

 

42,680

 

 

 

31,519

 

 

414

 

 

(612)

 

 

248

 

 

31,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 

 —

 

 

 —

 

 

15,228

 

 

 —

 

 

42

 

 

15,270

 

 

 

 —

 

 

13,381

 

 

 —

 

 

 —

 

 

13,381

Other TRS loans

 

 

 

234

 

 

 —

 

 

(95)

 

 

(44)

 

 

 —

 

 

95

 

 

 

107

 

 

53

 

 

(17)

 

 

 6

 

 

149

Republic Credit Solutions

 

 

 

13,118

 

 

 —

 

 

1,706

 

 

(2,709)

 

 

271

 

 

12,386

 

 

 

13,049

 

 

3,383

 

 

(3,824)

 

 

254

 

 

12,862

Total Republic Processing Group

 

 

 

13,352

 

 

 —

 

 

16,839

 

 

(2,753)

 

 

313

 

 

27,751

 

 

 

13,156

 

 

16,817

 

 

(3,841)

 

 

260

 

 

26,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

43,351

 

$

6,734

 

$

22,514

 

$

(3,275)

 

$

1,107

 

$

70,431

 

 

$

44,675

 

$

17,231

 

$

(4,453)

 

$

508

 

$

57,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The cumulative loss rate used as the basis for the estimate of ACLL at March 31, 2020 was primarily based on a static pool analysis of each of the Company’s loan pools using the Company’s loss experience from 2013 through 2019, adjusted for current and forecasted conditions that considered the economic impact of the COVID-19 pandemic. As of March 31, 2020 the Company forecasted for the upcoming year that the U.S. unemployment rate would rise above 8%, and the Company’s loan losses would rise to levels consistent with this rise in U.S. unemployment. Furthermore, it is management’s expectation that the Company’s loss rates will immediately revert back after this one-year forecast to long-term historical averages, which include periods of economic expansion and contraction.    

 

See additional detail regarding the Company’s response to COVID-19 under Footnote 17 “Subsequent Events” of this section of the filing.

26

Table of Contents

Nonperforming Loans and Nonperforming Assets

 

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

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

March 31, 2020

    

December 31, 2019

    

 

 

 

 

 

 

 

 

Loans on nonaccrual status*

 

$

20,358

 

$

23,332

 

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

 

 

495

 

 

157

 

Total nonperforming loans

 

 

20,853

 

 

23,489

 

Other real estate owned

 

 

85

 

 

113

 

Total nonperforming assets

 

$

20,938

 

$

23,602

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.53

%

Nonperforming assets to total loans (including OREO)

 

 

0.46

 

 

0.53

 

Nonperforming assets to total assets

 

 

0.37

 

 

0.42

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.54

%

Nonperforming assets to total loans (including OREO)

 

 

0.47

 

 

0.54

 

Nonperforming assets to total assets

 

 

0.38

 

 

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.

 

27

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)

    

March 31, 2020

    

December 31, 2019

  

  

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

13,120

 

$

12,220

 

 

$

 —

 

$

 —

 

Nonowner occupied

 

 

620

 

 

623

 

 

 

 —

 

 

 —

 

Commercial real estate

 

 

3,108

 

 

6,865

 

 

 

 —

 

 

 —

 

Construction & land development

 

 

 —

 

 

143

 

 

 

 —

 

 

 —

 

Commercial & industrial

 

 

1,494

 

 

1,424

 

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Home equity

 

 

1,832

 

 

1,865

 

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Overdrafts

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Automobile loans

 

 

169

 

 

179

 

 

 

 —

 

 

 —

 

Other consumer

 

 

15

 

 

13

 

 

 

 —

 

 

 —

 

Total Traditional Banking

 

 

20,358

 

 

23,332

 

 

 

 —

 

 

 —

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Total Core Banking

 

 

20,358

 

 

23,332

 

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Other TRS loans

 

 

 —

 

 

 —

 

 

 

189

 

 

53

 

Republic Credit Solutions

 

 

 —

 

 

 —

 

 

 

306

 

 

104

 

Total Republic Processing Group

 

 

 —

 

 

 —

 

 

 

495

 

 

157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20,358

 

$

23,332

 

 

$

495

 

$

157

 


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

As of March 31, 2020

 

March 31, 2020

 

    

Nonaccrual   

    

Nonaccrual   

    

Total

    

Interest Income

 

 

Loans with

 

Loans without

 

Nonaccrual   

 

Recognized

(in thousands)

 

ACLL

 

ACLL

 

Loans

 

on Nonaccrual Loans*

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

2,909

 

$

10,211

 

$

13,120

 

$

191

Nonowner occupied

 

 

 —

 

 

620

 

 

620

 

 

 2

Commercial real estate

 

 

900

 

 

2,208

 

 

3,108

 

 

727

Construction & land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial & industrial

 

 

109

 

 

1,385

 

 

1,494

 

 

11

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Home equity

 

 

156

 

 

1,676

 

 

1,832

 

 

28

Consumer

 

 

138

 

 

46

 

 

184

 

 

 3

Total

 

$

4,212

 

$

16,146

 

$

20,358

 

$

962


*  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.

28

Table of Contents

Delinquent Loans

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30 - 59

    

60 - 89

    

90 or More

    

    

 

    

    

 

    

    

 

 

March 31, 2020

Days

 

Days

 

Days

 

Total

 

Total

 

 

 

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent*

 

Delinquent**

 

Current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,112

 

$

363

 

$

2,207

 

$

3,682

 

$

912,844

 

$

916,526

 

Nonowner occupied

 

 

359

 

 

 —

 

 

539

 

 

898

 

 

255,594

 

 

256,492

 

Commercial real estate

 

 

1,245

 

 

 —

 

 

2,489

 

 

3,734

 

 

1,317,056

 

 

1,320,790

 

Construction & land development

 

 

295

 

 

 —

 

 

 —

 

 

295

 

 

163,101

 

 

163,396

 

Commercial & industrial

 

 

159

 

 

31

 

 

1,050

 

 

1,240

 

 

444,707

 

 

445,947

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,676

 

 

12,676

 

Home equity

 

 

1,011

 

 

43

 

 

626

 

 

1,680

 

 

281,129

 

 

282,809

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

53

 

 

44

 

 

 —

 

 

97

 

 

15,511

 

 

15,608

 

Overdrafts

 

 

168

 

 

 3

 

 

 1

 

 

172

 

 

586

 

 

758

 

Automobile loans

 

 

27

 

 

 —

 

 

20

 

 

47

 

 

46,790

 

 

46,837

 

Other consumer

 

 

 7

 

 

11

 

 

 —

 

 

18

 

 

74,947

 

 

74,965

 

Total Traditional Banking

 

 

4,436

 

 

495

 

 

6,932

 

 

11,863

 

 

3,524,941

 

 

3,536,804

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

850,454

 

 

850,454

 

Total Core Banking

 

 

4,436

 

 

495

 

 

6,932

 

 

11,863

 

 

4,375,395

 

 

4,387,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

23,467

 

 

 —

 

 

 —

 

 

23,467

 

 

2,775

 

 

26,242

 

Other TRS loans

 

 

27

 

 

19

 

 

189

 

 

235

 

 

138

 

 

373

 

Republic Credit Solutions

 

 

5,508

 

 

1,248

 

 

306

 

 

7,062

 

 

94,664

 

 

101,726

 

Total Republic Processing Group

 

 

29,002

 

 

1,267

 

 

495

 

 

30,764

 

 

97,577

 

 

128,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

33,438

 

$

1,762

 

$

7,427

 

$

42,627

 

$

4,472,972

 

$

4,515,599

 

Delinquency ratio***

 

 

0.74

%  

 

0.04

%  

 

0.16

%  

 

0.94

%  

 

 

 

 

 

 


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

**     Delinquent status may be determined by either the number of days past due or number of payments past due. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority.

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

 

29

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.

30

Table of Contents

Collateral-Dependent Loans

 

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

Secured

    

Secured

 

March 31, 2020

 

by Real

 

by Personal

 

(dollars in thousands)

 

Estate

 

Property

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Owner occupied

 

$

16,432

 

$

 —

 

Nonowner occupied

 

 

1,434

 

 

 —

 

Commercial real estate

 

 

10,364

 

 

 —

 

Construction & land development

 

 

193

 

 

 —

 

Commercial & industrial

 

 

 —

 

 

2,928

 

Lease financing receivables

 

 

 —

 

 

 —

 

Home equity

 

 

2,362

 

 

 —

 

Consumer

 

 

 —

 

 

559

 

Total Traditional Banking

 

$

30,785

 

$

3,487

 

 

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

 

 

31

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 months ended March 31, 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

 

 

 

December 31, 2019

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Cash Basis

 

 

    

Unpaid

    

    

 

    

    

 

    

Average

    

Interest

    

Interest

    

 

 

Principal

 

Recorded

 

Allocated

 

Recorded

 

Income

 

Income

 

(in thousands)

 

Balance

 

Investment

 

ACLL

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no allocated ACLL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

14,768

 

$

13,893

 

$

 —

 

$

10,660

 

$

49

 

$

 —

 

Nonowner occupied

 

 

1,515

 

 

1,448

 

 

 —

 

 

2,076

 

 

20

 

 

 —

 

Commercial real estate

 

 

15,028

 

 

12,547

 

 

 —

 

 

3,980

 

 

24

 

 

 —

 

Construction & land development

 

 

198

 

 

198

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial & industrial

 

 

3,308

 

 

1,792

 

 

 —

 

 

618

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

3,107

 

 

3,023

 

 

 —

 

 

1,080

 

 

 5

 

 

 —

 

Consumer

 

 

206

 

 

160

 

 

 —

 

 

30

 

 

 —

 

 

 —

 

Impaired loans with allocated ACLL:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

12,954

 

 

12,911

 

 

1,392

 

 

16,298

 

 

146

 

 

 —

 

Nonowner occupied

 

 

 —

 

 

 —

 

 

 —

 

 

28

 

 

 —

 

 

 —

 

Commercial real estate

 

 

3,228

 

 

3,228

 

 

432

 

 

4,358

 

 

 —

 

 

 —

 

Construction & land development

 

 

 —

 

 

 —

 

 

 —

 

 

64

 

 

49

 

 

 —

 

Commercial & industrial

 

 

197

 

 

197

 

 

22

 

 

444

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 8

 

 

 —

 

Home equity

 

 

263

 

 

263

 

 

174

 

 

540

 

 

 2

 

 

 —

 

Consumer

 

 

701

 

 

690

 

 

492

 

 

544

 

 

 5

 

 

 —

 

Total impaired loans

 

$

55,473

 

$

50,350

 

$

2,512

 

$

40,720

 

$

308

 

$

 —

 

 

 

32

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 March 31, 2020 and December 31, 2019,  $6 million and $10 million of TDRs were on nonaccrual status.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

Total

 

 

 

Restructurings on

 

Restructurings on

 

Troubled Debt

 

 

 

Nonaccrual Status

 

Accrual Status

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

March 31, 2020 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate

 

57

 

$

4,581

 

132

 

$

13,761

 

189

 

$

18,342

 

Commercial real estate

 

 1

 

 

45

 

 8

 

 

6,558

 

 9

 

 

6,603

 

Construction & land development

 

 —

 

 

 —

 

 1

 

 

53

 

 1

 

 

53

 

Commercial & industrial

 

 4

 

 

1,199

 

 3

 

 

907

 

 7

 

 

2,106

 

Consumer

 

 1

 

 

10

 

2,116

 

 

622

 

2,117

 

 

632

 

Total troubled debt restructurings

 

63

 

$

5,835

 

2,260

 

$

21,901

 

2,323

 

$

27,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

 

 

33

Table of Contents

The Bank considers a TDR to be performing to its modified terms if the loan is in accrual status and not past due 30-days-or-more as of the reporting date. A summary of the categories of TDR loan modifications outstanding and respective performance under modified terms at March 31, 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

 

March 31, 2020 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 1

 

$

883

 

 —

 

$

 —

 

 1

 

$

883

 

Rate reduction

 

113

 

 

12,615

 

 5

 

 

300

 

118

 

 

12,915

 

Principal deferral

 

 8

 

 

846

 

 1

 

 

163

 

 9

 

 

1,009

 

Legal modification

 

54

 

 

3,052

 

 7

 

 

483

 

61

 

 

3,535

 

Total residential TDRs

 

176

 

 

17,396

 

13

 

 

946

 

189

 

 

18,342

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 3

 

 

1,547

 

 —

 

 

 —

 

 3

 

 

1,547

 

Rate reduction

 

 3

 

 

1,153

 

 1

 

 

45

 

 4

 

 

1,198

 

Principal deferral

 

 7

 

 

5,053

 

 1

 

 

100

 

 8

 

 

5,153

 

Legal modification

 

 —

 

 

 —

 

 2

 

 

864

 

 2

 

 

864

 

Total commercial TDRs

 

13

 

 

7,753

 

 4

 

 

1,009

 

17

 

 

8,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

2,115

 

 

614

 

 —

 

 

 —

 

2,115

 

 

614

 

Legal modification

 

 2

 

 

18

 

 —

 

 

 —

 

 2

 

 

18

 

Total consumer TDRs

 

2,117

 

 

632

 

 —

 

 

 —

 

2,117

 

 

632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

2,306

 

$

25,781

 

17

 

$

1,955

 

2,323

 

$

27,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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 March 31, 2020 and December 31, 2019,  93% 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 March 31, 2020 and December 31, 2019. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships at March 31, 2020 or December 31, 2019.

 

34

Table of Contents

A summary of the categories of TDR loan modifications by respective performance as of March 31, 2020 and 2019 that were modified during the three months ended March 31, 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

 

March 31, 2020 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal modification

 

 4

 

$

128

 

 —

 

$

 —

 

 4

 

$

128

 

Total residential TDRs

 

 4

 

 

128

 

 —

 

 

 —

 

 4

 

 

128

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

 1

 

 

24

 

 —

 

 

 —

 

 1

 

 

24

 

Total commercial TDRs

 

 1

 

 

24

 

 —

 

 

 —

 

 1

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

2,111

 

 

310

 

 —

 

 

 —

 

2,111

 

 

310

 

Total consumer TDRs

 

2,111

 

 

310

 

 —

 

 

 —

 

2,111

 

 

310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

2,116

 

$

462

 

 —

 

$

 —

 

2,116

 

$

462

 

 

35

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Troubled Debt

    

Troubled Debt

    

 

 

    

 

 

 

 

Restructurings

 

Restructurings

 

Total

 

 

 

Performing to

 

Not Performing to

 

Troubled Debt

 

 

 

Modified Terms

 

Modified Terms

 

Restructurings

 

 

    

Number of

    

Recorded

    

Number of

    

Recorded

    

Number of

    

Recorded

 

March 31, 2019 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

 1

 

$

33

 

 1

 

$

11

 

 2

 

$

44

 

Legal modification

 

 6

 

 

159

 

 2

 

 

83

 

 8

 

 

242

 

Total residential TDRs

 

 7

 

 

192

 

 3

 

 

94

 

10

 

 

286

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

 2

 

 

48

 

 —

 

 

 —

 

 2

 

 

48

 

Total commercial TDRs

 

 2

 

 

48

 

 —

 

 

 —

 

 2

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal modification

 

 —

 

 

 —

 

 1

 

 

18

 

 1

 

 

18

 

Total consumer TDRs

 

 —

 

 

 —

 

 1

 

 

18

 

 1

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

 9

 

$

240

 

 4

 

$

112

 

13

 

$

352

 


The tables above are inclusive of loans that were TDRs at the end of previous periods and were re-modified, e.g., a maturity date extension during the current period.

 

As of March 31, 2020 and 2019,  100% and 68% of the Bank’s TDRs that occurred during the first quarter of 2020 and 2019 were performing according to their modified terms. The Bank provided approximately $93,000 and $52,000 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the first quarter of 2020 and 2019.  

 

There was no significant change between the pre and post modification loan balances for the three months ending March 31, 2020 and 2019.

 

The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of March 31, 2020 and 2019 and for which there was a payment default during the three months ended March 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

 

2020

 

2019

 

 

    

     

Number of

    

Recorded

     

Number of

    

Recorded

 

(dollars in thousands)

 

 

Loans

 

Investment

 

Loans

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

 2

 

$

111

 

 1

 

$

47

 

Home equity

 

 

 1

 

 

13

 

 2

 

 

47

 

Consumer

 

 

 1

 

 

10

 

 1

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 4

 

$

134

 

 4

 

$

112

 

 

 

 

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Table of Contents

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)

 

March 31, 2020

 

December 31, 2019

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

85

 

$

113

 

 

 

 

 

 

 

 

 

Total other real estate owned

 

$

85

 

$

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)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

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

 

$

2,425

 

$

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 credit loss expense 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

 

 

    

March 31, 

 

(dollars in thousands)

    

2020

  

  

2019

 

 

 

 

 

 

 

 

 

 

Easy Advances originated

 

$

387,762

 

 

$

388,970

 

Net charge to the credit loss expense for Easy Advances

 

 

15,228

 

 

 

13,381

 

Credit loss expense to total Easy Advances originated

 

 

3.93

%  

 

 

3.44

%  

Easy Advances net (recoveries) charge-offs

 

$

(42)

 

 

$

 —

 

Easy Advances net (recoveries) charge-offs to total Easy Advances originated

 

 

(0.01)

%  

 

 

 —

%  

 

 

 

 

 

 

 

 

 

 

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Table of Contents

5. DEPOSITS

 

The composition of the deposit portfolio follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

Demand

 

$

959,911

 

$

922,972

 

Money market accounts

 

 

697,828

 

 

793,950

 

Savings

 

 

183,445

 

 

175,588

 

Individual retirement accounts (1)

 

 

51,639

 

 

51,548

 

Time deposits, $250 and over (1)

 

 

112,003

 

 

104,412

 

Other certificates of deposit (1)

 

 

261,386

 

 

248,161

 

Reciprocal money market and time deposits (1)

 

 

255,256

 

 

189,774

 

Brokered deposits (1)

 

 

180,245

 

 

200,072

 

Total Core Bank interest-bearing deposits

 

 

2,701,713

 

 

2,686,477

 

Total Core Bank noninterest-bearing deposits

 

 

1,042,311

 

 

981,164

 

Total Core Bank deposits

 

 

3,744,024

 

 

3,667,641

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Money market accounts

 

 

68,853

 

 

66,152

 

Total RPG interest-bearing deposits

 

 

68,853

 

 

66,152

 

 

 

 

 

 

 

 

 

Brokered prepaid card deposits

 

 

42,962

 

 

9,128

 

Other noninterest-bearing deposits

 

 

215,618

 

 

43,087

 

Total RPG noninterest-bearing deposits

 

 

258,580

 

 

52,215

 

Total RPG deposits

 

 

327,433

 

 

118,367

 

 

 

 

 

 

 

 

 

Total deposits

 

$

4,071,457

 

$

3,786,008

 


(1)

Includes time deposits.

 

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Table of Contents

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 March 31, 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)

    

March 31, 2020

  

  

December 31, 2019

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding balance at end of period

 

$

126,080

 

 

$

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

 

$

12,543

 

 

$

70,015

 

 

 

Mortgage backed securities - residential

 

 

113,339

 

 

 

134,265

 

 

 

Collateralized mortgage obligations

 

 

20,495

 

 

 

17,030

 

 

 

Total securities pledged

 

$

146,377

 

 

$

221,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

 

 

(dollars in thousands)

  

  

2020

  

  

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average outstanding balance during the period

 

 

$

208,969

 

 

$

231,602

 

 

 

Average interest rate during the period

 

 

 

0.23

%  

 

 

0.73

%  

 

 

Maximum outstanding at any month end during the period

 

 

$

143,801

 

 

$

219,700

 

 

 

 

 

 

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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 March 31, 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 March 31, 2020, payments on 25 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 had not executed an operating lease that had not commenced.

 

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 months ended March 31, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

    

2020

 

2019

        

 

 

 

 

 

 

 

 

Operating lease expense:

 

 

 

 

 

 

 

Related Party:

 

 

 

 

 

 

 

Variable lease expense

 

$

1,182

 

$

1,158

 

Fixed lease expense

 

 

10

 

 

23

 

Third Party:

 

 

 

 

 

 

 

Variable lease expense

 

 

180

 

 

224

 

Fixed lease expense

 

 

368

 

 

361

 

Short-term lease expense

 

 

13

 

 

15

 

Total operating lease expense

 

$

1,753

 

$

1,781

 

 

 

 

 

 

 

 

 

Other information concerning operating leases:

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

1,838

 

$

1,803

 

Short-term lease payments not included in the measurement of lease liabilities

 

 

13

 

 

15

 

 

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 March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

Weighted average remaining term in years

 

 

7.91

 

 

 

8.02

 

Weighted average discount rate

 

 

3.44

%

 

 

3.46

%

 

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Table of Contents

The following table presents a maturity schedule of the Company’s operating lease liabilities based on undiscounted cash flows, and a reconciliation of those undiscounted cash flows to the operating lease liabilities recognized on the Company’s balance sheet as of March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Year (in thousands)

    

Related Party

    

Third Party

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

$

3,445

 

$

1,893

 

$

5,338

 

2021

 

 

4,194

 

 

2,360

 

 

6,554

 

2022

 

 

3,332

 

 

1,955

 

 

5,287

 

2023

 

 

3,332

 

 

1,435

 

 

4,767

 

2024

 

 

3,205

 

 

1,008

 

 

4,213

 

Thereafter

 

 

12,718

 

 

1,905

 

 

14,623

 

Total undiscounted cash flows

 

$

30,226

 

$

10,556

 

$

40,782

 

Discount applied to cash flows

 

 

(4,324)

 

 

(921)

 

 

(5,245)

 

Total discounted cash flows reported as operating lease liabilities

 

$

25,902

 

$

9,635

 

$

35,537

 

 

 

8. FEDERAL HOME LOAN BANK ADVANCES

 

FHLB advances were as follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Overnight advances

 

$

125,000

 

$

200,000

 

Variable interest rate advance indexed to 3-Month LIBOR plus 0.14%

 

 

10,000

 

 

10,000

 

Fixed interest rate advances

 

 

437,500

 

 

540,000

 

Total FHLB advances

 

$

572,500

 

$

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 March 31, 2020 and December 31, 2019, Republic had available borrowing capacity of $409 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 March 31, 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)

 

$

125,000

 

0.14

%

2020 (Term)

 

 

377,500

 

0.60

 

2021

 

 

30,000

 

1.93

 

2022

 

 

20,000

 

2.12

 

2023

 

 

20,000

 

2.56

 

2024

 

 

 —

 

 —

 

Thereafter

 

 

 —

 

 —

 

Total

 

$

572,500

 

0.69

%

 

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Table of Contents

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

 

 

 

 

March 31, 

 

 

(dollars in thousands)

    

2020

    

 

2019

    

 

 

 

 

 

 

 

 

 

 

 

Average outstanding balance during the period

 

$

45,165

 

 

$

214,167

 

 

Average interest rate during the period

 

 

1.56

%

 

 

2.48

%

 

Maximum outstanding at any month end during the period

 

$

250,000

 

 

$

320,000

 

 

 

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

First lien, single family residential real estate

 

$

1,073,076

 

$

1,099,941

 

Home equity lines of credit

 

 

266,663

 

 

274,990

 

 

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Table of Contents

9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

 

The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. These financial instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.

 

The Company also extends binding commitments to clients and prospective clients. Such commitments assure a borrower of financing for a specified period of time at a specified rate. The risk to the Company under such loan commitments is limited by the terms of the contracts. For example, the Company may not be obligated to advance funds if the client’s financial condition deteriorates or if the client fails to meet specific covenants.

 

An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding.

 

The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments, for each period ended:

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Unused warehouse lines of credit

 

$

318,546

 

$

436,541

 

Unused home equity lines of credit

 

 

361,425

 

 

363,195

 

Unused loan commitments - other

 

 

772,367

 

 

757,657

 

Standby letters of credit

 

 

10,804

 

 

11,252

 

FHLB letter of credit

 

 

2,485

 

 

2,485

 

Total commitments

 

$

1,465,627

 

$

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.

 

The following table presents a rollforward of the ACLC for the three months ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACLC Rollforward

 

 

 

Three Months Ended March 31, 2020

 

 

 

Beginning

 

ASC 326

 

 

 

Charge-

 

 

 

Ending

(in thousands)

 

 

Balance

 

Adoption

 

Provision

 

offs

 

Recoveries

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused warehouse lines of credit

 

 

$

 —

 

$

55

 

$

 —

 

$

 —

 

$

 —

 

$

55

Unused home equity lines of credit

 

 

 

 —

 

 

89

 

 

23

 

 

 —

 

 

 —

 

 

112

Unused loan commitments - other

 

 

 

 —

 

 

312

 

 

79

 

 

 —

 

 

 —

 

 

391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 —

 

$

456

 

$

102

 

$

 —

 

$

 —

 

$

558

 

The Company increased its ACLC during the three months ended March 31, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations. 

 

See additional detail regarding the Company’s response to COVID-19 under Footnote 17  “Subsequent Events” of this section of the filing.

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Table of Contents

 

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 March 31, 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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Table of Contents

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).

 

45

Table of Contents

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 March 31, 2020 is presented net of any applicable ACL.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at 

 

 

 

 

 

 

March 31, 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

 

$

 

$

169,292

 

$

 

$

169,292

 

Private label mortgage backed security

 

 

 

 

 

 

3,249

 

 

3,249

 

Mortgage backed securities - residential

 

 

 

 

297,722

 

 

 

 

297,722

 

Collateralized mortgage obligations

 

 

 

 

59,881

 

 

 

 

59,881

 

Corporate bonds

 

 

 

 

9,615

 

 

 —

 

 

9,615

 

Trust preferred security

 

 

 

 

 —

 

 

4,100

 

 

4,100

 

Total available-for-sale debt securities

 

$

 —

 

$

536,510

 

$

7,349

 

$

543,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities with readily determinable fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

$

 

$

294

 

$

 

$

294

 

Community Reinvestment Act mutual fund

 

 

2,513

 

 

 —

 

 

 

 

2,513

 

Total equity securities with readily determinable fair value

 

$

2,513

 

$

294

 

$

 —

 

$

2,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

 

$

39,384

 

$

 

$

39,384

 

Consumer loans held for sale

 

 

 —

 

 

 —

 

 

3,431

 

 

3,431

 

Consumer loans held for investment

 

 

 —

 

 

 —

 

 

827

 

 

827

 

Rate lock loan commitments

 

 

 

 

4,568

 

 

 

 

4,568

 

Interest rate swap agreements

 

 

 

 

14,013

 

 

 

 

14,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

$

 

$

2,826

 

$

 

$

2,826

 

Interest rate swap agreements

 

 

 

 

14,249

 

 

 

 

14,249

 

 

 

46

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 months ended March 31, 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

 

 

 

 

March 31, 

 

(in thousands)

 

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

$

3,495

 

$

3,712

 

Total gains or losses included in earnings:

 

 

 

 

 

 

 

 

Net change in unrealized gain

 

 

 

 1

 

 

(33)

 

Recovery of actual losses previously recorded

 

 

 

 —

 

 

37

 

Principal paydowns

 

 

 

(247)

 

 

(57)

 

Balance, end of period

 

 

$

3,249

 

$

3,659

 

 

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.

 

47

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Valuation

    

    

    

 

 

March 31, 2020 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Range

 

 

 

 

 

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

3,249

 

Discounted cash flow

 

(1) Constant prepayment rate

 

2.7% - 5.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

1.8% - 6.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

March 31, 

 

(in thousands)

 

2020

 

2019

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

4,000

 

$

4,075

 

Total gains or losses included in earnings:

 

 

 

 

 

 

 

Discount accretion

 

 

11

 

 

10

 

Net change in unrealized gain

 

 

89

 

 

15

 

Balance, end of period

 

$

4,100

 

$

4,100

 

 

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. 

 

48

Table of Contents

Mortgage Loans Held for Sale

 

The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of March 31, 2020 and December 31, 2019.  

 

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Aggregate fair value

 

$

39,384

 

$

19,224

 

Contractual balance

 

 

38,208

 

 

18,690

 

Unrealized gain

 

 

1,176

 

 

534

 

 

The total amount of gains and losses from changes in fair value included in earnings for the three months ended March 31,  2020 and 2019 for mortgage loans held for sale are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

    

2020

    

2019

 

 

 

 

 

 

 

 

 

Interest income

 

$

214

 

$

102

 

Change in fair value

 

 

642

 

 

(82)

 

Total included in earnings

 

$

856

 

$

20

 

 

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 March 31, 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

    

    

    

 

March 31, 2020 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Rate

 

 

 

 

 

 

 

 

 

 

Consumer loans held for sale

 

$

3,431

 

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%

 

49

Table of Contents

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Aggregate fair value

 

$

3,431

 

$

598

 

Contractual balance

 

 

3,454

 

 

593

 

Unrealized (loss) gain

 

 

23

 

 

 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

 

 

 

March 31, 

 

(in thousands)

    

2020

    

2019

 

 

 

 

 

 

 

 

 

Interest income

 

$

1,476

 

$

 —

 

Change in fair value

 

 

18

 

 

 —

 

Total included in earnings

 

$

1,494

 

$

 —

 

 

50

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

March 31, 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

 

$

 

$

 

$

3,794

 

$

3,794

 

Commercial real estate

 

 

 

 

 

 

2,602

 

 

2,602

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

1,336

 

 

1,336

 

Home equity

 

 

 

 

 

 

331

 

 

331

 

Total collateral-dependent loans*

 

$

 —

 

$

 —

 

$

8,063

 

$

8,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

 

$

328

 

$

 —

 

$

328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

51

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

    

    

    

Range

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

March 31, 2020 (dollars in thousands)

 

Value

 

Technique

 

Inputs

 

Average)

 

 

 

 

 

 

 

 

 

 

Collateral-dependent loans - residential real estate owner occupied

 

$

3,794

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 50% (16%)

 

 

 

 

 

 

 

 

 

 

Collateral-dependent loans - commercial real estate

 

$

2,602

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 44% (2%)

 

 

 

 

 

 

 

 

 

 

Collateral-dependent loans - commercial & industrial

 

$

1,336

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

14% - 50%  (43%)

 

 

 

 

 

 

 

 

 

 

Collateral-dependent loans - home equity

 

$

331

 

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%)

 

 

 

 

 

 

 

 

 

 

52

Table of Contents

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)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Carrying amount of loans measured at fair value

 

$

6,870

 

$

7,729

 

Estimated selling costs considered in carrying amount

 

 

1,195

 

 

1,193

 

Valuation allowance

 

 

(2)

 

 

(2)

 

Total fair value

 

$

8,063

 

$

8,920

 

 

 

 

 

 

 

 

 

 

 

 

    

 

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

    

2020

    

2019

 

 

 

 

 

 

 

 

 

 

Credit loss expense on collateral-dependent, impaired loans

 

 

$

16

 

$

14

 

 

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Table of Contents

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

March 31, 2020:

 

 

    

 

 

    

    

 

    

    

 

    

    

 

    

Total

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

Fair

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

316,263

 

$

316,263

 

$

 —

 

$

 —

 

$

316,263

 

Available-for-sale debt securities

 

 

543,859

 

 

 —

 

 

536,510

 

 

7,349

 

 

543,859

 

Held-to-maturity debt securities

 

 

61,664

 

 

 —

 

 

59,725

 

 

 —

 

 

59,725

 

Equity securities with readily determinable fair values

 

 

2,807

 

 

2,513

 

 

294

 

 

 —

 

 

2,807

 

Mortgage loans held for sale, at fair value

 

 

39,384

 

 

 —

 

 

39,384

 

 

 —

 

 

39,384

 

Consumer loans held for sale, at fair value

 

 

3,431

 

 

 —

 

 

 —

 

 

3,431

 

 

3,431

 

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

 

 

12,089

 

 

 —

 

 

 —

 

 

12,089

 

 

12,089

 

Loans, net

 

 

4,445,168

 

 

 —

 

 

 —

 

 

4,425,308

 

 

4,425,308

 

Federal Home Loan Bank stock

 

 

38,900

 

 

 —

 

 

 

 

 —

 

 

NA

 

Accrued interest receivable

 

 

12,037

 

 

 —

 

 

12,037

 

 

 —

 

 

12,037

 

Rate lock loan commitments

 

 

4,568

 

 

 —

 

 

4,568

 

 

 —

 

 

4,568

 

Interest rate swap agreements

 

 

14,013

 

 

 —

 

 

14,013

 

 

 —

 

 

14,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

1,300,891

 

 

 —

 

$

1,300,891

 

 

 —

 

$

1,300,891

 

Transaction deposits

 

 

2,033,829

 

 

 —

 

 

2,033,829

 

 

 —

 

 

2,033,829

 

Time deposits

 

 

736,737

 

 

 —

 

 

748,977

 

 

 —

 

 

748,977

 

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

 

 

126,080

 

 

 —

 

 

126,080

 

 

 —

 

 

126,080

 

Federal Home Loan Bank advances

 

 

572,500

 

 

 —

 

 

575,135

 

 

 —

 

 

575,135

 

Subordinated note

 

 

41,240

 

 

 —

 

 

34,571

 

 

 —

 

 

34,571

 

Accrued interest payable

 

 

3,437

 

 

 —

 

 

3,437

 

 

 —

 

 

3,437

 

Mandatory forward contracts

 

 

2,826

 

 

 —

 

 

2,826

 

 

 —

 

 

2,826

 

Interest rate swap agreements

 

 

14,249

 

 

 —

 

 

14,249

 

 

 —

 

 

14,249

 

 

 

 

54

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

55

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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

    

 

 

March 31, 

 

(in thousands)

 

2020

    

2019

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

19,224

 

$

8,971

 

Origination of mortgage loans held for sale

 

 

125,273

 

 

40,714

 

Proceeds from the sale of mortgage loans held for sale

 

 

(109,918)

 

 

(39,632)

 

Net gain on sale of mortgage loans held for sale

 

 

4,805

 

 

1,260

 

Balance, end of period

 

$

39,384

 

$

11,313

 

 

The following table presents the components of Mortgage Banking income:

 

 

 

 

 

 

 

 

 

 

 

    

    

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

 

2020

    

2019

 

 

 

 

 

 

 

 

 

 

Net gain realized on sale of mortgage loans held for sale

 

 

$

3,078

 

$

875

 

Net change in fair value recognized on loans held for sale

 

 

 

642

 

 

(82)

 

Net change in fair value recognized on rate lock loan commitments

 

 

 

3,779

 

 

487

 

Net change in fair value recognized on forward contracts

 

 

 

(2,694)

 

 

(20)

 

Net gain recognized

 

 

 

4,805

 

 

1,260

 

 

 

 

 

 

 

 

 

 

Loan servicing income

 

 

 

675

 

 

601

 

Amortization of mortgage servicing rights

 

 

 

(585)

 

 

(322)

 

Change in mortgage servicing rights valuation allowance

 

 

 

(100)

 

 

 —

 

Net servicing income recognized

 

 

 

(10)

 

 

279

 

Total Mortgage Banking income

 

 

$

4,795

 

$

1,539

 

 

Activity for capitalized mortgage servicing rights was as follows:

 

 

 

 

 

 

 

 

 

 

 

    

 

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

    

2020

    

2019

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

$

5,888

 

$

4,919

 

Additions

 

 

 

791

 

 

338

 

Amortized to expense

 

 

 

(585)

 

 

(322)

 

Change in valuation allowance

 

 

 

(100)

 

 

 —

 

Balance, end of period

 

 

$

5,994

 

$

4,935

 

 

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

 

 

 

 

 

 

 

 

 

 

 

    

 

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

    

2020

    

2019

 

 

 

 

 

 

 

 

 

 

Beginning valuation allowance

 

 

$

 —

 

$

 —

 

Charge (credit) during the period

 

 

 

100

 

 

 —

 

Ending valuation allowance

 

 

$

100

 

$

 —

 

 

56

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Other information relating to mortgage servicing rights follows:

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

  

  

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of mortgage servicing rights portfolio

 

$

6,724

 

 

$

9,068

 

 

 

Monthly weighted average prepayment rate of unpaid principal balance*

 

 

292

%

 

 

202

%

 

 

Discount rate

 

 

10.00

%

 

 

10.00

%

 

 

Weighted average foreclosure rate

 

 

0.12

%

 

 

0.14

%

 

 

Weighted average life in years

 

 

4.29

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

38,208

 

$

39,384

 

$

18,690

 

$

19,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate lock loan commitments

 

$

141,916

 

$

4,568

 

$

32,776

 

$

789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

$

149,480

 

$

2,826

 

$

44,919

 

$

131

 

 

57

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

(112)

 

$

(84)

 

$

(46)

 

$

(34)

Interest rate swap on FHLB advance

 

 

10,000

 

2.33

%

 

3M LIBOR

 

12/2013 - 12/2020

 

 

(124)

 

 

(93)

 

 

(58)

 

 

(43)

Total

 

$

20,000

 

 

 

 

 

 

 

 

$

(236)

 

$

(177)

 

$

(104)

 

$

(77)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

    

2020

    

2019

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

$

12

 

$

(8)

 

Interest rate swap on FHLB advance

 

 

17

 

 

(11)

 

Total interest (benefit) expense on swap transactions

 

$

29

 

$

(19)

 

 

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

 

 

 

 

 

March 31, 

 

 

(in thousands)

    

    

2020

    

2019

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

(161)

 

$

(69)

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) reclassified from OCI on derivative (effective portion)

 

 

 

(29)

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 —

 

 

 —

 

 

 

 

The estimated net amount of the existing losses reported in AOCI at March 31, 2020 expected to be reclassified into earnings within the next 12 months is considered immaterial.

 

58

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 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

 

$

142,846

 

$

14,013

 

$

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

 

$

142,846

 

$

14,013

 

$

102,051

 

$

5,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting interest rate swaps with institutional swap dealer

 

Pay fixed/receive variable

 

 

142,846

 

 

(14,013)

 

 

102,051

 

 

(5,007)

 

 

Total

 

 

 

$

285,692

 

$

 —

 

$

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 $14.5 million and $7.5 million at March 31, 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

 

 

 

March 31, 

 

(in thousands, except per share data)

    

2020

    

2019

    

 

 

 

 

 

 

 

 

Net income

 

$

26,697

 

$

29,516

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

Class A Shares

 

 

(5,358)

 

 

(4,933)

 

Class B Shares

 

 

(572)

 

 

(531)

 

Undistributed net income for basic earnings per share

 

 

20,767

 

 

24,052

 

Weighted average potential dividends on Class A shares upon exercise of dilutive options

 

 

(17)

 

 

(35)

 

Undistributed net income for diluted earnings per share

 

$

20,750

 

$

24,017

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Class A Shares

 

 

18,831

 

 

18,761

 

Class B Shares

 

 

2,204

 

 

2,212

 

Effect of dilutive securities on Class A Shares outstanding

 

 

59

 

 

133

 

Weighted average shares outstanding including dilutive securities

 

 

21,094

 

 

21,106

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Class A Common Stock:

 

 

 

 

 

 

 

Per share dividends distributed

 

$

0.29

 

$

0.26

 

Undistributed earnings per share*

 

 

1.00

 

 

1.16

 

Total basic earnings per share - Class A Common Stock

 

$

1.29

 

$

1.42

 

 

 

 

 

 

 

 

 

Class B Common Stock:

 

 

 

 

 

 

 

Per share dividends distributed

 

$

0.26

 

$

0.24

 

Undistributed earnings per share*

 

 

0.91

 

 

1.05

 

Total basic earnings per share - Class B Common Stock

 

$

1.17

 

$

1.29

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

Class A Common Stock:

 

 

 

 

 

 

 

Per share dividends distributed

 

$

0.29

 

$

0.26

 

Undistributed earnings per share*

 

 

0.99

 

 

1.15

 

Total diluted earnings per share - Class A Common Stock

 

$

1.28

 

$

1.41

 

 

 

 

 

 

 

 

 

Class B Common Stock:

 

 

 

 

 

 

 

Per share dividends distributed

 

$

0.26

 

$

0.24

 

Undistributed earnings per share*

 

 

0.90

 

 

1.04

 

Total diluted earnings per share - Class B Common Stock

 

$

1.16

 

$

1.28

 


*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

 

 

 

 

March 31, 

 

 

    

    

2020

    

2019

 

 

 

 

 

 

 

 

Antidilutive stock options

 

 

175,000

 

163,000

 

Average antidilutive stock options

 

 

159,000

 

162,000

 

 

 

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Table of Contents

 

 

 

14. OTHER COMPREHENSIVE INCOME

 

OCI components and related tax effects were as follows:

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

 

 

March 31, 

 

(in thousands)

    

2020

    

2019

 

 

 

 

 

 

 

 

 

Available-for-Sale Debt Securities:

 

 

 

 

 

 

 

Change in unrealized gain on AFS debt securities

 

$

7,777

 

$

3,659

 

Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings

 

 

 1

 

 

(33)

 

Net unrealized (losses) gains

 

 

7,778

 

 

3,626

 

Tax effect

 

 

(1,945)

 

 

(762)

 

Net of tax

 

 

5,833

 

 

2,864

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

 

(161)

 

 

(69)

 

Reclassification amount for net derivative losses realized in income

 

 

29

 

 

(19)

 

Net unrealized gains

 

 

(132)

 

 

(88)

 

Tax effect

 

 

32

 

 

18

 

Net of tax

 

 

(100)

 

 

(70)

 

 

 

 

 

 

 

 

 

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

 

$

5,733

 

$

2,794

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts Reclassified from AOCI

 

 

 

Affected Line Items

 

Three Months Ended

 

 

 

in the Consolidated

 

March 31, 

 

(in thousands)

  

Statements of Income

  

2020

    

2019

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

Interest benefit (expense) on deposits

 

$

(12)

 

$

 8

 

Interest rate swap on FHLB advance

 

Interest benefit (expense) on FHLB advances

 

 

(17)

 

 

11

 

Total derivative gains (losses) on cash flow hedges

 

Total interest benefit (expense)

 

 

(29)

 

 

19

 

Tax effect

 

Income tax (benefit) expense

 

 

 7

 

 

(4)

 

Net of tax

 

Net income

 

$

(22)

 

$

15

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

2020

    

 

 

 

(in thousands)

 

December 31, 2019

 

Change

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on AFS debt securities

 

$

2,211

 

$

5,832

 

$

8,043

 

Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings

 

 

964

 

 

 1

 

 

965

 

Unrealized loss on cash flow hedges

 

 

(77)

 

 

(100)

 

 

(177)

 

Total unrealized gain

 

$

3,098

 

$

5,733

 

$

8,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

2019

    

 

 

 

(in thousands)

 

December 31, 2018

 

Change

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on AFS debt securities

 

$

(2,165)

 

$

2,891

 

$

726

 

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

 

 

(70)

 

 

20

 

Total unrealized gain (loss)

 

$

(997)

 

$

2,794

 

$

1,797

 

 

 

 

 

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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 March 31, 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)

 

$

40,620

 

$

4,307

 

$

214

 

   

$

45,141

 

 

$

20,525

 

$

7,072

 

 

$

27,597

 

 

 

$

72,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

3,138

 

 

11

 

 

 —

 

 

 

3,149

 

 

 

(13)

 

 

 —

 

 

 

(13)

 

 

 

 

3,136

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

15,823

 

 

 —

 

 

 

15,823

 

 

 

 

15,823

 

Mortgage banking income(1)

 

 

 —

 

 

 —

 

 

4,795

 

 

 

4,795

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

4,795

 

Interchange fee income

 

 

2,493

 

 

 —

 

 

 —

 

 

 

2,493

 

 

 

59

 

 

 —

 

 

 

59

 

 

 

 

2,552

 

Program fees(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

312

 

 

2,312

 

 

 

2,624

 

 

 

 

2,624

 

Increase in cash surrender value of BOLI(1)

 

 

389

 

 

 —

 

 

 —

 

 

 

389

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

389

 

Net gains (losses) on OREO

 

 

 3

 

 

 —

 

 

 —

 

 

 

 3

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

 3

 

Other

 

 

1,212

 

 

 —

 

 

24

 

 

 

1,236

 

 

 

11

 

 

 —

 

 

 

11

 

 

 

 

1,247

 

Total noninterest income

 

 

7,235

 

 

11

 

 

4,819

 

 

 

12,065

 

 

 

16,192

 

 

2,312

 

 

 

18,504

 

 

 

 

30,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

47,855

 

$

4,318

 

$

5,033

 

 

$

57,206

 

 

$

36,717

 

$

9,384

 

 

$

46,101

 

 

 

$

103,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration(2)

 

 

46

%  

 

 4

%  

 

 5

%  

 

 

55

%  

 

 

36

%  

 

 9

%  

 

 

45

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 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)

 

$

41,347

 

$

2,895

 

$

102

 

   

$

44,344

 

 

$

20,438

 

$

7,517

 

 

$

27,955

 

 

 

$

72,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

3,293

 

 

10

 

 

 —

 

 

 

3,303

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

3,303

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

17,100

 

 

 —

 

 

 

17,100

 

 

 

 

17,100

 

Mortgage banking income(1)

 

 

 —

 

 

 —

 

 

1,539

 

 

 

1,539

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

1,539

 

Interchange fee income

 

 

2,626

 

 

 —

 

 

 —

 

 

 

2,626

 

 

 

131

 

 

 —

 

 

 

131

 

 

 

 

2,757

 

Program fees(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

146

 

 

928

 

 

 

1,074

 

 

 

 

1,074

 

Increase in cash surrender value of BOLI(1)

 

 

382

 

 

 —

 

 

 —

 

 

 

382

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

382

 

Net gains (losses) on OREO

 

 

130

 

 

 —

 

 

 —

 

 

 

130

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

130

 

Other

 

 

465

 

 

 —

 

 

40

 

 

 

505

 

 

 

 —

 

 

627

 

 

 

627

 

 

 

 

1,132

 

Total noninterest income

 

 

6,896

 

 

10

 

 

1,579

 

 

 

8,485

 

 

 

17,377

 

 

1,555

 

 

 

18,932

 

 

 

 

27,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

48,243

 

$

2,905

 

$

1,681

 

 

$

52,829

 

 

$

37,815

 

$

9,072

 

 

$

46,887

 

 

 

$

99,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration(2)

 

 

48

%  

 

 3

%  

 

 2

%  

 

 

53

%  

 

 

38

%  

 

 9

%  

 

 

47

%  

 

 

 

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.

 

62

Table of Contents

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 March 31, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.

 

The 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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Table of Contents

Segment information follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 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

 

$

40,620

 

$

4,307

 

$

214

 

 

$

45,141

 

 

$

20,525

 

$

7,072

 

 

$

27,597

 

 

 

$

72,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit loss expense

 

 

5,589

 

 

332

 

 

 —

 

 

 

5,921

 

 

 

15,133

 

 

1,706

 

 

 

16,839

 

 

 

 

22,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

15,823

 

 

 —

 

 

 

15,823

 

 

 

 

15,823

 

Mortgage banking income

 

 

 —

 

 

 —

 

 

4,795

 

 

 

4,795

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

4,795

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

312

 

 

2,312

 

 

 

2,624

 

 

 

 

2,624

 

Net gain on branch divestiture

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

 —

 

Other noninterest income

 

 

7,235

 

 

11

 

 

24

 

 

 

7,270

 

 

 

57

 

 

 —

 

 

 

57

 

 

 

 

7,327

 

Total noninterest income

 

 

7,235

 

 

11

 

 

4,819

 

 

 

12,065

 

 

 

16,192

 

 

2,312

 

 

 

18,504

 

 

 

 

30,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

36,647

 

 

803

 

 

1,996

 

 

 

39,446

 

 

 

6,629

 

 

894

 

 

 

7,523

 

 

 

 

46,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

5,619

 

 

3,183

 

 

3,037

 

 

 

11,839

 

 

 

14,955

 

 

6,784

 

 

 

21,739

 

 

 

 

33,578

 

Income tax expense

 

 

460

 

 

716

 

 

638

 

 

 

1,814

 

 

 

3,497

 

 

1,570

 

 

 

5,067

 

 

 

 

6,881

 

Net income

 

$

5,159

 

$

2,467

 

$

2,399

 

 

$

10,025

 

 

$

11,458

 

$

5,214

 

 

$

16,672

 

 

 

$

26,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end assets

 

$

4,471,235

 

$

851,405

 

$

53,298

 

 

$

5,375,938

 

 

$

240,898

 

$

105,197

 

 

$

346,095

 

 

 

$

5,722,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.80

%  

 

2.68

%  

 

NM

 

 

 

3.65

%  

 

 

NM

 

 

NM

 

 

 

NM

 

 

 

 

5.57

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration*

 

 

46

%  

 

 4

%  

 

 5

%  

 

 

55

%  

 

 

36

%  

 

 9

%  

 

 

45

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 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

 

$

41,347

 

$

2,895

 

$

102

 

 

$

44,344

 

 

$

20,438

 

$

7,517

 

 

$

27,955

 

 

 

$

72,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit loss expense

 

 

189

 

 

225

 

 

 —

 

 

 

414

 

 

 

13,434

 

 

3,383

 

 

 

16,817

 

 

 

 

17,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 

 

 

 

 —

 

 

 

 —

 

 

 

17,100

 

 

 —

 

 

 

17,100

 

 

 

 

17,100

 

Mortgage banking income

 

 

 

 

 

 

1,539

 

 

 

1,539

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

1,539

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

146

 

 

928

 

 

 

1,074

 

 

 

 

1,074

 

Other noninterest income

 

 

6,896

 

 

10

 

 

40

 

 

 

6,946

 

 

 

131

 

 

627

 

 

 

758

 

 

 

 

7,704

 

Total noninterest income

 

 

6,896

 

 

10

 

 

1,579

 

 

 

8,485

 

 

 

17,377

 

 

1,555

 

 

 

18,932

 

 

 

 

27,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

35,550

 

 

758

 

 

1,320

 

 

 

37,628

 

 

 

7,114

 

 

767

 

 

 

7,881

 

 

 

 

45,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

12,504

 

 

1,922

 

 

361

 

 

 

14,787

 

 

 

17,267

 

 

4,922

 

 

 

22,189

 

 

 

 

36,976

 

Income tax expense

 

 

1,765

 

 

433

 

 

76

 

 

 

2,274

 

 

 

4,030

 

 

1,156

 

 

 

5,186

 

 

 

 

7,460

 

Net income

 

$

10,739

 

$

1,489

 

$

285

 

 

$

12,513

 

 

$

13,237

 

$

3,766

 

 

$

17,003

 

 

 

$

29,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end assets

 

$

4,471,419

 

$

559,545

 

$

17,087

 

 

$

5,048,051

 

 

$

224,485

 

$

93,232

 

 

$

317,717

 

 

 

$

5,365,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.84

%  

 

2.84

%  

 

NM

 

 

 

3.76

%  

 

 

NM

 

 

NM

 

 

 

NM

 

 

 

 

5.66

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration*

 

 

48

%  

 

 3

%  

 

 2

%  

 

 

53

%  

 

 

38

%  

 

 9

%  

 

 

47

%  

 

 

 

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. SUBSEQUENT EVENTS

 

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

 

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

 

On March 27, 2020, the U.S. Congress passed the CARES Act, which provided several forms of economic relief designed to defray the impact of COVID-19.  In April 2020, through its own independent relief efforts and CARES Act provisions, the Company began deferring and forbearing on loan principal and/or interest payments for many of its loan clients.  The deferral and forbearance periods were generally three months.  Loans deferred or in forbearance as a result of the pandemic are generally not considered TDRs by the Company if, prior to the pandemic, the borrower was performing in accordance with loan terms. The following table illustrates the loans for which COVID-19 related deferral and forbearance agreements were executed subsequent to March 31, 2020 and through April 30, 2020. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

     

Loans Deferred

     

Loans in Forbearance

April 30, 2020 (dollars in thousands)

 

 

# of Loans (1)

 

Balance(1)

 

# of Loans (1)

 

Balance(1)

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

166

 

$

33,756

 

22

 

$

6,611

Nonowner occupied

 

 

191

 

 

43,422

 

 —

 

 

 —

Commercial real estate

 

 

468

 

 

373,235

 

 —

 

 

 —

Construction & land development

 

 

15

 

 

9,660

 

 —

 

 

 —

Commercial & industrial

 

 

310

 

 

98,373

 

 —

 

 

 —

Lease financing receivables

 

 

 5

 

 

159

 

 —

 

 

 —

Home equity

 

 

73

 

 

11,316

 

 1

 

 

44

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards(2)

 

 

 —

 

 

 —

 

 —

 

 

 —

Overdrafts

 

 

 —

 

 

 —

 

 —

 

 

 —

Automobile loans

 

 

49

 

 

923

 

 —

 

 

 —

Other consumer

 

 

14

 

 

2,981

 

 —

 

 

 —

Total Traditional Banking

 

 

1,291

 

 

573,825

 

23

 

 

6,655

Warehouse lines of credit

 

 

 —

 

 

 —

 

 —

 

 

 —

Total Core Banking

    

 

1,291

 

 

573,825

 

23

 

 

6,655

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 —

 

 

 —

 

 —

 

 

 —

Easy Advances

 

 

 —

 

 

 —

 

 —

 

 

 —

Other TRS loans

 

 

 —

 

 

 —

 

 —

 

 

 —

Republic Credit Solutions

 

 

 —

 

 

 —

 

 —

 

 

 —

Total Republic Processing Group

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

1,291

 

$

573,825

 

23

 

$

6,655


(1)

– Reflects loans modified and recorded on the Bank’s core loan systems.  Excludes loans in process of modification.

(2)

– The Bank offered skip-a-pay options to its credit card clients during April 2020.

 

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In addition to the on-balance sheet portfolio identified in the table above, the Bank serviced for others $11 million in loans at April 30, 2020 whose borrowers entered into COVID-19 related forbearance agreements subsequent to March 31, 2020. The Bank is required to forward up to four months of contractual payments to its investors for serviced loans even if the underlying borrower has not made these payments to the Bank.

 

The CARES Act provided for the SBA PPP. The PPP allows the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the pandemic. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. The following table presents the number and amount of SBA PPP loans recorded on the Bank’s core loan applications subsequent to March 31, 2020 and as of April 30, 2020. Loans in process of origination are excluded from the table below.

 

 

 

 

 

 

 

 

 

    

     

Number of

    

Recorded

April 30, 2020 (dollars in thousands)

 

 

PPP Loans

 

Investment

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

Commercial & industrial

 

 

2,256

 

$

435,699

 

To provide liquidity to banks administering the SBA’s PPP, the FRB created the PPPLF, a lending facility secured by the PPP loans of the participating banks.  The FRB charges the banks a rate of 0.35% for the amounts borrowed through the PPPLF.  As of April 30, 2020, the Bank had borrowed $175 million from the FRB under its PPPLF.

 

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Table of Contents

 

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;

·

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;

·

integrations of acquired businesses;

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·

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.”

 

BUSINESS SEGMENT COMPOSITION

 

As of March 31, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.

 

(I)  Traditional Banking segment

 

The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 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.

 

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Table of Contents

As of March 31, 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, Georgia, Illinois, Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia, Washington, and Wisconsin, as well as, the District of Columbia.

 

Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial 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.  

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

 

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

 

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

 

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

 

(II)  Warehouse Lending segment

 

Through its Warehouse 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.

 

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.”

 

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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:

o

there is no recourse to the taxpayer, 

o

no negative credit reporting on the taxpayer, and

o

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. Credit loss expense on EAs are estimated when advances are made, with credit loss expense for all expected EA losses made in the first quarter of each year. Unpaid EAs are charged off by June 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged off loans.

 

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

 

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

 

 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 including the consumer’s ability to repay. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:

 

·

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

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

 

·

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

 

·

RCS installment loan products – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment loan product across the U.S. using a third-party service provider. As part of the program, the Bank sold 100% of the balances generated through the program back to its third-party service provider approximately 21 days after origination. During the second quarter of 2018, the Bank and its third-party service provider suspended the origination of new loans and the sale of unsold loans through this program. Since program suspension in 2018, the Bank has carried all unsold loans under this program as “held for investment” on its balance sheet and has continued to wind down those balances. Additionally, loans under this program are carried at fair value under a fair value option on the Bank’s balance sheet with the portfolio marked to market monthly. Approximately $827,000 of balances remained held for investment under this program as of March 31, 2020.

 

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

 

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

 

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RECENT EVENTS

 

With the onset of the COVID-19 pandemic, the last month of the first quarter of 2020 was primarily focused on the impact of the pandemic and Republic’s corporate response to it. In that regard, the Company’s primary focus in response to the pandemic has been:

 

(1) safeguarding the health of the Company’s associates and its clients;

(2) cushioning the Company’s clients from the pandemic’s negative economic impact;

(3) mitigating the Company’s risk of loss; and

(4) measuring, forecasting and planning for the negative financial impact of the pandemic to the Company on a go-forward basis.

 

With respect to safeguarding the Company’s associates and clients, Republic quickly and successfully enacted a social distancing protocol, which allowed the substantial majority of the Company’s back-office operations to work from home. For those personnel not able to work from home, Republic physically distanced these associates from each other within its office space. Within the Company’s banking centers, Republic changed its in-person client service hours to be by appointment-only in order to limit the number of people within the banking centers at any point in time. In addition, the Company diverted much of its client service interaction to its drive-thru operations, with many of the drive-thru transactions facilitated through ITMs.

 

To help cushion the impact of the COVID-19 virus on the Company’s deposit clients, Republic suspended certain deposit fees for transaction accounts for a yet-to-be-determined period of time. In addition, the Company also began waiving early withdrawal penalties for its term certificates of deposits (“CDs”) during the crisis so these clients could access this source of funds at no additional cost. For the Company’s retail loan clients, Republic began offering various payment relief options depending on the loan program.  In order to respond to anticipated demand for the SBA’s PPP, the Company quickly refocused its salesforce and many of its back-office operations to facilitate the program. Republic was able to start accepting applications the first day of the program.

 

In order to mitigate future risks and uncertainties, Republic increased its communication frequency across the organization.  The Company started with its Business Continuity Planning team, enacting a seven-day-a-week daily call with the sales and operational areas to ensure that everyone in the organization was aware of the major issues at hand and that the Company was protecting its assets while providing proper service and attention to its clients. 

 

In addition to its daily operational calls, the Company also added a second Asset-Liability Committee meeting each week to ensure its liquidity monitoring remains diligent and its loan and deposit pricing remains appropriate for the current risk environment. The Company also pledged additional collateral to the FHLB and the Federal Reserve discount window since the pandemic began, in order to fortify its liquidity position over the near term for any possible unanticipated cash-flow needs. 

 

To further mitigate risks within its loan portfolio, the Company made changes to its overall underwriting matrices during March, including revisions to many of its minimum credit score requirements as well as its loan-to-value maximums for newly underwritten commercial and residential clients.  Also, through its third-party marketer/servicer, the Company reduced marketing for its subprime RCS line-of-credit product.  With the on-going fluidity in the pandemic situation, management will continue to closely monitor the Bank’s underwriting standards and make appropriate revisions as facts and circumstances warrant.  

 

Overall, the Company is still in the early process of measuring, forecasting and planning for the negative financial impact of the pandemic.  As previously disclosed, Republic adopted the CECL accounting method on January 1st of this year. Upon adoption, Republic increased its ACLL by approximately $6.7 million in order to account for the expected life-of-loan credit losses within its portfolio.  This increase was offset with a tax-effected decrease to retained earnings. With the onset of the COVID-19 pandemic, Congress provided companies with an option to delay adoption of CECL within the recently enacted CARES Act. The Company, however, chose to move forward with CECL as previously planned due to the uncertainty around future adoption later this year.  As a result, the Company recorded an additional $7.2 million charge to its credit loss expense during the first quarter of 2020 to account for potential losses within the portfolio brought about by the impact of the pandemic. Republic’s credit loss expense could be subject to future fluctuations, up and down, as additional information becomes available about this very uncertain pandemic situation.

 

In regard to industry concentrations, the Bank lends to clients in industries that have been deemed “non-essential” or that have had their business models upended by the pandemic. Further economic damage to these clients may leave them unable to service their debt with the Bank.  The following table exhibits Republic’s top 20 loan concentrations by industry as of March 31, 2020.

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Table 1 — Top 20 Industry Concentrations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

 

Mar. 31, 2020

 

Industry

 

 

Outstanding

 

 

Available to Draw

 

Total Committed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Credit (primarily Warehouse Lines of Credit)

 

 

$

854,191

 

 

$

319,334

 

$

1,173,525

 

Lessors of Nonresidential Buildings (except Miniwarehouses)

 

 

 

588,503

 

 

 

28,404

 

 

616,907

 

Lessors of Residential Buildings and Dwellings

 

 

 

440,979

 

 

 

40,953

 

 

481,932

 

Commercial Banking

 

 

 

52,997

 

 

 

34,753

 

 

87,750

 

Hotels (except Casino Hotels) and Motels

 

 

 

76,665

 

 

 

3,443

 

 

80,108

 

Offices of Physicians (except Mental Health Specialists)

 

 

 

62,823

 

 

 

16,075

 

 

78,898

 

Limited-Service Restaurants

 

 

 

63,004

 

 

 

596

 

 

63,600

 

Full-Service Restaurants

 

 

 

49,384

 

 

 

4,307

 

 

53,691

 

Used Car Dealers

 

 

 

20,731

 

 

 

19,867

 

 

40,598

 

Religious Organizations

 

 

 

30,125

 

 

 

3,789

 

 

33,914

 

Fitness and Recreational Sports Centers

 

 

 

30,954

 

 

 

1,455

 

 

32,409

 

Offices of Lawyers

 

 

 

22,558

 

 

 

6,910

 

 

29,468

 

New Housing For-Sale Builders

 

 

 

17,537

 

 

 

7,403

 

 

24,940

 

Lessors of Other Real Estate Property

 

 

 

22,104

 

 

 

1,219

 

 

23,323

 

Offices of Dentists

 

 

 

21,656

 

 

 

1,411

 

 

23,067

 

Line-Haul Railroads

 

 

 

10,816

 

 

 

10,000

 

 

20,816

 

Commercial and Institutional Building Construction

 

 

 

13,221

 

 

 

7,285

 

 

20,506

 

Elementary and Secondary Schools

 

 

 

16,564

 

 

 

3,454

 

 

20,018

 

Fresh Fruit and Vegetable Merchant Wholesalers

 

 

 

10,372

 

 

 

9,249

 

 

19,621

 

Legislative Bodies

 

 

 

18,704

 

 

 

 —

 

 

18,704

 

Total Top 20 Industry Concentrations

 

 

$

2,423,888

 

 

$

519,907

 

$

2,943,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

·

Part I Item 1 “Financial Statements”

o

Footnote 2 “Investment Securities”

o

Footnote 4 “Loans and Allowance for Credit Losses”

o

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

o

Footnote 17 “Subsequent Events”

 

·

Part II Item 1A “Risk Factors”

 

OVERVIEW  (Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019)

 

Total Company net income for the first quarter of 2020 was $26.7 million, a $2.8 million, or 10%,  decrease from the same period in 2019. Diluted EPS decreased to $1.28 for the three months ended March 31, 2020 compared to $1.41 for the same period in 2019.     Net income was down from the first quarter of 2019, as it was significantly impacted by the increase in the Company’s estimated ACL in response to the potential impact of the COVID-19 pandemic.

 

The following are general highlights by reportable segment:

 

Traditional Banking segment

 

·

Net income decreased $5.6 million, or 52%, for the first quarter of 2020 compared to the same period in 2019.  

 

·

Net interest income decreased $727,000, or 2%, for the first quarter of 2020 compared to the same period in 2019.

 

·

Driven by COVID-19 related concerns, credit loss expense increased $5.4 million to $5.6 million for the first quarter of 2020 compared to $189,000 for the same period in 2019.

 

·

Total noninterest income increased  $339,000, or 5%, for the first quarter of 2020 compared to the same period in 2019.

 

·

Total noninterest expense increased  $1.1 million, or 3%, for the first quarter of 2020 compared to same period in 2019.

 

·

Total nonperforming loans to total loans for the Traditional Banking segment was 0.58% at March 31, 2020 compared to 0.65% at December 31, 2019.

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·

Delinquent loans to total loans for the Traditional Banking segment was 0.34% at March 31, 2020 compared to 0.36% at December 31, 2019.

 

Warehouse Lending segment

 

·

Net income increased $978,000, or 66%, for the first quarter of 2020 compared to the same period in 2019.

 

·

Net interest income increased $1.4 million, or 49%, for the first quarter of 2020 compared to the same period in 2019.

 

·

The Warehouse credit loss expense was a net charge of $332,000 for the first quarter of 2020 compared to a net charge of $225,000 for the same period in 2019.

 

·

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

 

·

Average line usage was 55% during the first quarter of 2020 compared to 39% during the same period in 2019.

 

Mortgage Banking segment

 

·

Within the Mortgage Banking segment, mortgage banking income increased  $3.3 million, or 212%, during the first quarter of 2020 compared to the same period in 2019.

 

·

Overall, Republic’s originations of secondary market loans totaled $125 million during the first quarter of 2020 compared to $41 million during the same period in 2019, with the Company’s gain recognized as a percent of total originations increasing to 3.84% during the first quarter of 2020 from 3.09% during the same period in 2019.

 

Tax Refund Solutions segment

 

·

Net income decreased  $1.8 million, or 13%, for the first quarter of 2020 compared to the same period in 2019. 

 

·

Net interest income increased $87,000 for the first quarter of 2020 compared to the same period in 2019.  

 

·

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

 

·

Overall, TRS recorded a net charge to credit loss expense of $15.1 million during the first quarter of 2020 compared to a net charge of $13.4 million for the same period in 2019.  

 

·

Noninterest income decreased $1.2 million, or 7%, for the first quarter of 2020 compared to the same period in 2019.

 

·

Net RT revenue decreased  $1.3 million, or 7%, for the first quarter of 2020 compared to the same period in 2019.

 

·

Noninterest expense was $6.6 million for the first quarter of 2020 compared to $7.1 million for the same period in 2019.

 

Republic Credit Solutions segment

 

·

Net income increased $1.4 million, or 38%, for the first quarter of 2020 compared to the same period in 2019. 

 

·

Net interest income decreased $445,000, or 6%, for the first quarter of 2020 compared to the same period in 2019.  

 

·

Overall, RCS recorded a net charge to credit loss expense of $1.7 million during the first quarter of 2020 compared to a net charge of $3.4 million for the same period in 2019.  

 

·

Noninterest income increased $757,000, or 49%,  from the first quarter of 2019 to the first quarter of 2020.

 

·

Noninterest expense was $894,000 for the first quarter of 2020 compared to $767,000 for the same period in 2019.

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·

Total nonperforming loans to total loans for the RCS segment was 0.30% at March 31, 2020 compared to 0.10% at December 31, 2019.

 

·

Delinquent loans to total loans for the RCS segment was 6.94% at March 31, 2020 compared to 7.25% at December 31, 2019.

 

RESULTS OF OPERATIONS (Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019)

 

Net Interest Income

 

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

 

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

 

Total Company net interest income increased  1% during the first quarter of 2020 compared to the same period in 2019.  Total Company net interest margin decreased to 5.57% during the first quarter of 2020 compared to 5.66% 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. While the Company and its operating segments were generally able to maintain their net interest spreads during the quarter as compared to the first quarter of 2019, these same units experienced compression in their net interest margins compared to the first quarter of 2019. The compression in the net interest margin across the Company and its operating segments was primarily attributable to the decreased value of the Company’s noninterest-bearing funding sources. The difference between the Company’s net interest margin and net interest spread was 32 basis points during the first quarter of 2020 compared to 40 basis points during the first quarter of 2019, with the differential representing the decreased value to the net interest margin of noninterest-bearing deposits and stockholders’ equity. The decrease in this value resulted from a 25 basis-point decline in the yield on the Company interest-earning assets from period to period.  Management believes the Company’s net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice lower, while further decreases in the rates of its interest-bearing liabilities are limited.

 

In addition to the general compression expected to the Company’s net interest margin in the near term, the Company’s net interest margin could be further negatively impacted by a negative interest rate environment. Some market experts are predicting a possible negative interest rate environment for the U.S., in which the yield on U.S. Treasury securities becomes negative for various terms over the yield curve. Recently, shorter term U.S. Treasury securities did experience negative yields for a brief period of time.  Overall, a sustained negative interest rate phenomenon across various points on the yield curve has never occurred in the U.S.  Because such an environment has never occurred in the U.S., it is difficult for management to project the impact of such an environment with the Company’s existing interest rate risk model.  Management does believe, however, a negative interest rate environment would likely significantly and negatively impact the Company’s net interest margin further, as overall asset yields continue to drop.  Unknown variables, which may further impact the Company’s net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.

 

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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 $727,000, or 2%, for the first quarter of 2020 compared to the same period in 2019. Traditional Banking’s net interest margin was 3.80% for the first quarter of 2020, a decrease of four basis points over the same period in 2019.  

 

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

 

·

Average loans decreased $41 million, or 1%, during the first quarter of 2020 compared to the same period in 2019. The primary contributor for the decrease in the year-over-year average balances was the sale of $128 million of the Traditional Bank’s loans in November 2019 as part of the Company’s branch divestiture. 

   

·

The net interest margin compressed partially due to 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 13 basis points during the first quarter of 2020 compared to 21 basis points during the first quarter of 2019, with the differential representing the decreased value to the net interest margin of noninterest-bearing deposits and stockholders’ equity. The decrease in this value resulted from  an 18 basis-point decline in the yield on the Traditional Banking segment’s interest-earning assets from period to period.

 

Warehouse Lending segment

 

As  mortgage rates fell during the first quarter of 2020, a surge in consumer refinance volume for Warehouse clients drove a 58% increase in average Warehouse loans for the quarter, which more than offset a 16-basis point decline in the Warehouse net interest margin.  Pricing pressure to the Bank on Warehouse lines of credit resulting from the negative impact of an inverted yield curve on the Bank’s Warehouse clients primarily drove the 16-basis-point compression in the Warehouse segment’s net interest margin.

 

Tax Refund Solutions segment

 

TRS’s net interest income increased $87,000 for the first quarter of 2020 compared to the same period in 2019.  

 

TRS’s EA product earned $19.3 million in interest income during the first quarter of 2020, a $405,000 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 $445,000, or 6%, from the first quarter of 2019 to the first 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 $6.0 million during the first quarter of 2020 compared to $6.6 million during the same period in 2019 and accounted for 80% and 81% 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, through its third-party marketer/servicer, reduced marketing for the product in response to the COVID-19 pandemic.  

 

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 March 31, 2020 the current on-balance-sheet Board-approved risk limit was $40 million for the Company. As of March 31, 2020, the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was $26 million.

 

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Table 2 — Total Company Average Balance Sheets and Interest Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

Three Months Ended March 31, 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

 

$

207,335

 

$

637

 

1.23

%  

$

289,928

 

$

1,724

 

2.38

%  

 

Investment securities, including FHLB stock (1)

 

 

519,726

 

 

3,009

 

2.32

 

 

563,752

 

 

4,081

 

2.90

 

 

TRS Easy Advance loans (2)

 

 

135,307

 

 

19,261

 

56.94

 

 

121,224

 

 

18,857

 

62.22

 

 

Other RPG loans (3) (6)

 

 

145,793

 

 

8,763

 

24.04

 

 

129,627

 

 

9,271

 

28.61

 

 

Outstanding Warehouse lines of credit(4)(6)

 

 

643,182

 

 

7,045

 

4.38

 

 

407,341

 

 

5,442

 

5.34

 

 

All other Traditional Bank loans (5) (6)

 

 

3,568,855

 

 

42,444

 

4.76

 

 

3,598,481

 

 

43,258

 

4.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

5,220,198

 

 

81,159

 

6.22

 

 

5,110,353

 

 

82,633

 

6.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit loss

 

 

(53,818)

 

 

 

 

 

 

 

(50,305)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning cash and cash equivalents

 

 

199,511

 

 

 

 

 

 

 

191,746

 

 

 

 

 

 

 

Premises and equipment, net

 

 

45,628

 

 

 

 

 

 

 

44,321

 

 

 

 

 

 

 

Bank owned life insurance

 

 

66,654

 

 

 

 

 

 

 

65,095

 

 

 

 

 

 

 

Other assets (1)

 

 

148,773

 

 

 

 

 

 

 

115,461

 

 

 

 

 

 

 

Total assets

 

$

5,626,946

 

 

 

 

 

 

$

5,476,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

1,128,781

 

$

682

 

0.24

%  

$

1,121,205

 

$

1,517

 

0.54

%  

 

Money market accounts

 

 

761,975

 

 

1,242

 

0.65

 

 

746,619

 

 

1,779

 

0.95

 

 

Time deposits

 

 

418,323

 

 

2,156

 

2.06

 

 

384,815

 

 

1,831

 

1.90

 

 

Reciprocal money market and time deposits

 

 

207,970

 

 

618

 

1.19

 

 

197,483

 

 

588

 

1.19

 

 

Brokered deposits

 

 

338,283

 

 

1,604

 

1.90

 

 

179,643

 

 

1,033

 

2.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

 

2,855,332

 

 

6,302

 

0.88

 

 

2,629,765

 

 

6,748

 

1.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

208,969

 

 

119

 

0.23

 

 

231,602

 

 

421

 

0.73

 

 

Federal Home Loan Bank advances

 

 

371,319

 

 

1,648

 

1.78

 

 

511,408

 

 

2,730

 

2.14

 

 

Subordinated note

 

 

41,240

 

 

352

 

3.41

 

 

41,240

 

 

435

 

4.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

3,476,860

 

 

8,421

 

0.97

 

 

3,414,015

 

 

10,334

 

1.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities and Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,249,025

 

 

 

 

 

 

 

1,258,461

 

 

 

 

 

 

 

Other liabilities

 

 

122,161

 

 

 

 

 

 

 

97,362

 

 

 

 

 

 

 

Stockholders’ equity

 

 

778,900

 

 

 

 

 

 

 

706,833

 

 

 

 

 

 

 

Total liabilities and stock-holders’ equity

 

$

5,626,946

 

 

 

 

 

 

$

5,476,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

72,738

 

 

 

 

 

 

$

72,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

5.25

%  

 

 

 

 

 

 

5.26

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

5.57

%  

 

 

 

 

 

 

5.66

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

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

(2)

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

(3)

Interest income includes loan fees of $7.4 million and  $8.0 million for the three months ended March 31, 2020 and 2019.  

(4)

Interest income includes loan fees of $630.000 and $536,000 for the three months ended March 31, 2020 and 2019.  

(5)

Interest income includes loan fees of $1.2 million and  $1.2 million for the three months ended March 31, 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 of Contents

Table 3 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

Table 3 — Total Company Volume/Rate Variance Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

 

Compared to

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Total Net

 

Increase / (Decrease) Due to

 

(in thousands)

 

Change

    

Volume

    

Rate

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other interest-earning deposits

 

$

(1,087)

 

$

(403)

 

$

(684)

 

Investment securities, including FHLB stock

 

 

(1,072)

 

 

(301)

 

 

(771)

 

TRS Easy Advance loans*

 

 

404

 

 

(59)

 

 

463

 

Other RPG loans

 

 

(508)

 

 

1,075

 

 

(1,583)

 

Outstanding Warehouse lines of credit

 

 

1,603

 

 

2,718

 

 

(1,115)

 

All other Traditional Bank loans

 

 

(814)

 

 

(354)

 

 

(460)

 

Net change in interest income

 

 

(1,474)

 

 

2,676

 

 

(4,150)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

 

(835)

 

 

10

 

 

(845)

 

Money market accounts

 

 

(537)

 

 

36

 

 

(573)

 

Time deposits

 

 

325

 

 

166

 

 

159

 

Reciprocal money market and time deposits

 

 

30

 

 

31

 

 

(1)

 

Brokered deposits

 

 

571

 

 

779

 

 

(208)

 

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

 

 

(302)

 

 

(38)

 

 

(264)

 

Federal Home Loan Bank advances

 

 

(1,082)

 

 

(670)

 

 

(412)

 

Subordinated note

 

 

(83)

 

 

 —

 

 

(83)

 

Net change in interest expense

 

 

(1,913)

 

 

314

 

 

(2,227)

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net interest income

 

$

439

 

$

2,362

 

$

(1,923)

 


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

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Table of Contents

Credit Loss Expense

 

Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures.

 

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 credit loss expense was $22.8 million for the first quarter of 2020 compared to $17.2 million for the same period in 2019.  

 

The following were the most significant components comprising the Company’s credit loss expense by reportable segment:

 

Traditional Banking segment

 

The Traditional Banking credit loss expense during the first quarter of 2020 was $5.6 million, compared to $189,000 for the first quarter of 2019. An analysis of credit loss expense for the first 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 $5.8 million and $284,000 to credit loss expense for the first quarter of 2020 and 2019.  For the first quarter of 2020, the Traditional Bank recorded $6.3 million of additional credit expense 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 credit loss expense due to the impact of the COVID-19 pandemic was a reduction in credit loss expense of $533,000 consistent with a $59 million decrease in Traditional Bank spot balances from December 31, 2019 to March 31, 2020.

 

·

The Bank recorded a net reduction to credit loss expense of $450,000 and $95,000 for the first quarters of 2020 and 2019 related to loans rated Substandard or Special Mention. The net reduction during the first quarter of 2020 was driven by a $470,000 recovery recorded upon the payoff of a large CRE relationship that had been partially charged-off in a prior period. 

 

·

Related to the Bank’s corporate bonds held within its investment securities portfolio, the Bank recorded $246,000 of credit loss expense during the first quarter 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 credit loss expense was recognized during the first quarter of 2019.

 

As a percentage of total loans, the Traditional Banking ACLL was 1.15% at March 31, 2020 compared to 0.78% at December 31, 2019 and 0.83% at March 31, 2019. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at March 31, 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 credit loss expense and the Bank’s credit quality.

 

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

 

·

Part I Item 1 “Financial Statements”

o

Footnote 2 “Investment Securities”

o

Footnote 4 “Loans and Allowance for Credit Losses”

o

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

o

Footnote 17 “Subsequent Events”

 

·

Part II Item 1A “Risk Factors”

 

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Table of Contents

Warehouse Lending segment

 

Warehouse recorded a net charge to credit loss expense of $332,000 for the first quarter of 2020 compared to a net charge of $225,000 for the same period in 2019.  Credit loss expense for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $133 million during the first quarter of 2020 compared to an increase of $90 million during the first quarter of 2019.

 

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

 

Tax Refund Solutions segment

 

TRS recorded a net charge to credit loss expense of $15.1 million during the first quarter of 2020 compared to a net charge of $13.4 million for the same period in 2019.  Substantially all TRS credit loss expense in both periods was related to its EA product.

 

TRS’s projected credit loss expense for EA loan losses was $15.2 million, or 3.93% of its $388 million in EAs originated during the first quarter of 2020, compared to a projected credit loss expense of $13.4 million, or 3.44% of its $389 million of EAs originated during the first quarter of 2019.  The $1.8 million year-over-year increase in credit loss expense on EAs reflects a higher percent of unpaid EAs as of March 31, 2020 compared to March 31, 2019, as  6.77% of EAs originated during the first quarter of 2020 were unpaid as of March 31, 2020, compared to 5.89% unpaid as of March 31, 2019.  EAs are only originated during the first two months of each year, with all uncollected EAs charged off by June 30th of each year.  The Company is uncertain if the COVID-19 pandemic contributed to the higher level of unpaid EAs at March 31, 2020 compared to March 31, 2019, and it is uncertain if the COVID-19 pandemic could negatively impact normal paydowns of EAs going forward in 2020.  Management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this filing.

 

EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans. TRS’s loss rate as of June 30, 2019 was 3.45% of total originations and it finished the calendar year 2019 with an EA loss rate of 2.74% of total EAs originated.

 

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 4 below, RCS recorded credit loss expense of $1.7 million during the first quarter of 2020 compared to credit loss expense of $3.4 million for the same period in 2019.  The decrease in credit loss expense was driven by a reduction in both net charge-offs and outstanding balances for RCS’s line-of-credit product.

 

While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 12.18% at March 31, 2020, 12.45% at December 31, 2019 and 13.83% at March 31, 2019. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at March 31, 2020.

 

The following table presents RCS credit loss expense by product:

 

Table 4 — RCS Credit Loss Expense by Product

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended Mar. 31,

 

 

 

 

 

 

(in thousands)

 

2020

 

 

2019

 

$ Change

 

% Change

Product:

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

1,707

 

$

3,360

 

$

(1,653)

 

(49)

%

Hospital receivables

 

 

(1)

 

 

23

 

 

(24)

 

(104)

 

Total

 

$

1,706

 

$

3,383

 

$

(1,677)

 

(50)

%

 

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Table of Contents

Table 5 — Summary of Loan and Lease Loss Experience

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(dollars in thousands)

 

2020

    

2019

 

 

 

 

 

 

 

 

 

ACLL at beginning of period

 

$

43,351

 

$

44,675

 

 

 

 

 

 

 

 

 

Adoption of ASC326

 

 

6,734

 

 

 —

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate

 

 

(27)

 

 

(89)

 

Home equity

 

 

 —

 

 

(13)

 

Consumer

 

 

(495)

 

 

(510)

 

Total Traditional Banking

 

 

(522)

 

 

(612)

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Total Core Banking

 

 

(522)

 

 

(612)

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

Commercial & industrial

 

 

(44)

 

 

(17)

 

Republic Credit Solutions

 

 

(2,709)

 

 

(3,824)

 

Total Republic Processing Group

 

 

(2,753)

 

 

(3,841)

 

Total charge-offs

 

 

(3,275)

 

 

(4,453)

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate

 

 

41

 

 

38

 

Commercial real estate

 

 

471

 

 

 2

 

Commercial & industrial

 

 

 3

 

 

 2

 

Home equity

 

 

75

 

 

30

 

Consumer

 

 

204

 

 

176

 

Total Traditional Banking

 

 

794

 

 

248

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Total Core Banking

 

 

794

 

 

248

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

Easy Advances

 

 

42

 

 

 —

 

Commercial & industrial

 

 

 —

 

 

 6

 

Republic Credit Solutions

 

 

271

 

 

254

 

Total Republic Processing Group

 

 

313

 

 

260

 

Total recoveries

 

 

1,107

 

 

508

 

 

 

 

 

 

 

 

 

Net loan charge-offs

 

 

(2,168)

 

 

(3,945)

 

 

 

 

 

 

 

 

 

Provision - Core Banking

 

 

5,675

 

 

414

 

Provision - RPG

 

 

16,839

 

 

16,817

 

Total Provision

 

 

22,514

 

 

17,231

 

ACLL at end of period

 

$

70,431

 

$

57,961

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACLL to total loans

 

 

1.56

%  

 

1.35

%  

ACLL to nonperforming loans

 

 

338

 

 

373

 

Net loan charge-offs to average loans

 

 

0.19

 

 

0.37

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACLL to total loans

 

 

0.97

%  

 

0.75

%  

ACLL to nonperforming loans

 

 

210

 

 

205

 

Net loan charge-offs to average loans

 

 

(0.03)

 

 

0.04

 

83

Table of Contents

Noninterest Income

 

Total Company noninterest income increased $3.2 million, or 11%, during the first 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 increased  $339,000  for the first quarter of 2020 compared to the same period in 2019. The following were the most significant categories affecting the change in noninterest income:

 

·

Service charges on deposit accounts decreased $155,000 to $3.1 million for the first quarter of 2020 compared to the same period in 2019. 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 March 31, 2020 and 2019 were $1.9 million and $2.0 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended March 31, 2020 and 2019 were $426,000 and  $543,000. 

 

·

As previously mentioned, the Bank began waiving certain deposit fees in March 2020 to  cushion the economic blow of the COVID-19 pandemic on its clients. The Bank expects this action to decrease its service charges on deposits in the near term. 

 

·

The Bank recognized a $353,000 net gain on sale of one of its former banking centers during the first quarter of 2020. The now-sold property is located in Tampa, Florida.

 

Mortgage Banking segment

 

Within the Mortgage Banking segment, mortgage banking income increased $3.3 million, or 212%, during the first quarter of 2020 compared to the same period in 2019. As mortgage rates fell during the first quarter of 2020, the Company experienced strong growth in consumer refinance activity, particularly within the Company’s relatively new Consumer Direct channel. Overall, the Company originated $125 million of secondary market mortgage loans during the first quarter of 2020 compared to $41 million for the first quarter of 2019.

 

In addition to the strong mortgage banking origination volume during the first quarter of 2020, the Company’s gain recognized as a percent of total originations increased to 3.84% during the first quarter of 2020 from 3.09% during the same period in 2019.  The stronger gain percentages resulted from favorable market conditions on pricing during the quarter.  If and when consumer refinance volume begins to slow down in the future, management believes market conditions for pricing will become more competitive and return to a range of 2.0%-3.0%, which is more in-line with historical averages for gains-as-a-percentage-of-loans-sold.

 

Tax Refund Solutions segment

 

TRS’s noninterest income decreased  $1.2 million during the first quarter of 2020 compared to the same period in 2019 resulting from a $1.3 million, or 7%, decrease in net RT revenue.   A 2% decrease in RTs funded along with a 7% decrease in the Company’s revenue share on RTs processed drove the year-over-year decrease in net RT revenue.

 

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Table of Contents

Republic Credit Solutions segment

 

RCS’s noninterest income increased $757,000, or 49%, during the first quarter of 2020 compared to the same period in 2019. As illustrated in Table 6 below, RCS program fees increased $1.4 million resulting primarily from RCS’s new installment loan program launched in December 2019.  This increase in program fees was partially offset by a $478,000 non-recurring gain on sale of RCS’s credit card portfolio recorded during the first quarter of 2019.  

 

 

The following table presents RCS program fees by product:

 

Table 6 — RCS Program Fees by Product

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended Mar. 31,

 

 

 

 

 

 

 

(in thousands)

 

2020

 

2019

 

$ Change

 

% Change

 

Product:

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

919

 

$

927

 

$

(8)

 

(1)

%

 

Hospital receivables

 

 

18

 

 

35

 

 

(17)

 

(49)

 

 

Installment loans*

 

 

1,375

 

 

(34)

 

 

1,409

 

NM

 

 

Total

 

$

2,312

 

$

928

 

$

1,384

 

149

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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

 

Noninterest Expense

 

Total Company noninterest expense increased  $1.5 million, or 3%, during the first 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

 

Traditional Banking noninterest expense increased  $1.1 million, or 3%, for the first quarter of 2020 compared to the same period in 2019.  Salaries and employee benefits expense increased  $1.2 million, or 6%. Annual merit increases and higher health care expenses primarily drove the increase.

 

Tax Refund Solutions segment

 

TRS’s noninterest expense decreased  $485,000, or 7%, during the first quarter of 2020 compared to the same period in 2019 partially due to $500,000 in legal reserves recorded during 2019.

 

 

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COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2020 AND DECEMBER 31, 2019

 

Table 7 — Loan Portfolio Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

March 31, 2020

    

December 31, 2019

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

$

916,526

 

$

949,568

 

$

(33,042)

 

(3)

%

Nonowner occupied

 

256,492

 

 

258,803

 

 

(2,311)

 

(1)

 

Commercial real estate

 

1,320,790

 

 

1,303,000

 

 

17,790

 

 1

 

Construction & land development

 

163,396

 

 

159,702

 

 

3,694

 

 2

 

Commercial & industrial

 

445,947

 

 

477,236

 

 

(31,289)

 

(7)

 

Lease financing receivables

 

12,676

 

 

14,040

 

 

(1,364)

 

(10)

 

Home equity

 

282,809

 

 

293,186

 

 

(10,377)

 

(4)

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

15,608

 

 

17,836

 

 

(2,228)

 

(12)

 

Overdrafts

 

758

 

 

1,522

 

 

(764)

 

(50)

 

Automobile loans

 

46,837

 

 

52,923

 

 

(6,086)

 

(11)

 

Other consumer

 

74,965

 

 

68,115

 

 

6,850

 

10

 

Total Traditional Banking

 

3,536,804

 

 

3,595,931

 

 

(59,127)

 

(2)

 

Warehouse lines of credit*

 

850,454

 

 

717,458

 

 

132,996

 

19

 

Total Core Banking

 

4,387,258

 

 

4,313,389

 

 

73,869

 

 2

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group*:

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

26,242

 

 

 —

 

 

26,242

 

NM

 

Other TRS loans

 

373

 

 

14,365

 

 

(13,992)

 

(97)

 

Republic Credit Solutions

 

101,726

 

 

105,397

 

 

(3,671)

 

(3)

 

Total Republic Processing Group

 

128,341

 

 

119,762

 

 

8,579

 

 7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans**

 

4,515,599

 

 

4,433,151

 

 

82,448

 

 2

 

Allowance for credit losses

 

(70,431)

 

 

(43,351)

 

 

(27,080)

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

$

4,445,168

 

$

4,389,800

 

$

55,368

 

 1

%


*      Identifies loans to borrowers located primarily outside of the Bank’s market footprint.

**   Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.

 

Gross loans increased by $82 million, or 2%, during the first quarter of 2019 to $4.5 billion at March 31, 2020. The most significant components comprising the change in loans by reportable segment follow:

 

Traditional Banking segment

 

Period-end balances for Traditional Banking loans decreased $59 million from December 31, 2019 to March 31, 2020.  The decrease in loans was primarily in the owner-occupied residential real estate and C&I categories.  As it relates to the owner-occupied residential real estate category, a sharp drop in long-term market interest rates during the quarter drove an increase in refinance volume in this category, which much of the refinance activity going into fixed rate products sold on the secondary market.  In regard to the C&I portfolio decline, a third of the decrease resulted from the Bank’s strategic wind down of its dealer floor plan credit facilities during the period. The remaining C&I portfolio decline resulted from relatively high payoffs experienced by the Company during the first two months of 2020, as the Bank remained disciplined on its pricing in a competitive rate environment. 

 

Signed into law on March 27, 2020, the CARES Act provided for the SBA PPP.  The PPP allows the Bank to lend to small business clients in amounts that enables those clients to primarily meet their cash-flow needs during the pandemic. These loans have a stated maturity of two years, a fixed interest rate of 1.0% to the client, and are 100% guaranteed by the SBA. In addition, under the rules of

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the program, the SBA will pay an origination fee to the originating bank of 1%, 3%, or 5% based on the size of the loan.   The loans are 100% forgivable to the client if certain program metrics are met. 

 

During April 2020, Republic originated $436 million in PPP loans, of which it expects to receive approximately $14.7 million from the SBA for its origination fees. Republic will accrete these fees into income 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 $133 million from December 31, 2019 to March 31, 2020. A sharp decline in long-term fixed mortgage rates during the first quarter 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 increased $12 million from December 31, 2019 to March 31, 2020 primarily reflecting $26 million of unpaid EAs partially offset by a $14 million reduction in other TRS loans.  EAs are only made during the first two months of each year, with all unpaid EAs charged off by June 30th of each year.  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 $4 million from December 31, 2019 to March 31, 2020 primarily reflecting a $3 million decrease in outstanding balances for RCS’s line-of-credit product. As previously mentioned, the decrease in balances for RCS’s line-of-credit product 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”

o

Footnote 2 “Investment Securities”

o

Footnote 4 “Loans and Allowance for Credit Losses”

o

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

o

Footnote 17 “Subsequent Events”

 

·

Part II Item 1A “Risk Factors”

 

Allowance for Credit Losses

 

At March 31, 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 presents and discusses the analysis with the Audit Committee and the Board of Directors quarterly.

 

Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures.

 

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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.

 

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.

 

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

 

The Company’s ACLL increased $27 million from $43 million at December 31, 2019 to $70 million at March 31, 2020. As a percent of total loans, the total Company’s ACLL increased to 1.56% at March 31, 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 $13 million to $41 million at March 31, 2020, driven partially by the Company’s January 1, 2020 CECL adoption entry of approximately $7 million and partially by approximately $7 million of reserves for the expected impact of the COVID-19 pandemic. The pandemic is projected to increase the Traditional Bank’s losses in the near-term to loss levels consistent with unemployment levels above 8%. Offsetting the increase in the ACLL due to the pandemic was a reduction in the ACLL of approximately $1 million consistent with a $59 million decrease in Traditional Bank spot balances from January 1, 2020 to March 31, 2020.  The Traditional Bank ACLL to total Traditional Bank loans increased 37 basis points to 1.15% when comparing March 31, 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 $246,000 during the first quarter of 2020 to $297,000 based on higher PD and LGD expectations on its corporate bond portfolios.  These higher PD and LGD expectations generally reflect economic concerns from the COVID-19 pandemic. 

 

Following the Company’s ASC 326 adoption entry on January 1, 2020 for an ACLC on its off-balance sheet credit exposures of $456,000, the Company increased its ACLC $102,000 during the first quarter of 2020 to $558,000 at March 31, 2020. The higher ACLC at March 31, 2020 reflects higher assumed loss rates on these exposures as they convert to outstanding balances over their expected lives. The ACLC is recorded on the liability side of the balance sheet, with provisions for credit loss expense recorded within other noninterest expense, not as a component of credit loss expense.

 

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Warehouse Lending segment

 

The Warehouse ACLL increased to approximately $1.8 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing March 31, 2020 to December 31, 2019. As of March 31, 2020, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first quarter of 2020. Warehouse lines are generally short-term, sound quality facilities secured by marketable collateral; therefore, the Company made no adjustment to the Warehouse ACLL upon adoption of CECL.  Additionally, the Company made no ACLL adjustment for Warehouse lines for COVID-19 concerns at March 31, 2020, as its Warehouse clients are experiencing relatively high demand for refinance transactions as borrowers take advantage of the low interest rate environment. 

 

Tax Refund Solutions segment

 

The TRS ACLL increased to $15 million at March 31, 2020 from $234,000 at December 31, 2019, driven primarily by estimated losses on TRS’s EA product. Due to the seasonal nature of the EA, estimated reserves are generally made during the first two months of the year when the product is offered, with losses charged against those reserves in the second quarter of each year. Based on the timing of EA reserves versus charge-offs, the ACLL for EAs to total remaining outstanding EAs is relatively substantial at the end of the first quarter, or 58% and 59% at March 31, 2020 and March 31, 2019. The Company provided an ACLL for expected losses equal to 3.93% of total originations during the first quarter of 2020 as compared to 3.44% during the first quarter of 2019 because a higher percentage of EAs remained outstanding at March 31, 2020 compared to March 31, 2019. The Company is uncertain if the COVID-19 pandemic contributed to the higher level of unpaid EAs at March 31, 2020 compared to March 31, 2019, and it is uncertain if the COVID-19 pandemic could negatively impact normal paydowns of EAs going forward in 2020.  Management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this filing.

 

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

 

Republic Credit Solutions segment

 

The RCS ACLL decreased $1 million to $12 million at March 31, 2020 from $13 million at December 31, 2019. The decrease in ACLL was driven by a $3 million decrease in outstanding balances for RCS’s subprime line-of-credit product partially offset by a higher estimated loss rate on this product to 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 March 31, 2020, including its line-of-credit product and its healthcare-receivables product. At March 31, 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”

o

Footnote 2 “Investment Securities”

o

Footnote 4 “Loans and Allowance for Credit Losses”

o

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

o

Footnote 17 “Subsequent Events”

 

·

Part II Item 1A “Risk Factors”

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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 $2 million during the first quarter of 2020 resulting primarily from the payoff of Special Mention loans.

 

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 8 — Classified and Special Mention Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss

 

$

 

$

 

$

 —

 

 —

%

Doubtful

 

 

 

 

 

 

 —

 

 —

 

Substandard

 

 

32,434

 

 

33,297

 

 

(863)

 

(3)

 

PCI/PCD* - Substandard

 

 

2,043

 

 

1,289

 

 

754

 

58

 

Total Classified Loans

 

 

34,477

 

 

34,586

 

 

(109)

 

(0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

19,495

 

 

21,754

 

 

(2,259)

 

(10)

 

PCI/PCD* - Special Mention

 

 

1,267

 

 

797

 

 

470

 

59

 

Total Special Mention Loans

 

 

20,762

 

 

22,551

 

 

(1,789)

 

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Classified and Special Mention Loans

 

$

55,239

 

$

57,137

 

$

(1,898)

 

(3)

%


*The Bank’s PCI loans at December 31, 2019 were reclassified to PCD loans on January 1, 2020 in connection with the Company’s adoption of ASC 326.    See Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements” for additional discussion regarding the Company’s adoption of ASC 326.

 

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 $6 million and $10 million at March 31, 2020 and December 31, 2019.

 

Nonperforming loans to total loans decreased to 0.46% at March 31, 2020 from 0.53% at December 31, 2019, as the total balance of nonperforming loans decreased by  $3 million, or 11%, while total loans increased $82 million, or 2%, during the first quarter of 2020.

 

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Table 9 — Nonperforming Loans and Nonperforming Assets Summary

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

    

 

 

 

 

 

 

 

 

Loans on nonaccrual status*

 

$

20,358

 

$

23,332

 

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

 

 

495

 

 

157

 

Total nonperforming loans

 

 

20,853

 

 

23,489

 

Other real estate owned

 

 

85

 

 

113

 

Total nonperforming assets

 

$

20,938

 

$

23,602

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.53

%

Nonperforming assets to total loans (including OREO)

 

 

0.46

 

 

0.53

 

Nonperforming assets to total assets

 

 

0.37

 

 

0.42

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.46

%  

 

0.54

%

Nonperforming assets to total loans (including OREO)

 

 

0.47

 

 

0.54

 

Nonperforming assets to total assets

 

 

0.38

 

 

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 10 — Nonperforming Loan Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

December 31, 2019

 

 

 

 

 

 

 

Percent of

 

 

 

 

Percent of

 

 

 

   

 

 

 

Total

 

 

 

 

Total

 

(in thousands)

 

Balance

 

Loan Class

Balance

 

Loan Class

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

   

$

13,120

 

1.43

%  

  

$

12,220

 

1.29

%  

 

Nonowner occupied

 

   

 

620

 

0.24

 

 

 

623

 

0.24

 

 

Commercial real estate

 

   

 

3,108

 

0.24

 

 

 

6,865

 

0.53

 

 

Construction & land development

 

   

 

 —

 

 —

 

 

 

143

 

0.09

 

 

Commercial & industrial

 

   

 

1,494

 

0.34

 

 

 

1,424

 

0.30

 

 

Lease financing receivables

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Home equity

 

   

 

1,832

 

0.65

 

  

 

1,865

 

0.64

 

 

Consumer:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Overdrafts

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Automobile loans

 

 

 

169

 

0.36

 

 

 

179

 

0.34

 

 

Other consumer

 

 

 

15

 

0.02

 

 

 

13

 

0.02

 

 

Total Traditional Banking

 

 

 

20,358

 

0.58

 

 

 

23,332

 

0.65

 

 

Warehouse lines of credit

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Total Core Banking

 

 

 

20,358

 

0.46

 

 

 

23,332

 

0.54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Other TRS loans

 

 

 

189

 

50.67

 

 

 

53

 

0.37

 

 

Republic Credit Solutions

 

   

 

306

 

0.30

 

 

 

104

 

0.10

 

 

Total Republic Processing Group

 

   

 

495

 

0.39

 

 

 

157

 

0.13

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

 

   

$

20,853

 

0.46

%  

 

$

23,489

 

0.53

%  

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table 11 — Stratification of Nonperforming Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Nonperforming Loans and Recorded Investment

 

 

    

 

    

 

 

    

 

 

    

Balance

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2020

 

 

 

Balance

 

 

 

 

> $100 &

 

 

 

 

Balance 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

 

No.

 

<= $500

 

 

No.

 

> $500

 

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

143

 

$

5,252

 

 

24

 

$

4,565

 

 

 3

 

$

3,303

 

 

170

 

$

13,120

 

Nonowner occupied

 

 2

 

 

81

 

 

 —

 

 

 —

 

 

 1

 

 

539

 

 

 3

 

 

620

 

Commercial real estate

 

 2

 

 

45

 

 

 3

 

 

900

 

 

 1

 

 

2,163

 

 

 6

 

 

3,108

 

Construction & land development

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial & industrial

 

 —

 

 

 —

 

 

 4

 

 

629

 

 

 1

 

 

865

 

 

 5

 

 

1,494

 

Lease financing receivables

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

27

 

 

908

 

 

 5

 

 

924

 

 

 —

 

 

 —

 

 

32

 

 

1,832

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

13

 

 

169

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13

 

 

169

 

Other consumer

 

 6

 

 

15

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 6

 

 

15

 

Total Traditional Banking

 

193

 

 

6,470

 

 

36

 

 

7,018

 

 

 6

 

 

6,870

 

 

235

 

 

20,358

 

Warehouse lines of credit

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total Core Banking

 

193

 

 

6,470

 

 

36

 

 

7,018

 

 

 6

 

 

6,870

 

 

235

 

 

20,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

NM

 

 

189

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

NM

 

 

189

 

Republic Credit Solutions

 

NM

 

 

306

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

NM

 

 

306

 

Total Republic Processing Group

 

NM

 

 

495

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

NM

 

 

495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

193

 

$

6,965

 

 

36

 

$

7,018

 

 

 6

 

$

6,870

 

 

235

 

$

20,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Nonperforming Loans and Recorded Investment

 

 

    

 

    

 

 

    

 

 

    

Balance

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2019

 

 

 

Balance

 

 

 

 

> $100 &

 

 

 

 

Balance 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

 

No.

 

<= $500

 

 

No.

 

> $500

 

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

137

 

$

5,005

 

 

24

 

$

4,525

 

 

 3

 

$

2,690

 

 

164

 

$

12,220

 

Nonowner occupied

 

 3

 

 

84

 

 

 —

 

 

 —

 

 

 1

 

 

539

 

 

 4

 

 

623

 

Commercial real estate

 

 2

 

 

45

 

 

 2

 

 

609

 

 

 4

 

 

6,211

 

 

 8

 

 

6,865

 

Construction & land development

 

 —

 

 

 —

 

 

 1

 

 

143

 

 

 —

 

 

 —

 

 

 1

 

 

143

 

Commercial & industrial

 

 —

 

 

 —

 

 

 2

 

 

397

 

 

 1

 

 

1,027

 

 

 3

 

 

1,424

 

Lease financing receivables

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

23

 

 

795

 

 

 5

 

 

1,070

 

 

 —

 

 

 —

 

 

28

 

 

1,865

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

13

 

 

179

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13

 

 

179

 

Other consumer

 

 7

 

 

13

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 7

 

 

13

 

Total Traditional Banking

 

185

 

 

6,121

 

 

34

 

 

6,744

 

 

 9

 

 

10,467

 

 

228

 

 

23,332

 

Warehouse lines of credit

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total Core Banking

 

185

 

 

6,121

 

 

34

 

 

6,744

 

 

 9

 

 

10,467

 

 

228

 

 

23,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

NM

 

 

53

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

NM

 

 

53

 

Republic Credit Solutions

 

NM

 

 

104

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

NM

 

 

104

 

Total Republic Processing Group

 

NM

 

 

157

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

NM

 

 

157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

185

 

$

6,278

 

 

34

 

$

6,744

 

 

 9

 

$

10,467

 

 

228

 

$

23,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92

Table of Contents

Table 12 — Rollforward of Nonperforming Loans

 

 

 

 

 

 

 

 

 

 

 

    

    

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

 

 

2020

 

2019

 

 

 

 

 

 

 

 

 

 

Nonperforming loans at the beginning of the period

 

 

$

23,489

 

$

16,138

 

Loans added to nonperforming status during the period that remained nonperforming at the end of the period

 

 

 

2,629

 

 

1,508

 

Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)

 

 

 

(4,975)

 

 

(1,376)

 

Principal balance paydowns of loans nonperforming at both period ends

 

 

 

(628)

 

 

(764)

 

Net change in principal balance of other loans nonperforming at both period ends*

 

 

 

338

 

 

54

 

 

 

 

 

 

 

 

 

 

Nonperforming loans at the end of the period

 

 

$

20,853

 

$

15,560

 


*Includes relatively small consumer portfolios, e.g., RCS loans.  

 

Table 13 — Detail of Loans Removed from Nonperforming Status

 

 

 

 

 

 

 

 

 

 

 

    

    

Three Months Ended

 

 

 

 

March 31, 

 

(in thousands)

    

    

2020

    

2019

 

 

 

 

 

 

 

 

 

 

Loans charged off

 

 

$

(43)

 

$

(13)

 

Loans transferred to OREO

 

 

 

 —

 

 

(56)

 

Loans refinanced at other institutions

 

 

 

(4,907)

 

 

(1,236)

 

Loans returned to accrual status

 

 

 

(25)

 

 

(71)

 

 

 

 

 

 

 

 

 

 

Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period

 

 

$

(4,975)

 

$

(1,376)

 

 

Based on the Bank’s review at March 31, 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 increased to 0.94% at March 31, 2020, from 0.47% at December 31, 2019,  primarily due to delinquent EAs as of March 31, 2020. All EAs not paid off during the second quarter will be charged off by June 30, 2020.

 

Core Bank delinquent loans to total Core Bank loans decreased to 0.27% at March 31, 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 March 31, 2020 and December 31, 2019 were on nonaccrual status.

 

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Table 14 — Delinquent Loan Composition* 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

December 31, 2019

 

 

 

 

 

 

 

Percent of

 

 

 

 

Percent of

 

 

 

 

 

 

 

Total

 

 

 

 

Total

 

(in thousands)

    

Balance

 

Loan Class

Balance

 

Loan Class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

   

$

3,682

 

0.40

%  

   

$

4,434

 

0.47

%  

 

Nonowner occupied

 

   

 

898

 

0.35

 

   

 

539

 

0.21

 

 

Commercial real estate

 

   

 

3,734

 

0.28

 

   

 

3,300

 

0.25

 

 

Construction & land development

 

   

 

295

 

0.18

 

   

 

 —

 

 —

 

 

Commercial & industrial

 

   

 

1,240

 

0.28

 

   

 

1,355

 

0.28

 

 

Lease financing receivables

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Home equity

 

 

 

1,680

 

0.59

 

 

 

2,918

 

1.00

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

97

 

0.62

 

 

 

155

 

0.87

 

 

Overdrafts

 

 

 

172

 

22.69

 

 

 

283

 

18.59

 

 

Automobile loans

 

 

 

47

 

0.10

 

 

 

49

 

0.09

 

 

Other consumer

 

 

 

18

 

0.02

 

 

 

 9

 

0.01

 

 

Total Traditional Banking

 

 

 

11,863

 

0.34

 

 

 

13,042

 

0.36

 

 

Warehouse lines of credit

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Total Core Banking

 

 

 

11,863

 

0.27

 

 

 

13,042

 

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

   

 

23,467

 

89.43

 

   

 

 —

 

 —

 

 

Other TRS loans

 

   

 

235

 

63.00

 

   

 

119

 

0.83

 

 

Republic Credit Solutions

 

   

 

7,062

 

6.94

 

   

 

7,643

 

7.25

 

 

Total Republic Processing Group

 

   

 

30,764

 

23.97

 

   

 

7,762

 

6.48

 

 

 

 

   

 

 

 

 

 

   

 

 

 

 

 

 

Total delinquent loans

 

   

$

42,627

 

0.94

%  

   

$

20,804

 

0.47

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


*     Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority.

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Table 15 — Rollforward of Delinquent Loans

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

    

2020

    

2019

 

 

 

 

 

 

 

 

 

Delinquent loans at the beginning of the period

 

$

20,804

 

$

15,962

 

Loans that became delinquent during the period - Easy Advances*

 

 

23,467

 

 

19,099

 

Loans added to delinquency status during the period and remained in delinquency status at the end of the period

 

 

3,950

 

 

2,378

 

Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below)

 

 

(4,702)

 

 

(3,312)

 

Principal balance paydowns of loans delinquent at both period ends

 

 

(95)

 

 

(117)

 

Net change in principal balance of other loans delinquent at both period ends**

 

 

(797)

 

 

177

 

Delinquent loans at the end of period

 

$

42,627

 

$

34,187

 


*EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority.

**Includes relatively-small consumer portfolios, e.g., RCS loans.

 

Table 16 — Detail of Loans Removed from Delinquent Status

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(in thousands)

    

2020

    

2019

 

 

 

 

 

    

 

 

 

Loans charged off

 

$

 —

 

$

(13)

 

Loans transferred to OREO

 

 

 —

 

 

(56)

 

Loans refinanced at other institutions

 

 

(2,442)

 

 

(955)

 

Loans paid current

 

 

(2,260)

 

 

(2,288)

 

 

 

 

 

 

 

 

 

Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period

 

$

(4,702)

 

$

(3,312)

 

 

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 17 — Collateral-Dependent Loans and Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

 

 

 

 

 

 

 

 

Cashflow-dependent TDRs

 

$

13,461

 

$

14,348

 

Collateral-dependent TDRs

 

 

14,275

 

 

16,433

 

Total TDRs

 

 

27,736

 

 

30,781

 

Collateral dependent loans (which are not TDRs)

 

 

19,997

 

 

19,569

 

Total recorded investment in TDRs and collateral-dependent loans

 

$

47,733

 

$

50,350

 

 

See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans and TDRs.

 

95

Table of Contents

Deposits

 

Table 18 — Deposit Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

March 31, 2020

    

December 31, 2019

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

959,911

 

$

922,972

 

$

36,939

 

 4

%

 

Money market accounts

 

 

697,828

 

 

793,950

 

 

(96,122)

 

(12)

 

 

Savings

 

 

183,445

 

 

175,588

 

 

7,857

 

 4

 

 

Individual retirement accounts (1)

 

 

51,639

 

 

51,548

 

 

91

 

 0

 

 

Time deposits, $250 and over (1)

 

 

112,003

 

 

104,412

 

 

7,591

 

 7

 

 

Other certificates of deposit (1)

 

 

261,386

 

 

248,161

 

 

13,225

 

 5

 

 

Reciprocal money market and time deposits (1)

 

 

255,256

 

 

189,774

 

 

65,482

 

35

 

 

Brokered deposits (1)

 

 

180,245

 

 

200,072

 

 

(19,827)

 

(10)

 

 

Total Core Bank interest-bearing deposits

 

 

2,701,713

 

 

2,686,477

 

 

15,236

 

 1

 

 

Total Core Bank noninterest-bearing deposits

 

 

1,042,311

 

 

981,164

 

 

61,147

 

 6

 

 

Total Core Bank deposits

 

 

3,744,024

 

 

3,667,641

 

 

76,383

 

 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

68,853

 

 

66,152

 

 

2,701

 

 4

 

 

Total RPG interest-bearing deposits

 

 

68,853

 

 

66,152

 

 

2,701

 

 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokered prepaid card deposits

 

 

42,962

 

 

9,128

 

 

33,834

 

371

 

 

Other noninterest-bearing deposits

 

 

215,618

 

 

43,087

 

 

172,531

 

400

 

 

Total RPG noninterest-bearing deposits

 

 

258,580

 

 

52,215

 

 

206,365

 

395

 

 

Total RPG deposits

 

 

327,433

 

 

118,367

 

 

209,066

 

177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

4,071,457

 

$

3,786,008

 

$

285,449

 

 8

%

 


(1)

Includes time deposits.

 

Total Company deposits increased  $285 million, or 8%, from December 31, 2019 to $4.1 billion at March 31, 2020.  Total deposits at March 31, 2020 included $140 million of short-term RT deposits held by TRS.  These deposits are expected to exit the Company shortly after March 31, 2020. 

 

Total Company noninterest-bearing deposits increased $268 million, or 26%, with growth driven by the previously discussed $140 million in short-term RT deposits and the remainder primarily driven by business accounts. Management believes much of the remaining growth in noninterest-bearing deposits was a flight to safety brought about by the COVID-19 pandemic. At this time, management is unable to predict how long these funds might remain at the Bank due to the uncertain economic environment for many of the depositors, including the depositors’ short-term and long-term cash needs.

 

Total Company interest-bearing deposits increased approximately $18 million for the first quarter, with Core Bank interest-bearing deposits representing approximately $15 million of that increase.  Included in the $15 million net increase during the quarter was a $36 million decline in MemoryBank’s online money market accounts, as the Bank significantly lowered its pricing during the quarter due to the overall decrease in market interest rates.  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 one client in the foreseeable future.

 

Federal Home Loan Bank Advances

 

As the overall increase in deposits outpaced the overall increase in interest-earning assets for the first quarter of 2020, FHLB advances declined by $178 million from December 31, 2019 to March 31, 2020. The Bank held $125 million in overnight advances at a rate of 0.14% as of March 31, 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 basis due to its current interest rate risk position.  The overall use and types of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. Because of the Bank’s current interest rate position, management expects the Company will continue to predominately borrow on an overnight basis from the FHLB.  If a meaningful amount of the Bank’s loan originations in the future have repricing terms longer than five years, management could elect to borrow

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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 118% at March 31, 2020 and 126% at December 31, 2019. At March 31, 2020 and December 31, 2019, the Company had cash and cash equivalents on-hand of $316 million and $385 million.  The Bank also had available borrowing capacity of $409 million and $259 million from the FHLB at March 31, 2020 and December 31, 2019.  In addition, the Bank’s liquidity resources included unencumbered debt securities of $451 million and $304 million as of March 31, 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 March 31, 2020 and December 31, 2019, these pledged investment securities had a fair value of $155 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 March 31, 2020, the Bank had approximately $1.1 billion in deposits from 180 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $464 million, or 11%, of the Company’s total deposit balances at March 31, 2020.  These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.

 

Due to its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached and, periodically during each quarter, has fallen short of its Board-approved minimum internal policy limits for liquidity management. Most recently, the Bank has experienced a significant increase in its outstanding Warehouse line-of-credit balances.  Because management deems this increase in Warehouse balances to not be long-term in nature and the Bank is asset sensitive for its interest

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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 March 31, 2020, it was not always within policy parameters for each day of the quarter.  The Bank will likely continue to maintain its liquidity levels near the Bank’s Board-approved minimums for the foreseeable future and will also likely utilize much of its FHLB borrowing capacity or short-term brokered deposits to fund the current spike in Warehouse balances. 

 

In addition to its typical operations which impacts liquidity, the COVID-19 pandemic could create both substantially positive and negative impacts to the Bank’s liquidity over the short-term and long-term.  The overall impact to Bank’s liquidity over the long-term will likely depend heavily on the length of the economy’s shut-down. 

 

A near-term positive to the Bank’s liquidity is the apparent flight to safety by its clients and the increase in the Bank’s deposit balances. Management is uncertain as to how long these deposit balances might stay in the Bank, however, as 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.

 

Also negatively impacting the Bank’s liquidity in the near term is the demand for the SBA’s PPP program. As of April 30, 2020, the Bank had originated approximately $436 million of these loans, with another $86 million in its pipeline. The Bank did begin participating in the Federal Reserve’s PPPLF on April 24, 2020.  Under the PPLF program, the Bank can fully fund these loans on a dollar-for-dollar basis at a borrowing rate of 0.35%.  While management believes that a full-funding of the PPP loans will be available to the Bank through the PPPLF program until these loans are forgiven by the SBA or paid off by the borrower over their two-year terms, if the PPPLF program were to go away or be significantly modified for any reason during the term of the PPP loans it could be a strain on the Bank’s overall liquidity.

 

To further protect itself from short-term liquidity demands, the Bank did raise $100 million of broker deposits subsequent to March 31, 2020. In addition, the Bank also pledged additional collateral to the FHLB and the Federal Reserve discount window since the pandemic began, in order to fortify its liquidity position over the near term for any possible unanticipated cash-flow needs.     

 

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

 

·

Part I Item 1 “Financial Statements”

o

Footnote 2 “Investment Securities”

o

Footnote 4 “Loans and Allowance for Credit Losses”

o

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

o

Footnote 17 “Subsequent Events”

 

·

Part II Item 1A “Risk Factors”

 

Capital

 

Total stockholders’ equity increased from $764 million at December 31, 2019 to $784 million at March 31, 2020. The increase in stockholders’ equity was primarily attributable to net income earned during 2019 reduced by cash dividends declared.

 

See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” for additional detail regarding stock repurchases and stock buyback programs.

 

Common Stock —  The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.

 

Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At March 31, 2020, RB&T could, without prior approval, declare dividends of approximately $145 million.

 

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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 13.84% at March 31, 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 April 1, 2020 and is currently carrying the note at a cost of LIBOR plus 1.42%.

 

Table 19 — Capital Ratios (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

As of December 31, 2019

 

 

(dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

864,844

 

17.33

%  

$

825,987

 

17.01

%  

 

Republic Bank & Trust Company

 

 

764,802

 

15.34

 

 

723,248

 

14.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

766,032

 

15.35

%  

$

742,636

 

15.29

%  

 

Republic Bank & Trust Company

 

 

705,990

 

14.16

 

 

679,897

 

14.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (core) capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

806,032

 

16.15

%  

$

782,636

 

16.11

%  

 

Republic Bank & Trust Company

 

 

705,990

 

14.16

 

 

679,897

 

14.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

806,032

 

14.35

%  

$

782,636

 

13.93

%  

 

Republic Bank & Trust Company

 

 

705,990

 

12.56

 

 

679,897

 

12.11

 

 

 


(1)

As of March 31, 2020, the Company and the Bank elected to defer the impact of CECL on regulatory capital. The deferral period is five years, with the total estimated CECL impact 100% deferred for the first two years, then phased in over the next three years. If not for this election, the Company’s regulatory capital ratios would have been approximately 19 basis points lower than those presented in the table above as of March 31, 2020.

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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 March 31, 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 April 1, 2020 and ending March 31, 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 20 — 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 March 31, 2020

 

(3.0)

%  

 

(2.4)

%  

 

(3.5)

%  

 

(4.3)

%  

 

(3.3)

%

% Change from base net interest income at December 31, 2019

 

(4.3)

%  

 

0.9

%  

 

1.6

%  

 

1.9

%

 

2.5

%

 

The Bank’s dynamic simulation model run for December 2019 projected a decrease in the Bank’s net interest income for the Down 100 scenario but increases for Up 100 through Up 400. The Down 100 through Up 400 scenarios for March 2020 reflected decreases in net interest income, with these decreases more favorable in the Down 100 but less favorable in the Up 100 through Up 400 scenarios than the comparable scenarios at December 2019. The deterioration in the Up rate scenarios 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 rate scenario primarily related to the amount of loans that have reached or will reach their interest rate floors, and therefore not subject to further rate reductions. 

 

The Company’s interest rate risk projections, generally assumes 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 March 31, 2020 Compared to Three Months Ended March 31, 2019)” and RESULTS OF OPERATIONS (Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019).”

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

 

Information required by this item is included under Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 4.Controls and Procedures.

 

As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

There were no changes in Republic’s internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, Republic’s internal control over financial reporting. On January 1, 2020, Republic adopted Accounting Standards Codification 326, Financial Instruments - Credit Losses. Republic enhanced its internal controls to enable the preparation of financial information as part of the adoption. There were no significant changes to Republic’s internal control over financial reporting due to the adoption of the new standard.

 

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 program, have been and are expected to continue to be a strong focus of the Bank’s operations in the near term.  Government-backed products may be substantially less profitable than the Bank’s traditional products. Additionally, these economic conditions may lead to the impairment of the Company’s intangible assets, including its goodwill and MSRs.

 

·

Loan and Credit Losses – COVID-19 has led to the closure of businesses deemed non-essential by various jurisdictions, with many businesses ceasing or substantially reducing operations. Employees for many businesses have been and may continue to be furloughed or laid off. The Bank’s credit delinquencies and losses may rise steeply due to these events. Specifically, concentrations of credit in certain markets and in certain industries currently are and may continue to be more susceptible to delinquency and loss.

 

o

Geographic Concentrations – COVID-19 has impacted certain areas of the U.S. harder than others. The Company’s market footprint is primarily in Kentucky, Florida, Ohio, Tennessee, and Indiana. These areas may be more susceptible to economic hardship in the near term.

 

o

Industry Concentrations – The Bank lends to clients in industries that have been deemed “non-essential” or that have had their business models upended by the pandemic. Further economic damage to these clients may leave them unable to service their debt with the Bank.

 

o

Warehouse Lending – Through its Warehouse Lending segment, the Bank maintains a significant concentration of loans in the form of short-term, revolving credit facilities to mortgage bankers across the U.S. The Bank’s Warehouse Lending clients may face increased stress on their liquidity and overall financial condition due to their mortgage-servicing obligations. Such increased stress may lead to default on their underlying credit facility with the Bank.

 

o

Borrower Relief –   In response to the pandemic, the Bank has suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and is offering fee waivers, payment deferrals, and other expanded assistance for credit card, automobile, mortgage, small business and personal lending customers, and future governmental actions may require these and other types of customer-related responses.

 

·

Reliance on Forecasted Information – The Company’s model for estimating credit losses relies on forecasted economic projections.  Such projections could be materially inaccurate, with different projections leading to a material adverse impact on the Company’s financial position and results of operations.

 

·

Capital and Liquidity – A prolonged period of economic stress leading to increased borrower defaults and corresponding servicing obligations could substantially weaken the Company’s capital and liquidity. As a result, the Company may lose access to capital markets and may need to suspend paying dividends. 

 

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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 – Speculation has been building regarding the COVID-19 conditions leading to negative interest rates in the U.S. The Bank has not traditionally modeled the impact of negative interest rates and this condition would be substantially negative to the Company’s financial performance.

 

·

Stock Price Fluctuations – The Company has and could continue to experience higher than historical volatility in its stock price as a direct result of COVID-19 driven economic conditions.

 

·

Business Interruption Insurance – Business interruption insurance may fail to cover material COVID-19 related costs of the Company.

 

·

Increased Litigation Risk – The Bank may experience an increase in litigation stemming from the COVID-19 pandemic. 

 

·

Company Reputation – The Company and the Bank’s reputation could be negatively impacted by the public’s perception of how the Company and Bank have operated during the pandemic.

 

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

 

Details of Republic’s Class A Common Stock purchases during the first quarter of 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

  

 

 

 

 

 

 

 

 

 

 

 

January 1 - January 31

 

 —

 

$

 —

 

 —

 

 

 

February 1 - February 29

 

 —

 

 

 —

 

 —

 

 

 

March 1 - March 31

 

85,437

 

 

33.37

 

85,437

 

 

 

Total

 

85,437

 

$

33.37

 

85,437

 

87,423

 

 

The Company repurchased  85,437 shares during the first quarter of 2020. In addition, in connection with employee stock awards, there were 5,333 shares withheld upon award of Performance Stock Units to cover withholding taxes and 1,067 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 March 31, 2020, the Company had 87,423 shares that could be repurchased under its current share repurchase programs.

 

During the first quarter of 2020, there were 6,561 shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock by stockholders of Republic in accordance with the share-for-share conversion credit loss expense option of the Class B Common Stock. The exemption from registration of newly issued Class A Common Stock relies upon Section (3)(a)(9) of the Securities Act of 1933.

 

There were no equity securities of the registrant sold without registration during the quarter covered by this report.

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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

 

Amendment 2019-1 to the Republic Bancorp, Inc. and Subsidiaries Non-Employee Director and Key Employee Deferred Compensation Plan

 

 

 

10.2

 

Agreement of Employment dated April 24, 2020, between Republic Bank & Trust Company and Logan Pichel (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed May 5, 2020 (Commission File Number: 0-24649))

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32*

 

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

 

 

 

101

 

Interactive data files: (i) Consolidated Balance Sheets at March 31, 2020 and December 31, 2019, (ii) Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2020 and 2019, (iii) Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 and (v) Notes to Consolidated Financial Statements


* This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

 

REPUBLIC BANCORP, INC.

 

 

 

(Registrant)

 

 

 

 

 

 

 

Principal Executive Officer:

 

 

 

 

 

 

 

 

Date: May 8, 2020

     

     

/s/ Steven E. Trager          

 

 

 

By:   Steven E. Trager

 

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

Principal Financial Officer:

 

 

 

 

 

 

 

 

Date: May 8, 2020

 

 

/s/ Kevin Sipes                 

 

 

 

By:   Kevin Sipes

 

 

 

 

  Executive Vice President, Chief Financial

 

 

 

Officer and Chief Accounting Officer

 

106