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REPUBLIC BANCORP INC /KY/ - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

1 min

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 September 30, 2021

or

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

Commission File Number: 0-24649

Graphic

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 October 31, 2021, was 18,042,274 and 2,165,064.

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.

70

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

114

Item 4.

Controls and Procedures.

114

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings.

114

Item 1A.

Risk Factors.

115

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

115

Item 6.

Exhibits.

116

SIGNATURES

117

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

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

Economic Aid Act

The Economic Aid to Hard Hit Small Business, Not for Profits and Venues Act

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

Green Dot

Green Dot Corporation

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

LOC I

RCS product introduced in 2014 for which the Bank participates out a 90% interest and holds a 10% interest

LOC II

RCS product introduced in 2021 for which the Bank participates out a 95% interest and holds a 5% interest

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

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

Purchase Agreement

May 13, 2021 Asset Purchase Agreement for the sale of substantially all of the Bank's TRS assets and operations to Green Dot

QF

Qualitative Factor

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

Sale Transaction

Sale contemplated in the May 13, 2021 Purchase Agreement between the Bank and Green Dot

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)

    

September 30, 

    

December 31, 

2021

2020

ASSETS

Cash and cash equivalents

$

1,011,247

$

485,587

Available-for-sale debt securities, at fair value (amortized cost of $489,015 in 2021 and $512,518 in 2020, allowance for credit losses of $0 in 2021 and $0 in 2020)

 

495,880

 

523,863

Held-to-maturity debt securities (fair value of $45,590 in 2021 and $54,190 in 2020, allowance for credit losses of $54 in 2021 and $178 in 2020)

 

44,991

 

53,324

Equity securities with readily determinable fair value

2,578

3,083

Mortgage loans held for sale, at fair value

 

25,791

 

46,867

Consumer loans held for sale, at fair value

10,779

3,298

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

3,976

1,478

Loans for discontinued operations, at the lower of cost or fair value

24

23,765

Loans (loans carried at fair value of $254 in 2021 and $497 in 2020)

 

4,343,782

 

4,789,338

Allowance for credit losses

 

(63,024)

 

(61,067)

Loans, net

 

4,280,758

 

4,728,271

Federal Home Loan Bank stock, at cost

 

10,311

 

17,397

Premises and equipment, net

 

37,499

 

39,512

Right-of-use assets

39,257

43,345

Goodwill

 

16,300

 

16,300

Other real estate owned

 

1,845

 

2,499

Bank owned life insurance

 

99,634

 

68,018

Other assets and accrued interest receivable

 

106,764

 

111,718

TOTAL ASSETS

$

6,187,634

$

6,168,325

LIABILITIES

Deposits:

Noninterest-bearing

$

2,053,485

$

1,871,539

Interest-bearing

 

2,861,399

 

2,842,765

Deposits of discontinued operations

33,063

18,877

Total deposits

 

4,947,947

 

4,733,181

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

 

260,583

 

211,026

Operating lease liabilities

40,151

44,340

Federal Home Loan Bank advances

 

25,000

 

235,000

Subordinated note

 

 

41,240

Other liabilities and accrued interest payable

 

75,296

 

80,215

Total liabilities

 

5,348,977

 

5,345,002

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

 

4,752

 

4,899

Additional paid in capital

 

140,842

 

143,637

Retained earnings

 

687,915

 

666,278

Accumulated other comprehensive income

 

5,148

 

8,509

Total stockholders’ equity

 

838,657

 

823,323

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

6,187,634

$

6,168,325

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

    

Nine Months Ended

September 30, 

September 30, 

2021

2020

2021

2020

INTEREST INCOME:

Loans, including fees

$

51,409

$

53,447

$

153,433

$

164,302

Taxable investment securities

 

1,845

 

2,266

 

5,655

 

7,761

Federal Home Loan Bank stock and other

 

446

 

192

 

1,178

 

2,379

Total interest income

 

53,700

 

55,905

 

160,266

 

174,442

INTEREST EXPENSE:

Deposits

 

1,148

 

2,876

 

4,037

 

12,298

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

 

71

 

92

 

350

 

1,701

Federal Reserve Payment Protection Plan Liquidity Facility

48

153

Federal Home Loan Bank advances

 

6

 

658

 

47

 

3,128

Subordinated note

 

166

 

182

 

507

 

829

Total interest expense

 

1,391

 

3,856

 

4,941

 

18,109

NET INTEREST INCOME

 

52,309

 

52,049

 

155,325

 

156,333

Provision for expected credit loss expense

 

3,553

 

5,842

 

4,381

 

15,555

NET INTEREST INCOME AFTER PROVISION

 

48,756

 

46,207

 

150,944

 

140,778

NONINTEREST INCOME:

Service charges on deposit accounts

 

3,277

 

3,017

 

9,221

 

8,604

Mortgage banking income

 

5,280

 

10,775

 

16,655

 

23,968

Interchange fee income

 

3,200

 

2,874

 

9,539

 

8,093

Program fees

 

4,530

 

1,487

 

10,304

 

5,249

Increase in cash surrender value of bank owned life insurance

 

626

 

400

 

1,616

 

1,184

Net losses on other real estate owned

 

(52)

 

(14)

 

(107)

 

(10)

Other

 

1,134

 

861

 

2,769

 

2,673

Total noninterest income

 

17,995

 

19,400

 

49,997

 

49,761

NONINTEREST EXPENSE:

Salaries and employee benefits

 

25,948

 

25,207

 

79,470

 

75,405

Technology, equipment, and communication

 

7,226

 

7,402

 

21,479

 

20,966

Occupancy

 

3,195

 

3,367

 

10,004

 

9,885

Marketing and development

 

1,234

 

864

 

3,085

 

2,574

FDIC insurance expense

 

325

 

345

 

1,039

 

644

Bank franchise tax expense

 

329

 

972

 

1,106

 

2,665

Interchange related expense

 

1,275

 

1,056

 

3,707

 

3,305

Other real estate owned and other repossession expense

 

 

6

 

(32)

 

45

Legal and professional fees

581

1,240

2,182

3,337

Other

 

2,481

 

3,319

 

7,953

 

10,262

Total noninterest expense

 

42,594

 

43,778

 

129,993

 

129,088

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE

 

24,157

 

21,829

 

70,948

 

61,451

INCOME TAX EXPENSE

 

5,745

 

4,554

 

15,708

 

12,107

INCOME FROM CONTINUING OPERATIONS

18,412

17,275

55,240

49,344

DISCONTINUED OPERATIONS:

Income from discontinued operations before income taxes

2,070

3,997

19,584

17,550

Income tax expense

473

883

4,840

4,004

Income from discontinued operations, net of tax

1,597

3,114

14,744

13,546

NET INCOME

$

20,009

$

20,389

$

69,984

$

62,890

BASIC EARNINGS PER SHARE:

Class A Common Stock - continuing operations

$

0.91

$

0.83

$

2.69

$

2.37

Class A Common Stock - discontinued operations

0.08

0.15

0.71

0.65

Class A Common Stock

$

0.99

$

0.98

$

3.40

$

3.02

Class B Common Stock - continuing operations

$

0.83

$

0.75

$

2.45

$

2.16

Class B Common Stock - discontinued operations

0.07

0.14

0.65

0.59

Class B Common Stock

$

0.90

$

0.89

$

3.10

$

2.75

DILUTED EARNINGS PER SHARE:

Class A Common Stock - continuing operations

$

0.91

$

0.83

$

2.68

$

2.37

Class A Common Stock - discontinued operations

0.08

0.15

0.71

0.65

Class A Common Stock

$

0.99

$

0.98

$

3.39

$

3.02

Class B Common Stock - continuing operations

$

0.83

$

0.75

$

2.44

$

2.15

Class B Common Stock - discontinued operations

0.07

0.14

0.65

0.59

Class B Common Stock

$

0.90

$

0.89

$

3.09

$

2.74

See accompanying footnotes to consolidated financial statements.

5

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

2021

    

2020

    

2021

    

2020

Net income

$

20,009

$

20,389

$

69,984

$

62,890

OTHER COMPREHENSIVE INCOME (LOSS)

Change in fair value of derivatives used for cash flow hedges

 

 

(1)

 

 

(173)

Reclassification amount for net derivative losses realized in income

 

 

103

 

 

211

Unrealized gains and (losses) on AFS debt securities

 

(1,899)

 

(258)

 

(4,542)

 

8,618

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

 

13

 

61

 

62

 

(46)

Total other comprehensive income (loss) before income tax

 

(1,886)

 

(95)

 

(4,480)

 

8,610

Tax effect

 

471

 

24

 

1,119

 

(2,153)

Total other comprehensive income (loss), net of tax

 

(1,415)

 

(71)

 

(3,361)

 

6,457

COMPREHENSIVE INCOME

$

18,594

$

20,318

$

66,623

$

69,347

See accompanying footnotes to consolidated financial statements.

6

Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended September 30, 2021

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, July 1, 2021

 

18,421

2,166

$

4,841

$

142,884

$

690,802

$

6,563

$

845,090

Net income

 

 

 

 

 

20,009

 

 

20,009

Net change in accumulated other comprehensive income

 

 

 

 

 

 

(1,415)

 

(1,415)

Dividends declared on Common Stock:

Class A Shares ($0.308 per share)

 

 

 

 

 

(5,557)

 

 

(5,557)

Class B Shares ($0.280 per share)

 

 

 

 

 

(606)

 

 

(606)

Conversion of Class B to Class A Common Shares

1

 

(1)

 

 

 

 

 

Repurchase of Class A Common Stock

(387)

 

 

(90)

 

(2,855)

 

(16,733)

 

 

(19,678)

Net change in notes receivable on Class A Common Stock

 

 

 

 

100

 

 

 

100

Deferred compensation - Class A Common Stock:

 

Directors

 

 

 

121

 

 

 

121

Designated key employees

 

 

 

175

 

 

 

175

Employee stock purchase plan - Class A Common Stock

4

 

 

1

 

191

 

 

 

192

Stock-based awards - Class A Common Stock:

Performance stock units

 

 

 

 

32

 

 

 

32

Restricted stock

 

1

 

 

 

64

 

 

 

64

Stock options

 

 

 

 

130

 

 

 

130

Balance, September 30, 2021

18,040

2,165

$

4,752

$

140,842

$

687,915

$

5,148

$

838,657

Three Months Ended September 30, 2020

Common Stock

Accumulated

    

Class A

    

Class B

    

    

    

Additional

    

    

    

Other

    

Total

Shares

Shares

Paid In

Retained

Comprehensive

Stockholders’

(in thousands, except per share data)

Outstanding

Outstanding

Amount

Capital

Earnings

Income

Equity

Balance, July 1, 2020

 

18,708

2,200

$

4,898

$

142,813

$

638,282

$

9,626

$

795,619

Net income

 

 

 

 

 

20,389

 

 

20,389

Net change in accumulated other comprehensive income

 

 

 

 

 

 

(71)

 

(71)

Dividends declared on Common Stock:

Class A Shares ($0.286 per share)

 

 

 

 

 

(5,375)

 

 

(5,375)

Class B Shares ($0.260 per share)

 

 

 

 

 

(572)

 

 

(572)

Stock options exercised, net of shares withheld

 

1

 

 

1

 

(6)

 

 

 

(5)

Net change in notes receivable on Class A Common Stock

 

 

 

 

(201)

 

 

 

(201)

Deferred compensation - Class A Common Stock:

 

Directors

 

 

 

72

 

 

 

72

Designated key employees

 

 

 

141

 

 

 

141

Employee stock purchase plan - Class A Common Stock

6

 

 

1

 

169

 

 

 

170

Stock-based awards - Class A Common Stock:

Performance stock units

 

 

 

 

 

 

 

Restricted stock

 

 

 

 

69

 

 

 

69

Stock options

 

 

 

 

126

 

 

 

126

Balance, September 30, 2020

 

18,715

 

2,200

$

4,900

$

143,183

$

652,724

$

9,555

$

810,362

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Table of Contents

Nine Months Ended September 30, 2021

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, 2021

 

18,697

2,199

$

4,899

$

143,637

$

666,278

$

8,509

$

823,323

Net income

 

 

 

 

 

69,984

 

 

69,984

Net change in accumulated other comprehensive income

 

 

 

 

 

 

(3,361)

 

(3,361)

Dividends declared on Common Stock:

Class A Shares ($0.924 per share)

 

 

 

 

 

(16,980)

 

 

(16,980)

Class B Shares ($0.840 per share)

 

 

 

 

 

(1,830)

 

 

(1,830)

Stock options exercised, net of shares withheld

 

28

 

 

13

 

(155)

 

 

 

(142)

Conversion of Class B to Class A Common Shares

34

 

(34)

 

 

 

 

 

Repurchase of Class A Common Stock

(749)

 

 

(165)

 

(5,205)

 

(29,537)

 

 

(34,907)

Net change in notes receivable on Class A Common Stock

 

 

 

 

150

 

 

 

150

Deferred compensation - Class A Common Stock:

 

Directors

4

 

 

 

330

 

 

 

330

Designated key employees

 

 

 

478

 

 

 

478

Employee stock purchase plan - Class A Common Stock

11

 

 

3

 

507

 

 

 

510

Stock-based awards - Class A Common Stock:

Performance stock units

 

 

 

 

97

 

 

 

97

Restricted stock

 

15

 

 

2

 

583

 

 

 

585

Stock options

 

 

 

 

420

 

 

 

420

Balance, September 30, 2021

18,040

2,165

$

4,752

$

140,842

$

687,915

$

5,148

$

838,657

Nine Months Ended September 30, 2020

Common Stock

Accumulated

 

    

Class A

    

Class B

    

    

    

Additional

    

    

    

Other

    

Total

 

Shares

Shares

Paid In

Retained

Comprehensive

Stockholders’

 

(in thousands, except per share data)

Outstanding

Outstanding

Amount

Capital

Earnings

Income

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

 

 

 

 

 

62,890

 

 

62,890

Net change in accumulated other comprehensive income

 

 

 

 

 

 

6,457

 

6,457

Dividends declared on Common Stock:

Class A Shares ($0.858 per share)

 

 

 

 

 

(16,080)

 

 

(16,080)

Class B Shares ($0.780 per share)

 

 

 

 

 

(1,716)

 

 

(1,716)

Stock options exercised, net of shares withheld

 

20

 

 

9

 

242

 

 

 

251

Repurchase of Class A Common Stock

 

6

 

(6)

 

 

 

 

 

Conversion of Class B to Class A Common Shares

 

(86)

 

 

(20)

 

(582)

 

(2,250)

 

 

(2,852)

Net change in notes receivable on Class A Common Stock

 

 

 

 

(87)

 

 

 

(87)

Deferred compensation - Class A Common Stock:

 

Directors

4

 

 

 

222

 

 

 

222

Designated key employees

 

 

 

418

 

 

 

418

Employee stock purchase plan - Class A Common Stock

15

 

 

3

 

458

 

 

 

461

Stock-based awards - Class A Common Stock:

Performance stock units

 

18

 

 

 

(200)

 

 

 

(200)

Restricted stock

 

1

 

 

1

 

316

 

 

 

317

Stock options

 

 

 

 

328

 

 

 

328

Balance, September 30, 2020

 

18,715

 

2,200

$

4,900

$

143,183

$

652,724

$

9,555

$

810,362

See accompanying footnotes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Nine Months Ended

September 30, 

    

2021

    

2020

OPERATING ACTIVITIES:

Net income

$

69,984

$

62,890

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

Net amortization on investment securities

 

805

 

1,154

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

 

(12,650)

 

(3,261)

Unrealized losses on equity securities with readily determinable fair value

505

118

Depreciation of premises and equipment

 

6,747

 

7,420

Amortization of mortgage servicing rights

 

2,617

 

2,701

Impairment of mortgage servicing rights

(500)

500

Provision for on-balance sheet exposures for continuing operations

 

4,381

 

15,555

Provision for on-balance sheet exposures for discontinued operations

7,850

15,239

Provision for off-balance sheet exposures

(52)

467

Net gain on sale of mortgage loans held for sale

 

(16,339)

 

(25,030)

Origination of mortgage loans held for sale

 

(525,246)

 

(547,556)

Proceeds from sale of mortgage loans held for sale

 

562,661

 

546,950

Net gain on sale of consumer loans held for sale

(7,889)

(3,751)

Origination of consumer loans held for sale

(561,062)

(391,688)

Proceeds from sale of consumer loans held for sale

558,972

395,791

Net gain realized on sale of other real estate owned

 

(51)

 

(43)

Writedowns of other real estate owned

 

158

 

53

Deferred compensation expense - Class A Common Stock

 

808

 

640

Stock-based awards and ESPP expense - Class A Common Stock

 

1,178

 

445

Net gain on sale of bank premises and equipment

 

(399)

 

(353)

Increase in cash surrender value of bank owned life insurance

 

(1,616)

 

(1,184)

Net change in other assets and liabilities:

Accrued interest receivable

 

3,573

 

810

Accrued interest payable

 

(162)

 

(2,074)

Other assets

 

(4,743)

 

(13,126)

Other liabilities

 

(1,381)

 

(623)

Net cash provided by operating activities

 

88,149

 

62,044

INVESTING ACTIVITIES:

Purchases of available-for-sale debt securities

 

(141,571)

 

(278,878)

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

 

164,280

 

207,397

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

 

8,444

 

7,952

Net change in outstanding warehouse lines of credit

 

212,114

 

(311,217)

Net change in other loans from continuing operations

 

235,993

 

(282,185)

Net change in loans from discontinued operations

23,717

14,132

Proceeds from redemption of Federal Home Loan Bank stock

 

7,086

 

20,197

Purchase of Federal Home Loan Bank stock

(9,000)

Proceeds from sales of other real estate owned

 

611

 

156

Proceeds from sale of bank premises and equipment

637

894

Purchase of bank owned life insurance

(30,000)

Net purchases of premises and equipment

 

(4,972)

 

(2,711)

Net cash provided by (used in) investing activities

 

476,339

 

(633,263)

FINANCING ACTIVITIES:

Net change in deposits from continuing operations

 

200,580

 

1,153,770

Net change in deposits from discontinued operations

14,186

52,551

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

 

49,557

 

(41,445)

Payments of Federal Home Loan Bank advances

 

(235,000)

 

(1,067,500)

Proceeds from Federal Home Loan Bank advances

 

25,000

 

450,000

Payoff of subordinated note, net of common security interest

(40,000)

Repurchase of Class A Common Stock

 

(34,907)

 

(2,852)

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

435

461

Net proceeds from option exercises and equity awards vested - Class A Common Stock

 

(142)

 

251

Cash dividends paid

 

(18,537)

 

(17,292)

Net cash (used in) provided by financing activities

 

(38,828)

 

527,944

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

525,660

 

(43,275)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

485,587

 

385,303

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

1,011,247

$

342,028

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

Cash paid during the period for:

Interest

$

4,790

$

19,167

Income taxes

 

16,736

 

16,204

SUPPLEMENTAL NONCASH DISCLOSURES:

Mortgage servicing rights capitalized

$

3,889

$

3,987

Transfers from loans to real estate acquired in settlement of loans

64

2,109

Transfers from loans held for investment to held for sale

24

Unfunded commitments in low-income-housing investments

10,000

Right-of-use assets recorded

263

14,144

Allowance for credit losses recorded upon adoption of ASC 326

7,241

See accompanying footnotes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –SEPTEMBER 30, 2021 and 2020 AND DECEMBER 31, 2020 (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.

In 2005, Republic Bancorp Capital Trust, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. On September 30, 2021, as permitted under the terms of RBCT’s governing documents, Republic redeemed these securities at the par amount of approximately $40 million, without penalty. Although the TPS were treated as part of Republic’s Tier I Capital while outstanding, Republic’s capital ratios remained well above “well capitalized” levels following this redemption.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020.

As of September 30, 2021, 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.

See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.

The Company’s financial condition as of September 30, 2021 and results of operations for the three and nine months ended September 30, 2021 and 2020 were impacted by the COVID-19 pandemic and the public’s response to it.

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

Footnote 4 “Loans and Allowance for Credit Losses”
Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”

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Core Bank

Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of September 30, 2021, Republic had 42 full-service banking centers 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 — 7

Metropolitan Cincinnati, Ohio — 2

Metropolitan Nashville, Tennessee — 2

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, and increases in the cash surrender value of BOLI.

Traditional Banking operating expenses consist primarily of: salaries and employee benefits; technology, equipment, and communication; occupancy; interchange related expense; marketing and development; FDIC insurance 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 — The Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.

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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 for loans generated in states within its footprint and generally sells servicing for loans generated in states outside of its footprint. 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 — On May 13, 2021, the Bank entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Green Dot Corporation (“Green Dot”) providing for the purchase by Green Dot, upon the terms and subject to the conditions set forth therein, of substantially all of the assets and operations of the Bank’s Tax Refund Solutions business (the “Sale Transaction”).

As a result of the Purchase Agreement and the proposed Sale Transaction, the results for the Company, RPG, and its TRS segment are presented within this filing to reflect continuing versus discontinued operations. RPG’s continuing operations include its RCS segment, its RPS division, and certain overhead costs previously allocated to TRS that will remain with RPG. Discontinued operations are those contracted to be sold. These discontinued operations have historically contained the majority of TRS’s revenue and expense. Interest income and expense for continuing and discontinued operations also include intercompany interest charged and earned based on the Company’s funds transfer pricing methodology.

On October 4, 2021, Green Dot announced that it had been unable to obtain the Federal Reserve’s approval of or non-objection to the Sale Transaction and that, as a result, Green Dot would not consummate the Sale Transaction. On October 5, 2021, the Bank filed a lawsuit against Green Dot in the Delaware Court of Chancery, C.A. No. 2021-0854-SG, alleging breach of contract. In so doing, the Bank seeks, among other relief, specific performance to require that Green Dot proceed with the Sale Transaction as the parties had agreed to in the Purchase Agreement. Due to the inherent uncertainties of legal proceedings, at this time, the Company cannot predict the outcome of these proceedings and their impact on the Company’s financial condition and results of operations.

See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.

Republic Payment Solutions division — RPS is currently managed and operated within the TRS segment’s continuing operations. The RPS division offers general-purpose reloadable prepaid cards as an issuing bank 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’s continuing operations. 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 that are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:

RCS line-of-credit products – Using separate third-party service providers, the Bank originates two line-of-credit products to generally subprime borrowers in multiple states. The first of these two products (the “LOC I”) has been originated by the Bank since 2014. The second (the “LOC II”) was introduced in January 2021.

oRCS’s LOC I represents the substantial majority of RCS activity. Elastic Marketing, LLC and Elevate Decision Sciences, LLC, are third-party service providers for the product and are both subject to the Bank’s oversight and supervision. Together, these companies provide the Bank with certain marketing, servicing, technology, and support services, while a separate third party provides customer support, servicing, and other services on the Bank’s behalf. The Bank is the lender for this 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 product. 

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The Bank sells participation interests in this 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 LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.

oIn January 2021, RCS began originating balances through its LOC II. One of RCS’s existing third-party service providers, subject to the Bank’s oversight and supervision, provides the Bank with marketing services and loan servicing for the LOC II product. The Bank is the lender for this product and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this product. 

The Bank sells participation interests in this product. These participation interests are a 95% 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 5% participation interest in each advance, it maintains 100% ownership of the underlying LOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.

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

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

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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Recently Adopted Accounting Standards

The following ASUs were adopted by the Company during the nine months ended September 30, 2021:

ASU. No.

    

Topic

    

Nature of Update

    

Date Adopted

    

Method of Adoption

    

Financial Statement Impact

2020-08

Codification Improvements to Subtopic 310-20,
Receivables—Nonrefundable Fees and Other Costs

This ASU clarifies that an entity should re-evaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period.

January 1, 2021

Prospectively

Immaterial

2020-10

Codification Improvements

This ASU affects a wide variety of Topics in the Codification.

More specifically, this ASU, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). Those amendments are not expected to change current practice.

January 1, 2021

Prospectively

Immaterial

2021-01

Reference Rate Reform (Topic 848): Scope

This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

January 7, 2021

Prospectively

Immaterial

2021-06

Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946)

This ASU amends the SEC sections of the Codification related to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.

August 9, 2021

Prospectively

Immaterial

Accounting Standards Update

There were no not-yet-effective ASUs relevant to the Company’s financial statements issued since the Company’s last filing on Form 10-Q.

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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

September 30, 2021 (in thousands)

Cost

Gains

Losses

Credit Losses

 

Value

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

$

234,980

$

747

$

(882)

$

$

234,845

Private label mortgage-backed security

 

1,468

 

1,312

 

 

 

2,780

Mortgage-backed securities - residential

 

204,869

 

5,059

 

(123)

 

 

209,805

Collateralized mortgage obligations

 

34,027

 

521

 

(29)

 

 

34,519

Corporate bonds

 

10,000

 

81

 

 

 

10,081

Trust preferred security

 

3,671

 

179

 

 

 

3,850

Total available-for-sale debt securities

$

489,015

$

7,899

$

(1,034)

$

$

495,880

    

    

Gross

    

Gross

    

Allowance

 

    

Amortized

Unrealized

Unrealized

for

 

Fair

December 31, 2020 (in thousands)

Cost

Gains

Losses

Credit Losses

 

Value

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

$

245,204

$

1,730

$

(25)

$

$

246,909

Private label mortgage-backed security

 

1,707

 

1,250

 

 

 

2,957

Mortgage-backed securities - residential

 

203,786

 

7,419

 

(3)

 

 

211,202

Collateralized mortgage obligations

 

48,190

 

772

 

(10)

 

 

48,952

Corporate bonds

 

10,000

 

43

 

 

 

10,043

Trust preferred security

 

3,631

 

169

 

 

 

3,800

Total available-for-sale debt securities

$

512,518

$

11,383

$

(38)

$

$

523,863

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

September 30, 2021 (in thousands)

Value

Gains

Losses

Value

Credit Losses

Mortgage-backed securities - residential

$

47

$

$

$

47

$

Collateralized mortgage obligations

 

9,777

 

150

 

 

9,927

 

Corporate bonds

 

34,976

 

390

 

 

35,366

 

(54)

Obligations of state and political subdivisions

245

5

250

Total held-to-maturity debt securities

$

45,045

$

545

$

$

45,590

$

(54)

    

    

    

Gross

    

Gross

    

    

    

Allowance

Carrying

Unrecognized

Unrecognized

Fair

for

December 31, 2020 (in thousands)

Value

Gains

Losses

Value

Credit Losses

Mortgage-backed securities - residential

$

99

$

5

$

$

104

$

Collateralized mortgage obligations

 

13,061

 

176

 

 

13,237

 

Corporate bonds

 

39,986

 

499

 

 

40,485

 

(178)

Obligations of state and political subdivisions

356

8

364

Total held-to-maturity debt securities

$

53,502

$

688

$

$

54,190

$

(178)

Sales of Available-for-Sale Debt Securities

During the three and nine months ended September 30, 2021 and 2020, there were no material 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 as of September 30, 2021 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

 

September 30, 2021 (in thousands)

Cost

Value

Value

Value

 

 

Due in one year or less

$

25,044

$

25,270

$

121

$

123

Due from one year to five years

 

179,937

 

179,803

 

35,100

 

35,493

Due from five years to ten years

 

40,000

 

39,853

 

 

Due beyond ten years

 

3,670

 

3,850

 

 

Private label mortgage-backed security

 

1,468

 

2,780

 

 

Mortgage-backed securities - residential

 

204,869

 

209,805

 

47

 

47

Collateralized mortgage obligations

 

34,027

 

34,519

 

9,777

 

9,927

Total debt securities

$

489,015

$

495,880

$

45,045

$

45,590

Unrealized-Loss Analysis on Debt Securities

The following tables summarize AFS debt securities in an unrealized loss position for which an ACLS had not been recorded as of September 30, 2021 and December 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

 

September 30, 2021 (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

$

158,944

$

(882)

$

$

$

158,944

$

(882)

Mortgage-backed securities - residential

34,432

(123)

34,432

(123)

Collateralized mortgage obligations

5,164

(29)

5,164

(29)

Total available-for-sale debt securities

$

198,540

$

(1,034)

$

$

$

198,540

$

(1,034)

Less than 12 months

12 months or more

Total

 

    

    

Unrealized

    

    

Unrealized

    

    

Unrealized

 

December 31, 2020 (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

$

59,971

$

(25)

$

$

$

59,971

$

(25)

Mortgage-backed securities - residential

1,068

(3)

1,068

(3)

Collateralized mortgage obligations

2,788

(10)

2,788

(10)

Total available-for-sale debt securities

$

63,827

$

(38)

$

$

$

63,827

$

(38)

As of September 30, 2021, the Bank’s security portfolio consisted of 170 securities, 30 of which were in an unrealized loss position.

As of December 31, 2020, the Bank’s security portfolio consisted of 173 securities, 19 of which were in an unrealized loss position.

As of September 30, 2021 and December 31, 2020, 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.

Mortgage-Backed Securities and Collateralized Mortgage Obligations

As of September 30, 2021, with the exception of the $2.8 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. As of September 30, 2021 and December 31, 2020, there were gross unrealized losses of $152,000 and $13,000 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.

16

Table of Contents

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 $2.8 million as of September 30, 2021. This security is mostly backed by “Alternative A” first-lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

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

Rollforward of the Allowance for Credit Losses on Debt Securities

The tables below present a rollforward for the three and nine months ended September 30, 2021 and 2020 of the ACLS on AFS and HTM debt securities:

ACLS Rollforward

Three Months Ended September 30, 

2021

2020

Beginning

Charge-

Ending

Beginning

Charge-

Ending

(in thousands)

Balance

Provision

offs

Recoveries

Balance

Balance

Provision

offs

Recoveries

Balance

Available-for-Sale Securities:

Corporate Bonds

$

$

$

$

$

$

126

$

(74)

$

$

$

52

Held-to-Maturity Securities:

Corporate Bonds

56

(2)

54

147

148

295

Total

$

56

$

(2)

$

$

$

54

$

273

$

74

$

$

$

347

The Company decreased the ACLS on its HTM corporate bonds during the three months ended September 30, 2021 based on improved PD and LGD estimates on these bonds. PD and LGD estimates for these bonds were elevated during 2020 due to pandemic-driven economic concerns.

ACLS Rollforward

Nine Months Ended September 30, 

2021

2020

Beginning

Charge-

Ending

Beginning

ASC 326

Charge-

Ending

(in thousands)

Balance

Provision

offs

Recoveries

Balance

Balance

Adoption

Provision

offs

Recoveries

Balance

Available-for-Sale Securities:

Corporate Bonds

$

$

$

$

$

$

$

$

52

$

$

$

52

Held-to-Maturity Securities:

Corporate Bonds

178

(124)

54

51

244

295

Total

$

178

$

(124)

$

$

$

54

$

$

51

$

296

$

$

$

347

The Company decreased the ACLS on its HTM corporate bonds during the nine months ended September 30, 2021 based on improved PD and LGD estimates on these bonds. PD and LGD estimates for these bonds were elevated during 2020 due to pandemic-driven economic concerns.

17

Table of Contents

There were no HTM debt securities on nonaccrual or past due over 89 days as of September 30, 2021 and December 31, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of September 30, 2021 and December 31, 2020.

There were no HTM debt securities considered collateral dependent as of September 30, 2021 and December 31, 2020.

Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet and is excluded from the ACLS. Accrued interest on AFS debt securities totaled $1 million and $1 million as of September 30, 2021 and December 31, 2020. Accrued interest receivable on HTM debt securities totaled $88,000 and $110,000 as of September 30, 2021 and December 31, 2020.

Pledged Debt Securities

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

(in thousands)

    

September 30, 2021

    

December 31, 2020

 

Carrying amount

$

354,275

$

303,535

Fair value

 

354,341

 

303,611

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Table of Contents

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

 

September 30, 2021 (in thousands)

Cost

Gains

Losses

Value

 

Freddie Mac preferred stock

$

$

102

$

$

102

Community Reinvestment Act mutual fund

 

2,500

 

 

(24)

 

2,476

Total equity securities with readily determinable fair values

$

2,500

$

102

$

(24)

$

2,578

    

    

Gross

    

Gross

    

    

 

Amortized

Unrealized

Unrealized

Fair

 

December 31, 2020 (in thousands)

Cost

Gains

Losses

Value

 

Freddie Mac preferred stock

$

$

560

$

$

560

Community Reinvestment Act mutual fund

 

2,500

 

23

 

 

2,523

Total equity securities with readily determinable fair values

$

2,500

$

583

$

$

3,083

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 September 30, 2021

    

Three Months Ended September 30, 2020

    

(in thousands)

    

Realized

    

Unrealized

    

Total

    

Realized

    

Unrealized

    

Total

Freddie Mac preferred stock

$

$

(13)

$

(13)

$

$

50

$

50

Community Reinvestment Act mutual fund

 

 

(9)

 

(9)

 

 

4

 

4

Total equity securities with readily determinable fair value

$

$

(22)

$

(22)

$

$

54

$

54

Gains (Losses) Recognized on Equity Securities

Nine Months Ended September 30, 2021

    

Nine Months Ended September 30, 2020

(in thousands)

Realized

Unrealized

Total

Realized

Unrealized

Total

Freddie Mac preferred stock

$

$

(458)

$

(458)

$

$

(178)

$

(178)

Community Reinvestment Act mutual fund

 

 

(47)

 

(47)

 

 

60

 

60

Total equity securities with readily determinable fair value

$

$

(505)

$

(505)

$

$

(118)

$

(118)

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Table of Contents

3. LOANS HELD FOR SALE

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

Mortgage Loans Held for Sale, at Fair Value

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

Consumer Loans Held for Sale, at Fair Value

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

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

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Balance, beginning of period

$

13,020

$

164

$

3,298

$

598

Origination of consumer loans held for sale

 

67,526

 

1,559

 

136,222

 

49,300

Proceeds from the sale of consumer loans held for sale

 

(71,427)

 

(1,321)

 

(132,330)

 

(50,872)

Net gain on sale of consumer loans held for sale

 

1,660

 

47

 

3,589

 

1,423

Balance, end of period

$

10,779

$

449

$

10,779

$

449

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

RCS originates for sale 90% to 95% of the balances from its line-of-credit products and 100% for some of its healthcare receivables products. 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

 

Nine Months Ended

    

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Balance, beginning of period

$

11,412

$

12,801

$

1,478

$

11,646

Origination of consumer loans held for sale

 

189,492

 

107,518

 

424,840

 

342,388

Proceeds from the sale of consumer loans held for sale

 

(199,036)

 

(109,669)

 

(426,642)

 

(344,919)

Net gain on sale of consumer loans held for sale

 

2,108

 

793

 

4,300

 

2,328

Balance, end of period

$

3,976

$

11,443

$

3,976

$

11,443

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4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the loan portfolio follows:

(in thousands)

   

September 30, 2021

    

December 31, 2020

 

Traditional Banking:

Residential real estate:

Owner occupied

$

827,898

$

879,800

Nonowner occupied

 

294,818

 

264,780

Commercial real estate

 

1,393,241

 

1,349,085

Construction & land development

 

105,968

 

98,674

Commercial & industrial

 

333,795

 

325,596

Paycheck Protection Program

126,271

392,319

Lease financing receivables

 

9,427

 

10,130

Aircraft

130,398

101,375

Home equity

 

215,282

 

240,640

Consumer:

Credit cards

 

14,781

 

14,196

Overdrafts

 

753

 

587

Automobile loans

 

17,533

 

30,300

Other consumer

 

6,223

 

8,167

Total Traditional Banking

3,476,388

3,715,649

Warehouse lines of credit*

 

750,682

 

962,796

Total Core Banking

4,227,070

4,678,445

Republic Processing Group*:

 

Tax Refund Solutions:

Easy Advances

Other TRS loans

1

Republic Credit Solutions

116,711

 

110,893

Total Republic Processing Group

116,712

110,893

Total loans**

 

4,343,782

 

4,789,338

Allowance for credit losses

 

(63,024)

 

(61,067)

Total loans, net

$

4,280,758

$

4,728,271

*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)

    

September 30, 2021

    

December 31, 2020

 

Contractually receivable

$

4,348,535

$

4,797,297

Unearned income

 

(598)

 

(708)

Unamortized premiums

 

121

 

216

Unaccreted discounts

 

(688)

 

(988)

PPP net unamortized deferred origination fees and costs

(3,986)

(8,564)

Other net unamortized deferred origination fees and costs

 

398

 

2,085

Carrying value of loans

$

4,343,782

$

4,789,338

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Paycheck Protection Program

The CARES Act was enacted in March 2020 and provided for the SBA’s PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID-19 pandemic. The Economic Aid Act was enacted in December 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As of September 30, 2021, net PPP loans of $126 million remained on the Traditional Bank’s balance sheet, including $19 million in loan balances originated during 2020, $111 million in loan balances originated during 2021, and $4 million of unaccreted PPP fees reported as a credit offset to these originated balances. Unaccreted PPP fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated.

To provide liquidity to banks administering the SBA’s PPP, the FRB created the PPPLF, a lending facility secured by the PPP loans of the participating banks. As of September 30, 2021, the Bank had no outstanding borrowings from the FRB under the PPPLF.

22

Table of Contents

Credit Quality Indicators

The following tables include loans by segment, risk category, and, for non-revolving loans, origination year. Loan segments and risk categories as of September 30, 2021 remain unchanged from those defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Regarding origination year, loan extensions and renewals are generally considered originated in the year extended or renewed unless the loan is classified as a TDR. Loan extensions and renewals classified as TDRs generally receive no change in origination date upon extension or renewal.

Revolving Loans

Revolving Loans

(in thousands)

Term Loans Amortized Cost Basis by Origination Year

Amortized

Converted

As of September 30, 2021

2021

2020

2019

2018

Prior

Cost Basis

to Term

Total

Residential real estate owner occupied:

Risk Rating

Pass or not rated

$

170,594

$

229,444

$

96,923

$

56,318

$

251,929

$

$

$

805,208

Special Mention

304

36

8,509

8,849

Substandard

557

685

1,006

11,593

13,841

Doubtful

Total

$

170,898

$

230,001

$

97,608

$

57,360

$

272,031

$

$

$

827,898

Residential real estate nonowner occupied:

Risk Rating

Pass or not rated

$

75,983

$

71,290

$

50,082

$

32,111

$

61,625

$

$

3,588

$

294,679

Special Mention

40

40

Substandard

99

99

Doubtful

Total

$

75,983

$

71,290

$

50,082

$

32,111

$

61,764

$

$

3,588

$

294,818

Commercial real estate:

Risk Rating

Pass or not rated

$

362,616

$

271,691

$

179,046

$

104,300

$

311,904

$

$

79,005

$

1,308,562

Special Mention

12,103

2,411

29,879

11,535

19,767

75,695

Substandard

2,576

266

3,941

2,201

8,984

Doubtful

Total

$

374,719

$

276,678

$

209,191

$

115,835

$

335,612

$

$

81,206

$

1,393,241

Construction and land development:

Risk Rating

Pass or not rated

$

59,659

$

37,136

$

4,384

$

1,527

$

593

$

$

$

103,299

Special Mention

310

2,359

2,669

Substandard

Doubtful

Total

$

59,659

$

37,446

$

6,743

$

1,527

$

593

$

$

$

105,968

Commercial and industrial:

Risk Rating

Pass or not rated

$

117,127

$

55,354

$

66,818

$

21,262

$

48,361

$

$

4,112

$

313,034

Special Mention

15,398

2,344

800

43

2,095

20,680

Substandard

48

33

81

Doubtful

Total

$

132,525

$

57,746

$

67,618

$

21,305

$

50,489

$

$

4,112

$

333,795

Paycheck Protection Program:

Risk Rating

Pass or not rated

$

107,498

$

18,773

$

$

$

$

$

$

126,271

Special Mention

Substandard

Doubtful

Total

$

107,498

$

18,773

$

$

$

$

$

$

126,271

Lease financing receivables:

Risk Rating

Pass or not rated

$

2,068

$

903

$

2,896

$

1,406

$

2,154

$

$

$

9,427

Special Mention

Substandard

Doubtful

Total

$

2,068

$

903

$

2,896

$

1,406

$

2,154

$

$

$

9,427

Aircraft:

Risk Rating

Pass or not rated

$

47,983

$

46,405

$

24,134

$

10,049

$

1,827

$

$

$

130,398

Special Mention

Substandard

Doubtful

Total

$

47,983

$

46,405

$

24,134

$

10,049

$

1,827

$

$

$

130,398

Home equity:

Risk Rating

Pass or not rated

$

$

$

$

$

$

213,297

$

$

213,297

Special Mention

125

125

Substandard

1,860

1,860

Doubtful

Total

$

$

$

$

$

$

215,282

$

$

215,282

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Table of Contents

Revolving Loans

Revolving Loans

(in thousands)

Term Loans Amortized Cost Basis by Origination Year (Continued)

Amortized

Converted

As of September 30, 2021

2021

2020

2019

2018

Prior

Cost Basis

to Term

Total

Consumer:

Risk Rating

Pass or not rated

$

844

$

725

$

10,451

$

5,156

$

6,864

$

14,880

$

$

38,920

Special Mention

Substandard

25

47

298

370

Doubtful

Total

$

844

$

725

$

10,476

$

5,203

$

7,162

$

14,880

$

$

39,290

Warehouse:

Risk Rating

Pass or not rated

$

$

$

$

$

$

750,682

$

$

750,682

Special Mention

Substandard

Doubtful

Total

$

$

$

$

$

$

750,682

$

$

750,682

TRS:

Risk Rating

Pass or not rated

$

$

$

$

$

$

1

$

$

1

Special Mention

Substandard

Doubtful

Total

$

$

$

$

$

$

1

$

$

1

RCS:

Risk Rating

Pass or not rated

$

23,112

$

9,275

$

2,387

$

985

$

3,943

$

76,004

$

$

115,706

Special Mention

Substandard

1,005

1,005

Doubtful

Total

$

23,112

$

9,275

$

2,387

$

985

$

3,943

$

77,009

$

$

116,711

Grand Total:

Risk Rating

Pass or not rated

$

967,484

$

740,996

$

437,121

$

233,114

$

689,200

$

1,054,864

$

86,705

$

4,209,484

Special Mention

27,805

5,065

33,038

11,614

30,411

125

108,058

Substandard

3,181

976

1,053

15,964

2,865

2,201

26,240

Doubtful

Grand Total

$

995,289

$

749,242

$

471,135

$

245,781

$

735,575

$

1,057,854

$

88,906

$

4,343,782

Revolving Loans

Revolving Loans

(in thousands)

Term Loans Amortized Cost Basis by Origination Year

Amortized

Converted

As of December 31, 2020

2020

2019

2018

2017

Prior

Cost Basis

to Term

Total

Residential real estate owner occupied:

Risk Rating

Pass or not rated

$

268,313

$

132,018

$

82,754

$

67,430

$

301,366

$

$

$

851,881

Special Mention

364

42

1,610

8,730

10,746

Substandard

394

1,423

1,331

614

13,411

17,173

Doubtful

Total

$

268,707

$

133,805

$

84,127

$

69,654

$

323,507

$

$

$

879,800

Residential real estate nonowner occupied:

Risk Rating

Pass or not rated

$

73,291

$

63,102

$

43,610

$

45,759

$

38,316

$

$

621

$

264,699

Special Mention

Substandard

81

81

Doubtful

Total

$

73,291

$

63,102

$

43,610

$

45,759

$

38,397

$

$

621

$

264,780

Commercial real estate:

Risk Rating

Pass or not rated

$

315,550

$

258,251

$

166,542

$

171,207

$

315,336

$

$

55,949

$

1,282,835

Special Mention

3,397

30,969

236

11,355

9,659

55,616

Substandard

2,596

349

987

3,899

2,803

10,634

Doubtful

Total

$

321,543

$

289,569

$

166,778

$

183,549

$

328,894

$

$

58,752

$

1,349,085

Construction and land development:

Risk Rating

Pass or not rated

$

53,972

$

31,756

$

7,840

$

701

$

1,964

$

$

$

96,233

Special Mention

2,397

2,397

Substandard

44

44

Doubtful

Total

$

53,972

$

34,197

$

7,840

$

701

$

1,964

$

$

$

98,674

Commercial and industrial:

Risk Rating

Pass or not rated

$

105,985

$

84,575

$

33,391

$

32,303

$

46,697

$

$

1,040

$

303,991

Special Mention

18,195

800

2,215

21,210

Substandard

383

12

395

Doubtful

Total

$

124,563

$

85,387

$

33,391

$

32,303

$

48,912

$

$

1,040

$

325,596

24

Table of Contents

Revolving Loans

Revolving Loans

(in thousands)

Term Loans Amortized Cost Basis by Origination Year (Continued)

Amortized

Converted

As of December 31, 2020

2020

2019

2018

2017

Prior

Cost Basis

to Term

Total

Paycheck Protection Program:

Risk Rating

Pass or not rated

$

392,319

$

$

$

$

$

$

$

392,319

Special Mention

Substandard

Doubtful

Total

$

392,319

$

$

$

$

$

$

$

392,319

Lease financing receivables:

Risk Rating

Pass or not rated

$

1,117

$

3,663

$

1,814

$

2,847

$

689

$

$

$

10,130

Special Mention

Substandard

Doubtful

Total

$

1,117

$

3,663

$

1,814

$

2,847

$

689

$

$

$

10,130

Aircraft:

Risk Rating

Pass or not rated

$

55,823

$

30,529

$

13,804

$

1,219

$

$

$

$

101,375

Special Mention

Substandard

Doubtful

Total

$

55,823

$

30,529

$

13,804

$

1,219

$

$

$

$

101,375

Home equity:

Risk Rating

Pass or not rated

$

$

$

$

$

$

237,633

$

$

237,633

Special Mention

127

127

Substandard

2,880

2,880

Doubtful

Total

$

$

$

$

$

$

240,640

$

$

240,640

Consumer:

Risk Rating

Pass or not rated

$

425

$

13,636

$

8,563

$

7,125

$

8,648

$

14,321

$

$

52,718

Special Mention

5

5

Substandard

32

49

229

212

5

527

Doubtful

Total

$

425

$

13,668

$

8,612

$

7,354

$

8,865

$

14,326

$

$

53,250

Warehouse:

Risk Rating

Pass or not rated

$

$

$

$

$

$

962,796

$

$

962,796

Special Mention

Substandard

Doubtful

Total

$

$

$

$

$

$

962,796

$

$

962,796

TRS:

Risk Rating

Pass or not rated

$

$

$

$

$

$

$

$

Special Mention

Substandard

Doubtful

Total

$

$

$

$

$

$

$

$

RCS:

Risk Rating

Pass or not rated

$

27,683

$

5,704

$

2,485

$

1,232

$

19,095

$

54,348

$

$

110,547

Special Mention

Substandard

346

346

Doubtful

Total

$

27,683

$

5,704

$

2,485

$

1,232

$

19,095

$

54,694

$

$

110,893

Grand Total:

Risk Rating

Pass or not rated

$

1,294,478

$

623,234

$

360,803

$

329,823

$

732,111

$

1,269,098

$

57,610

$

4,667,157

Special Mention

21,592

34,530

278

12,965

20,609

127

90,101

Substandard

3,373

1,860

1,380

1,830

17,603

3,231

2,803

32,080

Doubtful

Grand Total

$

1,319,443

$

659,624

$

362,461

$

344,618

$

770,323

$

1,272,456

$

60,413

$

4,789,338

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 September 30, 

2021

2020

Beginning

Charge-

Ending

Beginning

Charge-

Ending

(in thousands)

Balance

Provision

offs

Recoveries

Balance

Balance

Provision

offs

Recoveries

Balance

Traditional Banking:

Residential real estate:

Owner occupied

$

8,977

$

(677)

$

$

329

$

8,629

$

9,303

$

330

$

(13)

$

21

$

9,641

Nonowner occupied

2,551

47

2,598

2,274

96

7

2,377

Commercial real estate

23,307

286

3

23,596

16,300

4,663

20,963

Construction & land development

3,299

376

3,675

4,940

(341)

4,599

Commercial & industrial

4,117

(139)

(35)

16

3,959

2,405

654

(255)

80

2,884

Paycheck Protection Program

Lease financing receivables

97

2

99

125

(8)

117

Aircraft

303

23

326

208

11

219

Home equity

4,305

(63)

5

4,247

5,124

(7)

(14)

21

5,124

Consumer:

Credit cards

949

22

(40)

20

951

928

36

(29)

7

942

Overdrafts

717

143

(195)

88

753

488

324

(157)

50

705

Automobile loans

273

(34)

(19)

6

226

473

(67)

406

Other consumer

467

(28)

(25)

14

428

609

92

(41)

20

680

Total Traditional Banking

49,362

(42)

(314)

481

49,487

43,177

5,783

(509)

206

48,657

Warehouse lines of credit

2,100

(223)

1,877

2,575

(3)

2,572

Total Core Banking

51,462

(265)

(314)

481

51,364

45,752

5,780

(509)

206

51,229

Republic Processing Group (includes discontinued operations):

Tax Refund Solutions:

Easy Advances (discontinued operations)

(2,242)

2,242

(4,294)

4,294

Other TRS loans (discontinued operations)

(19)

19

211

(48)

(22)

141

Republic Credit Solutions (continuing operations)

8,829

3,820

(1,064)

75

11,660

9,134

(12)

(684)

83

8,521

Total Republic Processing Group

8,829

1,559

(1,064)

2,336

11,660

9,345

(4,354)

(706)

4,377

8,662

Total

$

60,291

$

1,294

$

(1,378)

$

2,817

$

63,024

$

55,097

$

1,426

$

(1,215)

$

4,583

$

59,891

26

Table of Contents

ACLL Rollforward

Nine Months Ended September 30, 

2021

2020

Beginning

Charge-

Ending

Beginning

ASC 326

Charge-

Ending

(in thousands)

Balance

Provision

offs

Recoveries

Balance

Balance

Adoption

Provision

offs

Recoveries

Balance

Traditional Banking:

Residential real estate:

Owner occupied

$

9,715

$

(1,461)

$

$

375

$

8,629

$

4,729

$

4,199

$

648

$

(40)

$

105

$

9,641

Nonowner occupied

2,466

131

1

2,598

1,737

148

481

11

2,377

Commercial real estate

23,606

336

(428)

82

23,596

10,486

273

10,002

(270)

472

20,963

Construction & land development

3,274

401

3,675

2,152

1,447

1,000

4,599

Commercial & industrial

2,797

1,170

(35)

27

3,959

2,882

(1,318)

1,643

(447)

124

2,884

Paycheck Protection Program

Lease financing receivables

106

(7)

99

147

(30)

117

Aircraft

253

73

326

176

43

219

Home equity

4,990

(789)

46

4,247

2,721

1,652

657

(14)

108

5,124

Consumer:

Credit cards

929

108

(130)

44

951

1,020

33

74

(206)

21

942

Overdrafts

587

351

(444)

259

753

1,169

13

(660)

183

705

Automobile loans

399

(178)

(19)

24

226

612

(7)

(220)

(8)

29

406

Other consumer

577

(137)

(56)

44

428

374

307

(81)

(86)

166

680

Total Traditional Banking

49,699

(2)

(1,112)

902

49,487

28,205

6,734

14,230

(1,731)

1,219

48,657

Warehouse lines of credit

2,407

(530)

1,877

1,794

778

2,572

Total Core Banking

52,106

(532)

(1,112)

902

51,364

29,999

6,734

15,008

(1,731)

1,219

51,229

Republic Processing Group (includes discontinued operations):

Tax Refund Solutions:

Easy Advances (discontinued operations)

7,984

(10,256)

2,272

15,239

(19,575)

4,336

Other TRS loans (discontinued operations)

158

(134)

(51)

27

234

(94)

1

141

Republic Credit Solutions (continuing operations)

8,803

5,037

(2,427)

247

11,660

13,118

251

(5,401)

553

8,521

Total Republic Processing Group

8,961

12,887

(12,734)

2,546

11,660

13,352

15,490

(25,070)

4,890

8,662

Total

$

61,067

$

12,355

$

(13,846)

$

3,448

$

63,024

$

43,351

$

6,734

$

30,498

$

(26,801)

$

6,109

$

59,891

The cumulative loss rate used as the basis for the estimate of the Company’s ACLL as of September 30, 2021 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 2020, supplemented by qualitative factor adjustments for current and forecasted conditions. The Company employs one-year forecasts of unemployment and CRE values within its ACLL model, with reversion to long-term averages following the forecasted period. The cumulative loss rate within the Company’s ACLL also includes estimated losses based on an individual evaluation of loans which are either collateral dependent or which do not share risk characteristics with pooled loans, e.g., TDRs.

For its CRE loan pool, the Company employed a one-year forecast of CRE vacancy rates through March 31, 2021 but discontinued use of this forecast during the second quarter of 2021 in favor of a one-year forecast of general CRE values. This change in forecast method had no material impact on the Company’s ACLL.

27

Table of Contents

Nonperforming Loans and Nonperforming Assets

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

(dollars in thousands)

    

September 30, 2021

    

December 31, 2020

    

Loans on nonaccrual status*

$

20,252

$

23,548

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

 

691

 

47

Total nonperforming loans

 

20,943

 

23,595

Other real estate owned

 

1,845

 

2,499

Total nonperforming assets

$

22,788

$

26,094

Credit Quality Ratios - Total Company:

Nonperforming loans to total loans

 

0.48

%  

 

0.49

%

Nonperforming assets to total loans (including OREO)

 

0.52

 

0.54

Nonperforming assets to total assets

 

0.37

 

0.42

Credit Quality Ratios - Core Bank:

Nonperforming loans to total loans

 

0.48

%  

 

0.50

%

Nonperforming assets to total loans (including OREO)

 

0.52

 

0.56

Nonperforming assets to total assets

 

0.39

 

0.45

*

Loans on nonaccrual status include collateral-dependent loans.

**

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

28

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)

    

September 30, 2021

    

December 31, 2020

  

  

September 30, 2021

    

December 31, 2020

Traditional Banking:

Residential real estate:

Owner occupied

$

11,708

$

14,328

$

$

Nonowner occupied

 

99

 

81

 

 

Commercial real estate

 

6,607

 

6,762

 

 

Construction & land development

 

 

 

 

Commercial & industrial

 

93

 

55

 

 

Paycheck Protection Program

Lease financing receivables

 

 

 

 

Aircraft

Home equity

 

1,657

 

2,141

 

 

Consumer:

Credit cards

 

 

 

 

5

Overdrafts

 

 

 

 

Automobile loans

 

84

 

170

 

 

Other consumer

 

4

 

11

 

 

Total Traditional Banking

20,252

23,548

5

Warehouse lines of credit

 

 

 

 

Total Core Banking

20,252

23,548

5

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

Other TRS loans

 

 

 

 

Republic Credit Solutions

691

42

Total Republic Processing Group

691

42

Total

$

20,252

$

23,548

$

691

$

47

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

Three Months Ended

Nine Months Ended

As of September 30, 2021

September 30, 2021

September 30, 2021

    

Nonaccrual

    

Nonaccrual

    

Total

Interest Income

    

Interest Income

Loans with

Loans without

Nonaccrual

Recognized

Recognized

(in thousands)

ACLL

ACLL

Loans

on Nonaccrual Loans*

on Nonaccrual Loans*

Residential real estate:

Owner occupied

$

2,041

$

9,667

$

11,708

$

225

$

672

Nonowner occupied

 

33

66

99

2

5

Commercial real estate

 

4,153

2,454

6,607

16

125

Construction & land development

 

Commercial & industrial

 

45

48

93

2

Paycheck Protection Program

Lease financing receivables

 

Aircraft

Home equity

 

63

1,594

1,657

19

121

Consumer

14

74

88

4

8

Total

$

6,349

$

13,903

$

20,252

$

266

$

933

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

29

Table of Contents

Three Months Ended

Nine Months Ended

As of December 31, 2020

September 30, 2020

September 30, 2020

    

Nonaccrual

    

Nonaccrual

    

Total

Interest Income

    

Interest Income

Loans with

Loans without

Nonaccrual

Recognized

Recognized

(in thousands)

ACLL

ACLL

Loans

on Nonaccrual Loans*

on Nonaccrual Loans*

Residential real estate:

Owner occupied

$

1,995

$

12,333

$

14,328

$

252

$

649

Nonowner occupied

 

8

73

81

2

6

Commercial real estate

 

576

6,186

6,762

17

854

Construction & land development

 

7

7

Commercial & industrial

 

55

55

7

16

Paycheck Protection Program

Lease financing receivables

 

Aircraft

Home equity

 

91

2,050

2,141

29

81

Consumer

69

112

181

3

9

$

2,739

$

20,809

$

23,548

$

317

$

1,622

* Includes interest income for loans on nonaccrual 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.

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

    

    

    

    

    

    

 

September 30, 2021

Days

Days

Days

Total

Total

 

(dollars in thousands)

Delinquent

Delinquent

Delinquent*

Delinquent**

Current

Total

 

Traditional Banking:

Residential real estate:

Owner occupied

$

896

$

315

$

917

$

2,128

$

825,770

$

827,898

Nonowner occupied

 

 

 

 

 

294,818

 

294,818

Commercial real estate

 

 

 

5,037

 

5,037

 

1,388,204

 

1,393,241

Construction & land development

 

 

 

 

 

105,968

 

105,968

Commercial & industrial

 

8

 

 

58

 

66

 

333,729

 

333,795

Paycheck Protection Program

126,271

126,271

Lease financing receivables

 

 

 

 

 

9,427

 

9,427

Aircraft

130,398

130,398

Home equity

 

50

 

 

209

 

259

 

215,023

 

215,282

Consumer:

Credit cards

 

36

 

9

 

 

45

 

14,736

 

14,781

Overdrafts

 

137

 

6

 

2

 

145

 

608

 

753

Automobile loans

 

 

 

11

 

11

 

17,522

 

17,533

Other consumer

 

1

 

 

 

1

 

6,222

 

6,223

Total Traditional Banking

1,128

330

6,234

7,692

3,468,696

3,476,388

Warehouse lines of credit

 

 

 

 

 

750,682

 

750,682

Total Core Banking

1,128

330

6,234

7,692

4,219,378

4,227,070

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

 

 

 

 

 

Other TRS loans

 

 

 

 

 

1

 

1

Republic Credit Solutions

6,828

 

2,182

 

691

 

9,701

 

107,010

 

116,711

Total Republic Processing Group

6,828

2,182

691

9,701

107,011

116,712

Total

$

7,956

$

2,512

$

6,925

$

17,393

$

4,326,389

$

4,343,782

Delinquency ratio***

 

0.18

%  

 

0.06

%  

 

0.16

%  

 

0.40

%  

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

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

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

30

Table of Contents

    

30 - 59

    

60 - 89

    

90 or More

    

    

    

    

    

    

 

December 31, 2020

Days

Days

Days

Total

Total

 

(dollars in thousands)

Delinquent

Delinquent

Delinquent*

Delinquent**

Current

Total

 

Traditional Banking:

Residential real estate:

Owner occupied

$

1,038

$

668

$

1,554

$

3,260

$

876,540

$

879,800

Nonowner occupied

 

 

 

 

 

264,780

 

264,780

Commercial real estate

 

 

348

 

5,109

 

5,457

 

1,343,628

 

1,349,085

Construction & land development

 

 

 

 

 

98,674

 

98,674

Commercial & industrial

 

 

 

12

 

12

 

325,584

 

325,596

Paycheck Protection Program

392,319

392,319

Lease financing receivables

 

 

 

 

 

10,130

 

10,130

Aircraft

 

 

 

101,375

 

101,375

Home equity

 

93

 

14

 

595

 

702

 

239,938

 

240,640

Consumer:

Credit cards

 

33

 

35

 

5

 

73

 

14,123

 

14,196

Overdrafts

 

140

 

5

 

2

 

147

 

440

 

587

Automobile loans

 

42

 

 

14

 

56

 

30,244

 

30,300

Other consumer

 

6

 

 

 

6

 

8,161

 

8,167

Total Traditional Banking

1,352

1,070

7,291

9,713

3,705,936

3,715,649

Warehouse lines of credit

 

 

 

 

 

962,796

 

962,796

Total Core Banking

1,352

1,070

7,291

9,713

4,668,732

4,678,445

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

 

 

 

 

 

Other TRS loans

 

 

 

 

 

 

Republic Credit Solutions

6,572

 

3,620

 

42

 

10,234

 

100,659

 

110,893

Total Republic Processing Group

6,572

3,620

42

10,234

100,659

110,893

Total

$

7,924

$

4,690

$

7,333

$

19,947

$

4,769,391

$

4,789,338

Delinquency ratio***

 

0.17

%  

 

0.10

%  

 

0.15

%  

 

0.42

%  

*       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.

31

Table of Contents

Collateral-Dependent Loans

The following table presents the amortized cost basis of collateral-dependent loans by class of loans:

September 30, 2021

December 31, 2020

Secured

    

Secured

Secured

    

Secured

by Real

by Personal

by Real

by Personal

(dollars in thousands)

Estate

Property

Estate

Property

Traditional Banking:

Residential real estate:

Owner occupied

$

13,645

$

$

17,212

$

Nonowner occupied

 

99

 

 

81

 

Commercial real estate

 

8,985

 

 

10,205

 

Construction & land development

 

 

 

 

Commercial & industrial

 

 

47

 

 

12

Paycheck Protection Program

Lease financing receivables

 

 

 

 

Aircraft

 

 

Home equity

 

1,860

 

 

2,899

 

Consumer

 

369

 

237

Total Traditional Banking

$

24,589

$

416

$

30,397

$

249

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.

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. As of September 30, 2021 and December 31, 2020, $6 million and $7 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

 

September 30, 2021 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate

64

$

3,736

94

$

8,293

158

$

12,029

Commercial real estate

2

2,580

2

1,262

4

 

3,842

Commercial & industrial

1

1

1

 

1

Consumer

1

12

2,306

567

2,307

579

Total troubled debt restructurings

67

$

6,328

2,403

$

10,123

2,470

$

16,451

    

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, 2020 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate

61

$

4,189

123

$

11,041

184

$

15,230

Commercial real estate

2

 

2,509

5

 

2,395

7

 

4,904

Construction & land development

 

1

 

44

1

 

44

Commercial & industrial

 

1

 

1

1

 

1

Consumer

1

14

2,194

585

2,195

599

Total troubled debt restructurings

64

$

6,712

2,324

$

14,066

2,388

$

20,778

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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 as of September 30, 2021 and December 31, 2020 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

 

September 30, 2021 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate loans (including home equity loans):

Rate reduction

88

$

7,964

2

$

123

90

$

8,087

Principal deferral

7

 

605

1

 

160

8

 

765

Legal modification

51

 

2,758

9

 

419

60

 

3,177

Total residential TDRs

146

 

11,327

12

 

702

158

 

12,029

  

Commercial related and construction/land development loans:

Rate reduction

1

 

936

 

1

 

936

Principal deferral

3

 

444

1

 

2,463

4

 

2,907

Total commercial TDRs

4

 

1,380

1

 

2,463

5

 

3,843

Consumer loans:

Principal deferral

2,304

560

 

2,304

 

560

Legal modification

3

19

3

 

19

Total consumer TDRs

2,307

 

579

 

2,307

 

579

Total troubled debt restructurings

2,457

$

13,286

13

$

3,165

2,470

$

16,451

    

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, 2020 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate loans (including home equity loans):

Interest only payments

1

$

826

$

1

$

826

Rate reduction

101

 

9,526

6

 

370

107

 

9,896

Principal deferral

9

 

858

2

 

166

11

 

1,024

Legal modification

58

 

3,068

7

 

416

65

 

3,484

Total residential TDRs

169

 

14,278

15

 

952

184

 

15,230

  

Commercial related and construction/land development loans:

Interest only payments

1

 

488

 

1

 

488

Rate reduction

2

 

1,046

1

 

45

3

 

1,091

Principal deferral

4

 

906

1

 

2,464

5

 

3,370

Total commercial TDRs

7

 

2,440

2

 

2,509

9

 

4,949

Consumer loans:

Principal deferral

2,193

578

 

2,193

 

578

Legal modification

2

21

2

 

21

Total consumer TDRs

2,195

 

599

 

2,195

 

599

Total troubled debt restructurings

2,371

$

17,317

17

$

3,461

2,388

$

20,778

As of September 30, 2021 and December 31, 2020, 81% and 83% of the Bank’s TDR balances were performing according to their modified terms. The Bank had provided $2 million and $1 million of specific ACLL allocations to clients whose loan terms have been modified in TDRs as of September 30, 2021 and December 31, 2020. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships as of September 30, 2021 or December 31, 2020.

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Table of Contents

A summary of the categories of TDR loan modifications by respective performance as of September 30, 2021 and 2020 that were modified during the three months ended September 30, 2021 and 2020 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

 

September 30, 2021 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate loans (including home equity loans):

Legal modification

3

$

142

1

$

14

4

$

156

Total residential TDRs

3

142

1

14

4

156

Consumer loans:

Principal deferral

124

 

13

 

124

 

13

Total consumer TDRs

124

 

13

 

124

 

13

Total troubled debt restructurings

127

$

155

1

$

14

128

$

169

    

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

 

September 30, 2020 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate loans (including home equity loans):

Principal deferral

2

$

54

1

$

4

3

$

58

Legal modification

4

152

1

20

5

172

Total residential TDRs

6

 

206

2

 

24

8

 

230

  

Consumer loans:

Principal deferral

221

 

29

 

221

29

Legal modification

1

 

15

 

1

15

Total consumer TDRs

222

 

44

 

222

 

44

Total troubled debt restructurings

228

$

250

2

$

24

230

$

274

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 September 30, 2021 and 2020, 92% and 91% of the Bank’s TDR balances that occurred during the third quarters of 2021 and 2020 were performing according to their modified terms. The Bank provided approximately $6,000 and $29,000 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the third quarters of 2021 and 2020.

There was no significant change between the pre and post modification loan balances for the three months ending September 30, 2021 and 2020.

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Table of Contents

A summary of the categories of TDR loan modifications by respective performance as of September 30, 2021 and 2020 that were modified during the nine months ended September 30, 2021 and 2020 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

 

September 30, 2021 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate loans (including home equity loans):

Principal deferral

$

1

$

160

1

$

160

Legal modification

6

378

5

288

11

666

Total residential TDRs

6

 

378

6

 

448

12

 

826

  

Consumer loans:

Principal deferral

556

 

72

 

556

 

72

Legal modification

1

 

3

 

1

 

3

Total consumer TDRs

557

 

75

 

557

 

75

Total troubled debt restructurings

563

$

453

6

$

448

569

$

901

    

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

 

September 30, 2020 (dollars in thousands)

Loans

Investment

Loans

Investment

Loans

Investment

Residential real estate loans (including home equity loans):

Rate reduction

2

$

54

1

$

4

3

$

58

Legal modification

11

429

2

128

13

557

Total residential TDRs

13

 

483

3

 

132

16

 

615

Commercial related and construction/land development loans:

Principal deferral

1

 

21

 

1

21

Total commercial TDRs

1

 

21

 

1

 

21

Consumer loans:

Principal deferral

1,492

 

183

 

1,492

183

Legal modification

1

 

15

 

1

15

Total consumer TDRs

1,493

 

198

 

1,493

 

198

Total troubled debt restructurings

1,507

$

702

3

$

132

1,510

$

834

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 September 30, 2021 and 2020, 50% and 84% of the Bank’s TDR balances that occurred during the first nine months of 2021 and 2020 were performing according to their modified terms. The Bank provided approximately $38,000 and $121,000 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the first nine months of 2021 and 2020.

There was no significant change between the pre and post modification loan balances for the nine months ending September 30, 2021 and 2020.

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Table of Contents

The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of September 30, 2021 and 2020 and for which there was a payment default during the three and/or nine months ended September 30, 2021 and 2020.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2021

2020

2021

2020

    

    

Recorded

    

Number of

    

Recorded

     

Number of

    

Recorded

     

Number of

    

Recorded

(dollars in thousands)

Loans

Investment

Loans

Investment

 

Loans

Investment

 

Loans

Investment

Residential real estate:

Owner occupied

 

2

$

179

3

$

163

6

$

468

5

$

269

Commercial real estate

 

 

2

 

2,964

1

 

116

2

 

2,964

Home equity

 

1

14

1

 

20

1

 

14

2

 

33

Total

 

3

$

193

6

$

3,147

8

$

598

9

$

3,266

COVID-19 Loan Accommodations

The CARES Act provided several forms of economic relief designed to defray the impact of COVID-19. In April 2020, through its own independent relief efforts and CARES Act provisions, the Company began offering loan accommodations through deferrals and forbearances. These accommodations were generally under three-month terms for commercial clients, with residential and consumer accommodations in line with prevailing regulatory and legal parameters. Loans that received an accommodation were generally not considered troubled debt restructurings by the Company if such loans were not greater than 30 days past due as of December 31, 2019.

As of September 30, 2021, $3 million, or less than 1% of the Company’s Traditional Bank portfolio remained under a COVID-19 hardship accommodation.

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)

September 30, 2021

December 31, 2020

 

Residential real estate

 

$

 

$

496

Commercial real estate

1,845

2,003

Total other real estate owned

$

1,845

 

$

2,499

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 requirements of the applicable jurisdiction:

(in thousands)

    

September 30, 2021

    

December 31, 2020

 

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

 

$

475

 

$

981

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Easy Advances

The Company’s TRS segment offered its EA product during the first two months of 2021 and 2020. During the first quarter of each year, the Company bases its estimated Provision for EAs on the current year’s EA delinquency information and the prior year’s tax refund payment patterns subsequent to the first quarter. Each year, all unpaid EAs are charged off by June 30th, and each quarter thereafter, any credits to the Provision for EAs matches the recovery of previously charged-off accounts.

See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.

Information regarding EAs follows:

Three Months Ended

Nine Months Ended

    

September 30, 

September 30, 

(dollars in thousands)

    

2021

2020

2021

  

2020

Easy Advances originated

 

$

$

$

250,045

$

387,762

Net (credit) charge to the Provision for Easy Advances

 

(2,242)

(4,294)

7,984

15,239

Provision to total Easy Advances originated

NA

NA

3.19

%  

3.93

%  

Easy Advances net charge-offs (recoveries)

 

$

(2,242)

$

(4,294)

$

7,984

$

15,239

Easy Advances net charge-offs to total Easy Advances originated

NA

NA

3.19

%  

3.93

%  

5. DEPOSITS

The composition of the deposit portfolio follows:

(in thousands)

    

September 30, 2021

    

December 31, 2020

 

Core Bank:

Demand

$

1,342,395

$

1,217,263

Money market accounts

 

793,236

 

712,824

Savings

 

295,663

 

236,335

Individual retirement accounts (1)

 

46,196

 

47,889

Time deposits, $250 and over (1)

 

84,340

 

83,448

Other certificates of deposit (1)

 

163,345

 

199,214

Reciprocal money market and time deposits (1)

 

101,109

 

314,109

Brokered deposits (1)

 

30,001

 

25,010

Total Core Bank interest-bearing deposits

 

2,856,285

 

2,836,092

Total Core Bank noninterest-bearing deposits

1,691,413

1,503,662

Total Core Bank deposits

4,547,698

4,339,754

Republic Processing Group:

Money market accounts

5,114

6,673

Total RPG interest-bearing deposits

5,114

6,673

Brokered prepaid card deposits

323,250

257,856

Other noninterest-bearing deposits

38,822

110,021

Total RPG noninterest-bearing deposits

362,072

367,877

Total RPG deposits

367,186

374,550

Deposits of discontinued operations (2)

33,063

18,877

Total deposits

$

4,947,947

$

4,733,181

(1)Includes time deposit
(2)See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.

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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.

As of September 30, 2021 and December 31, 2020, all securities sold under agreements to repurchase had overnight maturities. Additional information regarding securities sold under agreements to repurchase follows:

(dollars in thousands)

    

September 30, 2021

  

  

December 31, 2020

    

Outstanding balance at end of period

$

260,583

$

211,026

Weighted average interest rate at end of period

 

0.04

%  

 

0.04

%  

Fair value of securities pledged:

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

$

114,308

$

60,059

Mortgage backed securities - residential

156,237

140,554

Collateralized mortgage obligations

23,457

29,656

Total securities pledged

$

294,002

$

230,269

 

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

(dollars in thousands)

  

2021

    

2020

    

  

2021

  

  

2020

Average outstanding balance during the period

 

$

242,867

 

$

213,010

$

201,992

 

$

199,556

Average interest rate during the period

0.03

%  

0.04

%  

0.02

%  

0.11

%  

Maximum outstanding at any month end during the period

 

$

307,358

 

$

195,229

$

307,358

 

$

195,229

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Table of Contents

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.

As of September 30, 2021, the Company was under 45 separate and distinct operating lease contracts to lease the land and/or buildings for 36 of its offices, with 14 such operating leases contracted with a related party of the Company. As of September 30, 2021, payments on 24 of the Company’s operating leases were considered variable because such payments were adjustable based on periodic changes in the Consumer Price Index.

The Company executed no new operating leases during 2021. The Company renewed a related-party lease on one of its Louisville, Kentucky banking centers during the fourth quarter of 2020 that commenced in January 2021 with a right-of-use asset value of $392,000. During the second quarter of 2021, the Company extended one third-party lease for an additional five years, with the extended term beginning during the third quarter of 2021 and valued at approximately $263,000. During the fourth quarter of 2021, the Company recorded an amendment to one related-party lease to add leased space, with this amendment valued at approximately $819,000.

The following table presents information concerning the Company’s operating lease expense recorded as a noninterest expense within the “Occupancy” category for the three and nine months ended September 30, 2021 and 2020:

 

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

(in thousands)

    

2021

2020

        

2021

2020

Operating lease expense:

 

Related Party:

Variable lease expense

$

1,224

 

$

1,235

$

3,662

$

3,706

Fixed lease expense

 

34

23

102

69

Third Party:

Variable lease expense

197

180

590

541

Fixed lease expense

337

371

1,021

1,109

Short-term lease expense

3

7

Total operating lease expense

$

1,792

 

$

1,812

$

5,375

$

5,432

Other information concerning operating leases:

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

$

1,793

$

1,817

$

5,390

$

5,448

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

3

7

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 September 30, 2021 and December 31, 2020:

(dollars in thousands)

    

September 30, 2021

December 31, 2020

    

Weighted average remaining term in years

7.76

8.37

Weighted average discount rate

 

3.08

%

 

3.10

%

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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 September 30, 2021:

Year (in thousands)

    

Related Party

    

Third Party

    

Total

 

2021

 

$

1,160

 

$

636

 

$

1,796

2022

 

4,639

 

2,492

 

7,131

2023

 

4,639

 

2,049

 

6,688

2024

 

4,512

 

1,517

 

6,029

2025

 

4,344

 

979

 

5,323

Thereafter

 

15,800

 

2,729

 

18,529

Total undiscounted cash flows

$

35,094

$

10,402

$

45,496

Discount applied to cash flows

(4,065)

(1,280)

(5,345)

Total discounted cash flows reported as operating lease liabilities

$

31,029

$

9,122

$

40,151

8. FEDERAL HOME LOAN BANK ADVANCES

FHLB advances were as follows:

(in thousands)

    

September 30, 2021

    

December 31, 2020

 

Overnight advances

$

25,000

$

225,000

Fixed interest rate advances

 

 

10,000

Total FHLB advances

$

25,000

$

235,000

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. As of September 30, 2021 and December 31, 2020, Republic had available borrowing capacity of $898 million and $683 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million available through various other financial institutions as of September 30, 2021 and December 31, 2020.

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

 

2021 (Overnight)

 

$

25,000

 

0.14

%

2021 (Term)

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

Thereafter

 

 

Total

$

25,000

 

0.14

%

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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

Nine Months Ended

September 30, 

September 30, 

(dollars in thousands)

    

2021

    

2020

    

2021

    

2020

Average outstanding balance during the period

 

$

25,000

 

$

272

 

$

30,037

 

$

29,106

Average interest rate during the period

0.10

%

0.17

%

0.15

%

0.92

%

Maximum outstanding at any month end during the period

 

$

25,000

 

$

25,000

 

$

25,000

 

$

250,000

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

(in thousands)

    

September 30, 2021

    

December 31, 2020

 

First lien, single family residential real estate

$

1,034,959

$

1,048,236

Home equity lines of credit

 

191,443

 

208,944

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9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

COVID-19 Pandemic

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

While vaccines for the virus began rolling out during 2021, the future potential financial impact of the COVID-19 pandemic is still unknown at this time. This pandemic and the public’s response to it could cause the Company to experience a material adverse impact on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, MSRs, deferred tax assets, or counterparty risk derivatives.

Commitments to Extend Credit

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

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

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

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

(in thousands)

    

September 30, 2021

    

December 31, 2020

Unused warehouse lines of credit

$

658,318

$

456,004

Unused home equity lines of credit

 

350,198

 

353,322

Unused loan commitments - other

 

787,660

 

775,128

Standby letters of credit

 

14,130

 

10,949

FHLB letter of credit

 

643

 

643

Total commitments

$

1,810,949

$

1,596,046

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third-party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material.

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The following tables present a rollforward of the ACLC for the three and nine months ended September 30, 2021 and 2020:

ACLC Rollforward

Three Months Ended

2021

2020

Beginning

Charge-

Ending

Beginning

Charge-

Ending

(in thousands)

Balance

Provision

offs

Recoveries

Balance

Balance

Provision

offs

Recoveries

Balance

Loan Commitments

Unused warehouse lines of credit

$

140

$

$

$

$

140

$

58

$

(6)

$

$

$

52

Unused home equity lines of credit

213

29

242

124

22

146

Unused loan commitments - other

581

(26)

555

454

271

725

Total

$

934

$

3

$

$

$

937

$

636

$

287

$

$

$

923

The Company increased its ACLC during the three months ended September 30, 2021 based on an increase in the expected usage for its home equity lines of credit.

ACLC Rollforward

Nine Months Ended

2021

2020

Beginning

Charge-

Ending

Beginning

ASC 326

Charge-

Ending

(in thousands)

Balance

Provision

offs

Recoveries

Balance

Balance

Adoption

Provision

offs

Recoveries

Balance

Loan Commitments

Unused warehouse lines of credit

$

79

$

61

$

$

$

140

$

$

55

$

(3)

$

$

$

52

Unused home equity lines of credit

173

69

242

89

57

146

Unused loan commitments - other

737

(182)

555

312

413

725

Total

$

989

$

(52)

$

$

$

937

$

$

456

$

467

$

$

$

923

The Company decreased its ACLC during the nine months ended September 30, 2021 based on a decrease in the expected loss rate for its unused commitments.

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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.

For its TRUP investment, the Company considered the most recent bid price for the same instrument to approximate market value as of September 30, 2021. 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 within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. 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 considered immaterial and thus omitted.

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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.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single 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.

Mortgage servicing rights: On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded, and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and can generally be validated against available market data (Level 2).

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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 September 30, 2021 is presented net of any applicable ACL.

Fair Value Measurements at 

 

September 30, 2021 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

$

$

234,845

$

$

234,845

Private label mortgage-backed security

 

 

 

2,780

 

2,780

Mortgage-backed securities - residential

 

 

209,805

 

 

209,805

Collateralized mortgage obligations

 

 

34,519

 

 

34,519

Corporate bonds

10,081

10,081

Trust preferred security

 

 

 

3,850

 

3,850

Total available-for-sale debt securities

$

$

489,250

$

6,630

$

495,880

Equity securities with readily determinable fair value:

Freddie Mac preferred stock

$

$

102

$

$

102

Community Reinvestment Act mutual fund

 

2,476

 

 

 

2,476

Total equity securities with readily determinable fair value

$

2,476

$

102

$

$

2,578

Mortgage loans held for sale

$

$

25,791

$

$

25,791

Consumer loans held for sale

10,779

10,779

Consumer loans held for investment

254

254

Rate lock loan commitments

 

 

1,943

 

 

1,943

Mandatory forward contracts

722

722

Interest rate swap agreements

6,707

6,707

Financial liabilities:

Interest rate swap agreements

$

$

6,707

$

$

6,707

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Table of Contents

Fair Value Measurements at

 

December 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

$

$

246,909

$

$

246,909

Private label mortgage-backed security

 

 

 

2,957

 

2,957

Mortgage-backed securities - residential

 

 

211,202

 

 

211,202

Collateralized mortgage obligations

 

 

48,952

 

 

48,952

Corporate bonds

10,043

10,043

Trust preferred security

 

 

 

3,800

 

3,800

Total available-for-sale debt securities

$

$

517,106

$

6,757

$

523,863

Equity securities with readily determinable fair value:

Freddie Mac preferred stock

$

$

560

$

$

560

Community Reinvestment Act mutual fund

 

2,523

 

 

 

2,523

Total equity securities with readily determinable fair value

$

2,523

$

560

$

$

3,083

Mortgage loans held for sale

$

$

46,867

$

$

46,867

Consumer loans held for sale

3,298

3,298

Consumer loans held for investment

497

497

Rate lock loan commitments

 

 

4,540

 

 

4,540

Interest rate swap agreements

 

 

12,545

 

 

12,545

Financial liabilities:

Mandatory forward contracts

$

$

976

$

$

976

Interest rate swap agreements

12,545

 

12,545

All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2, or 3 assets during the three and nine months ended September 30, 2021 and 2020.

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

  

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

2020

2021

2020

Balance, beginning of period

$

2,824

$

3,023

$

2,957

$

3,495

Total gains or losses included in earnings:

Net change in unrealized gain

 

13

 

60

 

62

 

(46)

Principal paydowns

 

(57)

 

(79)

 

(239)

 

(445)

Balance, end of period

$

2,780

$

3,004

$

2,780

$

3,004

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

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

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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

    

    

    

 

September 30, 2021 (dollars in thousands)

Value

Technique

Unobservable Inputs

Range

 

Private label mortgage-backed security

$

2,780

 

Discounted cash flow

 

(1) Constant prepayment rate

 

4.5% - 18.0%

 

(2) Probability of default

 

1.8% - 9.3%

 

(3) Loss severity

 

50% - 75%

    

Fair

    

Valuation

    

    

    

 

December 31, 2020 (dollars in thousands)

Value

Technique

Unobservable Inputs

Range

 

Private label mortgage-backed security

$

2,957

 

Discounted cash flow

 

(1) Constant prepayment rate

 

4.5% - 18.0%

 

(2) Probability of default

 

1.8% - 9.0%

 

(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

    

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

2020

2021

2020

Balance, beginning of period

$

3,700

$

3,500

$

3,800

$

4,000

Total gains or losses included in earnings:

Discount accretion

14

21

40

43

Net change in unrealized gain

 

136

 

279

 

10

 

(243)

Balance, end of period

$

3,850

$

3,800

$

3,850

$

3,800

The fair value of the Company’s TRUP investment is based on the most recent bid price for this instrument, as provided by a third-party broker.

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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 September 30, 2021 and December 31, 2020.

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

(in thousands)

    

September 30, 2021

    

December 31, 2020

 

Aggregate fair value

$

25,791

$

46,867

Contractual balance

 

25,232

 

44,781

Unrealized gain

 

559

 

2,086

The total amount of gains and losses from changes in fair value included in earnings for the three and nine months ended September 30, 2021 and 2020 for mortgage loans held for sale are presented in the following table:

    

Three Months Ended

Nine Months Ended

    

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Interest income

$

253

$

300

$

802

$

932

Change in fair value

 

(373)

 

126

 

(1,527)

 

1,382

Total included in earnings

$

(120)

$

426

$

(725)

$

2,314

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 September 30, 2021 and December 31, 2020.

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

    

    

    

September 30, 2021 (dollars in thousands)

Value

Technique

Unobservable Inputs

Rate

Consumer loans held for sale

$

10,779

 

Contract Terms

 

(1) Net Premium

 

1.4%

 

(2) Discounted Sales

 

5.00%

    

Fair

    

Valuation

    

    

    

December 31, 2020 (dollars in thousands)

Value

Technique

Unobservable Inputs

Rate

Consumer loans held for sale

$

3,298

 

Contract Terms

 

(1) Net Premium

 

1.4%

 

(2) Discounted Sales

 

5.00%

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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)

    

September 30, 2021

    

December 31, 2020

Aggregate fair value

$

10,779

$

3,298

Contractual balance

 

10,703

 

3,284

Unrealized gain

 

76

 

14

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

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Interest income

$

2,102

$

42

$

4,070

$

1,563

Change in fair value

 

(16)

 

2

 

62

 

(2)

Total included in earnings

$

2,086

$

44

$

4,132

$

1,561

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Table of Contents

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

Fair Value Measurements at

September 30, 2021 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

$

$

$

1,733

$

1,733

Commercial real estate

 

 

 

3,568

 

3,568

Commercial & industrial

60

60

Home equity

 

 

 

314

 

314

Total collateral-dependent loans*

$

$

$

5,675

$

5,675

Other real estate owned:

Commercial real estate

$

$

$

1,845

$

1,845

Total other real estate owned

$

$

$

1,845

$

1,845

Fair Value Measurements at

December 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

$

$

$

3,860

$

3,860

Commercial real estate

 

 

 

4,107

 

4,107

Home equity

 

 

 

395

 

395

Total collateral-dependent loans*

$

$

$

8,362

$

8,362

Other real estate owned:

Residential real estate

$

$

$

2,003

$

2,003

Total other real estate owned

$

$

$

2,003

$

2,003

Mortgage servicing rights

$

$

3,233

$

$

3,233

*

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

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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

September 30, 2021 (dollars in thousands)

Value

Technique

Inputs

Average)

Collateral-dependent loans - residential real estate owner occupied

$

1,733

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 51% (10%)

Collateral-dependent loans - commercial real estate

$

3,568

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

15% - 31% (26%)

Collateral-dependent loans - commercial & industrial

$

60

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

1% (1%)

Collateral-dependent loans - home equity

$

314

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

6%-10% (6%)

Other real estate owned - commercial real estate

$

1,845

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

32% (32%)

    

    

    

    

    

    

    

Range

Fair

Valuation

Unobservable

(Weighted

December 31, 2020 (dollars in thousands)

Value

Technique

Inputs

Average)

Collateral-dependent loans - residential real estate owner occupied

$

3,860

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 51% (8%)

Collateral-dependent loans - commercial real estate

$

4,107

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

7% - 31% (26%)

Collateral-dependent loans - home equity

$

395

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

2%-6% (5%)

Other real estate owned - commercial real estate

$

2,003

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

26% (26%)

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Collateral-Dependent Loans

Collateral-dependent 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 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 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 loans are as follows:

(in thousands)

    

September 30, 2021

    

December 31, 2020

Carrying amount of loans measured at fair value

$

5,122

$

7,110

Estimated selling costs considered in carrying amount

 

911

 

1,252

Valuation allowance

(358)

Total fair value

$

5,675

$

8,362

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Provision on collateral-dependent

$

345

$

430

$

393

$

(71)

Other Real Estate Owned

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

    

(in thousands)

September 30, 2021

    

December 31, 2020

    

Other real estate owned carried at fair value

$

1,845

$

2,003

Other real estate owned carried at cost

 

 

496

Total carrying value of other real estate owned

$

1,845

$

2,499

    

Three Months Ended

Nine Months Ended

    

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Other real estate owned write-downs during the period

$

53

$

53

$

158

$

53

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

Fair Value Measurements at

 

September 30, 2021:

 

    

    

    

    

    

    

    

    

Total

 

Carrying

Fair

 

(in thousands)

Value

Level 1

Level 2

Level 3

Value

 

Assets:

Cash and cash equivalents

$

1,011,247

$

1,011,247

$

$

$

1,011,247

Available-for-sale debt securities

 

495,880

 

 

489,250

 

6,630

 

495,880

Held-to-maturity debt securities

 

44,991

 

 

45,590

 

 

45,590

Equity securities with readily determinable fair values

2,578

2,476

102

2,578

Mortgage loans held for sale, at fair value

 

25,791

 

 

25,791

 

 

25,791

Consumer loans held for sale, at fair value

10,779

10,779

10,779

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

3,976

3,976

3,976

Loans for discontinued operations, at the lower of cost or fair value

24

24

24

Loans, net

 

4,280,758

 

 

 

4,276,437

 

4,276,437

Federal Home Loan Bank stock

 

10,311

 

 

 

 

NA

Accrued interest receivable

 

9,352

 

 

9,352

 

 

9,352

Mortgage servicing rights

8,867

10,906

10,906

Rate lock loan commitments

1,943

1,943

1,943

Mandatory forward contracts

722

722

722

Interest rate swap agreements

6,707

6,707

6,707

Liabilities:

Noninterest-bearing deposits

$

2,053,485

 

$

2,053,485

 

$

2,053,485

Transaction deposits

 

2,536,782

 

 

2,536,782

 

 

2,536,782

Time deposits

 

324,617

 

 

328,162

 

 

328,162

Deposits of discontinued operations

33,063

33,063

33,063

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

 

260,583

 

 

260,583

 

 

260,583

Federal Home Loan Bank advances

 

25,000

 

 

25,000

 

 

25,000

Accrued interest payable

 

180

 

 

180

 

 

180

Interest rate swap agreements

6,707

6,707

6,707

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Fair Value Measurements at

 

December 31, 2020:

 

    

    

    

    

    

    

    

    

    

Total

 

Carrying

Fair

 

(in thousands)

Value

Level 1

Level 2

Level 3

Value

 

Assets:

Cash and cash equivalents

$

485,587

$

485,587

$

$

$

485,587

Available-for-sale debt securities

 

523,863

 

 

517,106

 

6,757

 

523,863

Held-to-maturity debt securities

 

53,324

 

 

54,190

 

 

54,190

Equity securities with readily determinable fair values

3,083

2,523

560

3,083

Mortgage loans held for sale, at fair value

 

46,867

 

 

46,867

 

 

46,867

Consumer loans held for sale, at fair value

3,298

3,298

3,298

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

1,478

1,478

1,478

Loans for discontinued operations, at the lower of cost or fair value

23,765

23,765

23,765

Loans, net

 

4,728,271

 

 

 

4,726,066

 

4,726,066

Federal Home Loan Bank stock

 

17,397

 

 

 

 

NA

Accrued interest receivable

 

12,925

 

 

12,925

 

 

12,925

Mortgage servicing rights

7,095

8,318

8,318

Rate lock loan commitments

4,540

4,540

4,540

Interest rate swap agreements

12,545

12,545

12,545

Liabilities:

Noninterest-bearing deposits

$

1,871,539

 

$

1,871,539

 

$

1,871,539

Transaction deposits

 

2,444,361

 

 

2,444,361

 

 

2,444,361

Time deposits

 

398,404

 

 

404,773

 

 

404,773

Deposits of discontinued operations

18,877

18,877

18,877

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

 

211,026

 

 

211,026

 

 

211,026

Federal Home Loan Bank advances

 

235,000

 

 

235,009

 

 

235,009

Subordinated note

 

41,240

 

 

31,071

 

 

31,071

Accrued interest payable

 

342

 

 

342

 

 

342

Mandatory forward contracts

976

976

976

Interest rate swap agreements

12,545

12,545

12,545

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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

Nine Months Ended

    

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Balance, beginning of period

$

32,401

$

40,028

$

46,867

$

19,224

Origination of mortgage loans held for sale

 

170,482

 

203,615

 

525,246

 

547,556

Proceeds from the sale of mortgage loans held for sale

 

(182,422)

 

(210,309)

 

(562,661)

 

(546,950)

Net gain on sale of mortgage loans held for sale

 

5,330

 

11,526

 

16,339

 

25,030

Balance, end of period

$

25,791

$

44,860

$

25,791

$

44,860

The following table presents the components of Mortgage Banking income:

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

    

2020

2021

    

2020

Net gain realized on sale of mortgage loans held for sale

$

5,008

$

9,151

$

18,764

$

18,279

Net change in fair value recognized on loans held for sale

 

(373)

 

126

 

(1,527)

 

1,382

Net change in fair value recognized on rate lock loan commitments

 

(258)

 

2,194

 

(2,596)

 

5,841

Net change in fair value recognized on forward contracts

 

953

 

55

 

1,698

 

(472)

Net gain recognized

 

5,330

 

11,526

 

16,339

 

25,030

Loan servicing income

 

832

 

757

 

2,433

 

2,139

Amortization of mortgage servicing rights

 

(882)

 

(1,108)

 

(2,617)

 

(2,701)

Change in mortgage servicing rights valuation allowance

 

 

(400)

 

500

 

(500)

Net servicing income recognized

 

(50)

 

(751)

 

316

 

(1,062)

Total Mortgage Banking income

$

5,280

$

10,775

$

16,655

$

23,968

Activity for capitalized mortgage servicing rights was as follows:

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Balance, beginning of period

$

8,335

$

6,711

$

7,095

$

5,888

Additions

 

1,414

 

1,471

 

3,889

 

3,987

Amortized to expense

 

(882)

 

(1,108)

 

(2,617)

 

(2,701)

Change in valuation allowance

 

 

(400)

 

500

 

(500)

Balance, end of period

$

8,867

$

6,674

$

8,867

$

6,674

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

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Beginning valuation allowance

$

$

100

$

500

$

Charge during the period

 

 

400

 

(500)

 

500

Ending valuation allowance

$

$

500

$

$

500

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Other information relating to mortgage servicing rights follows:

(in thousands)

    

September 30, 2021

  

  

December 31, 2020

 

Fair value of mortgage servicing rights portfolio

$

10,906

$

8,318

Monthly weighted average prepayment rate of unpaid principal balance*

 

205

%

 

308

%

Discount rate

10

%

10

%

Weighted average foreclosure rate

0.24

%

0.44

%

Weighted average life in years

 

5.88

 

4.85

*

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:

September 30, 2021

    

December 31, 2020

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

$

25,232

$

25,791

$

44,781

$

46,867

Included in other assets:

Rate lock loan commitments

$

94,210

$

1,943

$

105,395

$

4,540

Mandatory forward contracts

105,659

722

Included in other liabilities:

Mandatory forward contracts

$

$

$

136,236

$

976

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12. INTEREST RATE SWAPS

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 these 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 the 1-month LIBOR. Both swaps matured in December 2020.

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

    

Three Months Ended

Nine Months Ended

    

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Interest rate swap on money market deposits

$

$

52

$

$

107

Interest rate swap on FHLB advance

 

 

51

 

 

104

Total interest (benefit) expense on swap transactions

$

$

103

$

$

211

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

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

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

 

$

 

$

(1)

 

$

 

$

(173)

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

 

(103)

 

 

(211)

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

 

 

 

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:

    

September 30, 2021

December 31, 2020

 

Notional

Notional

 

(in thousands)

    

Bank Position

Amount

    

Fair Value

    

Amount

    

Fair Value

 

Interest rate swaps with Bank clients - Assets

 

Pay variable/receive fixed

 

$

109,456

 

$

6,707

 

$

138,277

 

$

12,545

Interest rate swaps with Bank clients - Liabilities

 

Pay variable/receive fixed

 

15,953

 

(103)

 

Interest rate swaps with Bank clients - Total

 

Pay variable/receive fixed

 

$

125,409

 

$

6,604

 

$

138,277

 

$

12,545

Offsetting interest rate swaps with institutional swap dealer

Pay fixed/receive variable

125,409

(6,604)

138,277

(12,545)

Total

 

$

250,818

$

 

$

276,554

$

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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 $7.8 million and $13.3 million as of September 30, 2021 and December 31, 2020.

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

Nine Months Ended

September 30, 

September 30, 

(in thousands, except per share data)

2021

    

2020

    

2021

    

2020

    

Income from continuing operations

$

18,412

$

17,275

$

55,240

$

49,344

Income (loss) from discontinued operations

1,597

3,114

14,744

13,546

Net income available to common shareholders

20,009

20,389

69,984

62,890

Dividends declared on Common Stock:

Class A Shares

(5,557)

(5,375)

(16,980)

(16,080)

Class B Shares

(606)

(572)

(1,830)

(1,716)

Undistributed net income for basic earnings per share

13,846

14,442

51,174

45,094

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

(17)

(7)

(40)

(24)

Undistributed net income for diluted earnings per share

$

13,829

$

14,435

$

51,134

$

45,070

Weighted average shares outstanding:

Class A Shares

 

18,342

 

18,826

 

18,625

 

18,830

Class B Shares

2,166

2,200

2,182

2,201

Effect of dilutive securities on Class A Shares outstanding

 

83

 

20

 

72

 

37

Weighted average shares outstanding including dilutive securities

 

20,591

 

21,046

 

20,879

 

21,068

Basic earnings per share:

Class A Common Stock:

Per share dividends distributed

$

0.31

$

0.29

$

0.92

$

0.86

Undistributed earnings per share* from continuing operations

0.60

0.54

1.77

1.51

Total basic earnings per share from continuing operations

0.91

0.83

2.69

2.37

Total basic earnings per share from discontinued operations

0.08

0.15

0.71

0.65

Total basic earnings per share - Class A Common Stock

$

0.99

$

0.98

$

3.40

$

3.02

Class B Common Stock:

Per share dividends distributed

$

0.28

$

0.26

$

0.84

$

0.78

Undistributed earnings per share*

0.55

0.49

1.61

1.38

Total basic earnings per share from continuing operations

0.83

0.75

2.45

2.16

Total basic earnings per share from discontinued operations

0.07

0.14

0.65

0.59

Total basic earnings per share - Class B Common Stock

$

0.90

$

0.89

$

3.10

$

2.75

Diluted earnings per share:

Class A Common Stock:

Per share dividends distributed

$

0.31

$

0.29

$

0.92

$

0.86

Undistributed earnings per share*

0.60

0.54

1.76

1.51

Total diluted earnings per share from continuing operations

0.91

0.83

2.68

2.37

Total diluted earnings per share from discontinued operations

0.08

0.15

0.71

0.65

Total diluted earnings per share - Class A Common Stock

$

0.99

$

0.98

$

3.39

$

3.02

Class B Common Stock:

Per share dividends distributed

$

0.28

$

0.26

$

0.84

$

0.78

Undistributed earnings per share*

0.55

0.49

1.60

1.37

Total diluted earnings per share from continuing operations

0.83

0.75

2.44

2.15

Total diluted earnings per share from discontinued operations

0.07

0.14

0.65

0.59

Total diluted earnings per share - Class B Common Stock

$

0.90

$

0.89

$

3.09

$

2.74

*

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.

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

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Antidilutive stock options

 

141,000

 

431,000

 

144,000

244,000

Average antidilutive stock options

 

141,000

 

367,000

 

144,000

193,000

14. OTHER COMPREHENSIVE INCOME

OCI components and related tax effects were as follows:

    

Three Months Ended

    

Nine Months Ended

    

September 30, 

September 30, 

(in thousands)

2021

    

2020

    

2021

    

2020

Available-for-Sale Debt Securities:

Unrealized gains and (losses) on AFS debt securities

$

(1,899)

$

(258)

$

(4,542)

$

8,618

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

 

13

 

61

 

62

 

(46)

Net unrealized (losses) gains

 

(1,886)

 

(197)

 

(4,480)

 

8,572

Tax effect

 

471

 

49

 

1,119

 

(2,144)

Net of tax

 

(1,415)

 

(148)

 

(3,361)

 

6,428

Cash Flow Hedges:

Change in fair value of derivatives used for cash flow hedges

 

 

(1)

 

 

(173)

Reclassification amount for net derivative losses realized in income

 

 

103

 

 

211

Net gains (losses)

 

 

102

 

 

38

Tax effect

 

 

(25)

 

 

(9)

Net of tax

 

 

77

 

 

29

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

$

(1,415)

$

(71)

$

(3,361)

$

6,457

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

Amounts Reclassified from AOCI

Affected Line Items

Three Months Ended

Nine Months Ended

in the Consolidated

September 30, 

September 30, 

(in thousands)

  

Statements of Income

  

2021

    

2020

  

2021

    

2020

Cash Flow Hedges:

Interest rate swap on money market deposits

 

Interest expense on deposits

$

$

(52)

$

$

(107)

Interest rate swap on FHLB advance

 

Interest expense on FHLB advances

 

 

(51)

 

 

(104)

Total derivative losses on cash flow hedges

 

Total interest expense

 

 

(103)

 

 

(211)

Tax effect

 

Income tax expense

 

 

26

 

 

53

Net of tax

 

Net income

$

$

(77)

$

$

(158)

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

    

    

2021

    

 

(in thousands)

December 31, 2020

Change

September 30, 2021

 

Unrealized gain (loss) on AFS debt securities

$

7,571

$

(3,407)

$

4,164

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

 

938

 

46

 

984

Total unrealized gain (loss)

$

8,509

$

(3,361)

$

5,148

    

    

2020

    

 

(in thousands)

December 31, 2019

Change

September 30, 2020

 

Unrealized gain on AFS debt securities

$

2,211

$

6,464

$

8,675

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

 

964

 

(35)

 

929

Unrealized (loss) gain on cash flow hedges

 

(77)

 

28

 

(49)

Total unrealized gain

$

3,098

$

6,457

$

9,555

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15. REVENUE FROM CONTRACTS WITH CUSTOMERS

The following tables present the Company’s net revenue and net revenue concentration from continuing operations by reportable segment:

Three Months Ended September 30, 2021

 

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)

$

40,297

$

6,291

$

253

   

$

46,841

$

171

$

5,297

$

5,468

$

52,309

Noninterest income:

Service charges on deposit accounts

3,262

15

3,277

3,277

Mortgage banking income (1)

 

 

 

5,280

 

5,280

 

 

 

 

5,280

Interchange fee income

3,199

3,199

1

1

3,200

Program fees (1)

763

3,767

4,530

4,530

Increase in cash surrender value of BOLI (1)

626

626

626

Net gains (losses) on OREO

(52)

(52)

(52)

Other

 

1,073

 

 

62

 

1,135

 

(1)

 

 

(1)

 

1,134

Total noninterest income

 

8,108

 

15

 

5,342

 

13,465

 

763

 

3,767

 

4,530

 

17,995

Total net revenue

$

48,405

$

6,306

$

5,595

$

60,306

$

934

$

9,064

$

9,998

$

70,304

Net-revenue concentration from continuing operations (2)

69

%  

9

%  

8

%  

86

%  

1

%  

13

%  

14

%  

100

%  

Three Months Ended September 30, 2020

 

Core Banking

Republic Processing Group

 

Total

Tax

Republic

Traditional

Warehouse

Mortgage

Core

Refund

Credit

Total

Total

 

(dollars in thousands)

Banking

Lending

Banking

Banking

Solutions

Solutions

RPG

Company

 

Net interest income (1)

$

38,753

$

7,345

$

300

   

$

46,398

$

675

$

4,976

$

5,651

$

52,049

Noninterest income:

Service charges on deposit accounts

3,000

18

3,018

(1)

(1)

3,017

Mortgage banking income (1)

 

 

 

10,775

 

10,775

 

 

 

 

10,775

Interchange fee income

2,873

2,873

1

1

2,874

Program fees (1)

643

844

1,487

1,487

Increase in cash surrender value of BOLI (1)

400

400

400

Net gains (losses) on OREO

(14)

(14)

(14)

Other

 

879

 

(39)

 

21

 

861

 

 

 

 

861

Total noninterest income

 

7,138

 

(21)

 

10,796

 

17,913

 

643

 

844

 

1,487

 

19,400

Total net revenue

$

45,891

$

7,324

$

11,096

$

64,311

$

1,318

$

5,820

$

7,138

$

71,449

Net-revenue concentration from continuing operations (2)

64

%  

10

%  

16

%  

90

%  

2

%  

8

%  

10

%  

100

%  

(1)This revenue is not subject to ASC 606.
(2)Net revenue from continuing operations represents net interest income plus total noninterest income from continuing operations. Net-revenue concentration from continuing operations equals segment-level net revenue from continuing operations divided by total Company net revenue from continuing operations.

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Table of Contents

Nine Months Ended September 30, 2021

 

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)

$

119,677

$

19,387

$

802

   

$

139,866

$

665

$

14,794

$

15,459

$

155,325

Noninterest income:

Service charges on deposit accounts

9,188

43

9,231

(10)

(10)

9,221

Mortgage banking income (1)

 

 

 

16,655

 

16,655

 

 

 

 

16,655

Interchange fee income

9,535

9,535

4

4

9,539

Program fees (1)

2,374

7,930

10,304

10,304

Increase in cash surrender value of BOLI (1)

1,616

1,616

1,616

Net gains (losses) on OREO

(107)

(107)

(107)

Other

 

2,630

 

 

140

 

2,770

 

(1)

 

 

(1)

 

2,769

Total noninterest income

 

22,862

 

43

 

16,795

 

39,700

 

2,367

 

7,930

 

10,297

 

49,997

Total net revenue

$

142,539

$

19,430

$

17,597

$

179,566

$

3,032

$

22,724

$

25,756

$

205,322

Net-revenue concentration from continuing operations (2)

70

%  

9

%  

9

%  

88

%  

1

%  

11

%  

12

%  

100

%  

Nine Months Ended September 30, 2020

 

Core Banking

Republic Processing Group

 

Total

Tax

Republic

Traditional

Warehouse

Mortgage

Core

Refund

Credit

Total

Total

 

(dollars in thousands)

Banking

Lending

Banking

Banking

Solutions

Solutions

RPG

Company

 

Net interest income (1)

$

118,409

$

17,715

$

932

   

$

137,056

$

1,622

$

17,655

$

19,277

$

156,333

Noninterest income:

Service charges on deposit accounts

8,576

46

8,622

(18)

(18)

8,604

Mortgage banking income (1)

 

 

 

23,968

 

23,968

 

 

 

 

23,968

Interchange fee income

8,090

8,090

3

3

8,093

Program fees (1)

1,573

3,676

5,249

5,249

Increase in cash surrender value of BOLI (1)

1,184

1,184

1,184

Net gains (losses) on OREO

(10)

(10)

(10)

Other

 

2,659

 

(39)

 

53

 

2,673

 

 

 

 

2,673

Total noninterest income

 

20,499

 

7

 

24,021

 

44,527

 

1,558

 

3,676

 

5,234

 

49,761

Total net revenue

$

138,908

$

17,722

$

24,953

$

181,583

$

3,180

$

21,331

$

24,511

$

206,094

Net-revenue concentration from continuing operations (2)

67

%  

9

%  

12

%  

88

%  

2

%  

10

%  

12

%  

100

%  

(1)This revenue is not subject to ASC 606.
(2)Net revenue from continuing operations represents net interest income plus total noninterest income from continuing operations. Net-revenue concentration from continuing operations equals segment-level net revenue from continuing operations divided by total Company net revenue from continuing operations.

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Table of Contents

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

Service charges on deposit accounts – 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.

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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Table of Contents

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 September 30, 2021, 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.

See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.

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:

Continuing Operations

Continuing operations of TRS include its RPS division and certain indirect costs that are expected to remain with the Bank. The RPS division of TRS offers general-purpose reloadable cards primarily to clients outside of the Bank’s market footprint.

Prepaid Cards

Discontinued Operations

The Bank agreed to sell its TRS business to Green Dot in May 2021. The TRS business has traditionally contained the significant majority of revenue and expense generated at the TRS segment. The TRS business contracted to be sold offers tax-related credit products and facilitates the receipt and payment of federal and state tax refunds through Refund Transfer products. TRS products are primarily provided to clients outside of the Bank’s market footprint.

Loans and refund transfers

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 2020 Annual Report on Form 10-K. 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 September 30, 2021

 

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

$

40,297

$

6,291

$

253

   

$

46,841

$

171

$

5,297

$

5,468

$

52,309

Provision for expected credit loss expense

 

(44)

 

(223)

 

 

(267)

 

 

3,820

 

3,820

 

3,553

Mortgage banking income

 

 

 

5,280

 

5,280

 

 

 

 

5,280

Program fees

763

3,767

4,530

4,530

Other noninterest income

 

8,108

 

15

 

62

 

8,185

 

 

 

 

8,185

Total noninterest income

 

8,108

 

15

 

5,342

 

13,465

 

763

 

3,767

 

4,530

 

17,995

Total noninterest expense

 

35,927

 

1,056

 

3,257

 

40,240

 

1,308

 

1,046

 

2,354

 

42,594

Income (loss) from continuing operations before income tax expense

 

12,522

 

5,473

 

2,338

 

20,333

 

(374)

 

4,198

 

3,824

 

24,157

Income tax expense (benefit)

3,038

1,258

514

4,810

(102)

1,037

935

5,745

Income (loss) from continuing operations

9,484

4,215

1,824

15,523

(272)

3,161

2,889

18,412

Discontinued operations:

Income from discontinued operations before income taxes

2,070

2,070

2,070

Income tax expense

473

473

473

Income from discontinued operations, net of tax

1,597

1,597

1,597

Net income

$

9,484

$

4,215

$

1,824

$

15,523

$

1,325

$

3,161

$

4,486

$

20,009

Period-end assets

$

4,907,503

$

750,266

$

41,196

$

5,698,965

$

365,552

$

123,117

$

488,669

$

6,187,634

Net interest margin from continuing operations

 

3.22

%  

 

3.51

%  

 

NM

 

3.25

%  

 

NM

 

NM

 

NM

 

3.55

%  

Net-revenue concentration from continuing operations*

69

%  

9

%  

8

%  

86

%  

1

%  

13

%  

14

%  

100

%  

Three Months Ended September 30, 2020

 

Core Banking

Republic Processing Group

 

    

    

    

    

    

Total

    

    

Tax

Republic

    

    

 

Traditional

Warehouse

Mortgage

Core

Refund

Credit

Total

Total

 

(dollars in thousands)

Banking

Lending

Banking

Banking

Solutions

Solutions

RPG

Company

 

Net interest income

$

38,753

$

7,345

$

300

$

46,398

$

675

$

4,976

$

5,651

$

52,049

Provision for expected credit loss expense

 

5,857

 

(3)

 

 

5,854

 

 

(12)

 

(12)

 

5,842

Mortgage banking income

 

 

 

10,775

 

10,775

 

 

 

 

10,775

Program fees

643

844

1,487

1,487

Other noninterest income

 

7,138

 

(21)

 

21

 

7,138

 

 

 

 

7,138

Total noninterest income

 

7,138

 

(21)

 

10,796

 

17,913

 

643

 

844

 

1,487

 

19,400

Total noninterest expense

 

36,415

 

1,875

 

2,832

 

41,122

 

1,481

 

1,175

 

2,656

 

43,778

Income (loss) from continuing operations before income tax expense

 

3,619

 

5,452

 

8,264

 

17,335

 

(163)

 

4,657

 

4,494

 

21,829

Income tax expense (benefit)

 

558

 

1,226

 

1,736

 

3,520

 

(40)

 

1,074

 

1,034

 

4,554

Income (loss) from continuing operations

3,061

4,226

6,528

13,815

(123)

3,583

3,460

17,275

Discontinued operations:

Income from discontinued operations before income taxes

3,997

3,997

3,997

Income tax expense

883

883

883

Income from discontinued operations, net of tax

3,114

3,114

3,114

Net income

$

3,061

$

4,226

$

6,528

$

13,815

$

2,991

$

3,583

$

6,574

$

20,389

Period-end assets

$

4,769,848

$

1,026,790

$

61,809

$

5,858,447

$

269,337

$

112,662

$

381,999

$

6,240,446

Net interest margin from continuing operations

 

3.22

%  

 

3.41

%  

 

NM

 

3.25

%  

 

NM

 

NM

 

NM

 

3.57

%  

Net-revenue concentration from continuing operations*

64

%  

10

%  

16

%  

90

%  

2

%  

8

%  

10

%  

100

%  

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

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Table of Contents

Nine Months Ended September 30, 2021

 

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

$

119,677

$

19,387

$

802

$

139,866

$

665

$

14,794

$

15,459

$

155,325

Provision for expected credit loss expense

 

(126)

 

(530)

 

 

(656)

 

 

5,037

 

5,037

 

4,381

Mortgage banking income

 

 

 

16,655

 

16,655

 

 

 

 

16,655

Program fees

2,374

7,930

10,304

10,304

Other noninterest income

 

22,862

 

43

 

140

 

23,045

 

(7)

 

 

(7)

 

23,038

Total noninterest income

 

22,862

 

43

 

16,795

 

39,700

 

2,367

 

7,930

 

10,297

 

49,997

Total noninterest expense

 

110,192

 

3,150

 

9,384

 

122,726

 

4,239

 

3,028

 

7,267

 

129,993

Income (loss) from continuing operations before income tax expense

 

32,473

 

16,810

 

8,213

 

57,496

 

(1,207)

 

14,659

 

13,452

 

70,948

Income tax expense (benefit)

6,718

3,919

1,807

12,444

(373)

3,637

3,264

15,708

Income (loss) from continuing operations

25,755

12,891

6,406

45,052

(834)

11,022

10,188

55,240

Discontinued operations:

Income from discontinued operations before income taxes

19,584

19,584

19,584

Income tax expense

4,840

4,840

4,840

Income from discontinued operations, net of tax

14,744

14,744

14,744

Net income

$

25,755

$

12,891

$

6,406

$

45,052

$

13,910

$

11,022

$

24,932

$

69,984

Period-end assets

$

4,907,503

$

750,266

$

41,196

$

5,698,965

$

365,552

$

123,117

$

488,669

$

6,187,634

Net interest margin from continuing operations

 

3.21

%  

 

3.47

%  

 

NM

 

3.24

%  

 

NM

 

NM

 

NM

 

3.46

%  

Net-revenue concentration from continuing operations*

70

%  

9

%  

9

%  

88

%  

1

%  

11

%  

12

%  

100

%  

Nine Months Ended September 30, 2020

 

Core Banking

Republic Processing Group

 

    

    

    

    

    

Total

    

    

Tax

Republic

    

    

 

Traditional

Warehouse

Mortgage

Core

Refund

Credit

Total

Total

 

(dollars in thousands)

Banking

Lending

Banking

Banking

Solutions

Solutions

RPG

Company

 

Net interest income

$

118,409

$

17,715

$

932

$

137,056

$

1,622

$

17,655

$

19,277

$

156,333

Provision for expected credit loss expense

 

14,526

 

778

 

 

15,304

 

 

251

 

251

 

15,555

Mortgage banking income

 

 

 

23,968

 

23,968

 

 

 

 

23,968

Program fees

1,573

3,676

5,249

5,249

Other noninterest income

 

20,499

 

7

 

53

 

20,559

 

(15)

 

 

(15)

 

20,544

Total noninterest income

 

20,499

 

7

 

24,021

 

44,527

 

1,558

 

3,676

 

5,234

 

49,761

Total noninterest expense

 

109,750

 

3,489

 

7,517

 

120,756

 

5,360

 

2,972

 

8,332

 

129,088

Income (loss) from continuing operations before income tax expense

 

14,632

 

13,455

 

17,436

 

45,523

 

(2,180)

 

18,108

 

15,928

 

61,451

Income tax expense (benefit)

 

1,747

 

3,027

 

3,662

 

8,436

 

(517)

 

4,188

 

3,671

 

12,107

Income (loss) from continuing operations

12,885

10,428

13,774

37,087

(1,663)

13,920

12,257

49,344

Discontinued operations:

Income from discontinued operations before income taxes

17,550

17,550

17,550

Income tax expense

4,004

4,004

4,004

Income from discontinued operations, net of tax

13,546

13,546

13,546

Net income

$

12,885

$

10,428

$

13,774

$

37,087

$

11,883

$

13,920

$

25,803

$

62,890

Period-end assets

$

4,769,848

$

1,026,790

$

61,809

$

5,858,447

$

269,337

$

112,662

$

381,999

$

6,240,446

Net interest margin from continuing operations

 

3.41

%  

 

3.07

%  

 

NM

 

3.37

%  

 

NM

 

NM

 

NM

 

3.69

%  

Net-revenue concentration from continuing operations*

67

%  

9

%  

12

%  

88

%  

2

%  

10

%  

12

%  

100

%  

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

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17. DISCONTINUED OPERATIONS

On May 13, 2021, the Bank entered into the Purchase Agreement with Green Dot providing for the Sale Transaction. As a result of the Purchase Agreement and the proposed Sale Transaction, the results for the Company, RPG, and its TRS segment are presented within this filing to reflect continuing versus discontinued operations. RPG’s continuing operations include its RCS segment, its RPS division, and certain overhead costs previously allocated to TRS that will remain with RPG. Discontinued operations are those contracted to be sold. These discontinued operations have historically contained the majority of TRS’s revenue and expense. Interest income and expense for continuing and discontinued operations also include intercompany interest charged and earned based on the Company’s funds transfer pricing methodology.

On October 4, 2021, Green Dot announced that it had been unable to obtain the Federal Reserve’s approval of or non-objection to the Sale Transaction and that, as a result, Green Dot would not consummate the Sale Transaction. On October 5, 2021, the Bank filed a lawsuit against Green Dot in the Delaware Court of Chancery alleging breach of contract. In so doing, the Bank seeks, among other relief, specific performance to require that Green Dot proceed with the Sale Transaction as the parties had agreed to in the Purchase Agreement. Due to the inherent uncertainties of legal proceedings, at this time, the Company cannot predict the outcome of these proceedings and their impact on the Company’s financial condition and results of operations.

Results of operations for the TRS business sold to Green Dot are presented separately as discontinued operations for all periods because the sale met the relevant criteria as of September 30, 2021. A summary income statement of discontinued operations for the three and nine months ended September 30, 2021 is presented below:

Three Months Ended

    

Nine Months Ended

 

September 30, 

September 30, 

(in thousands)

2021

2020

2021

2020

INTEREST INCOME:

Loans, including fees

$

76

$

135

$

14,815

$

20,978

Funds transfer credit

 

51

 

70

 

313

 

1,543

Total interest income

 

127

 

205

 

15,128

 

22,521

INTEREST EXPENSE:

Deposits

 

 

 

 

527

Funds transfer cost

 

4

 

2

 

200

 

1,132

Total interest expense

 

4

 

2

 

200

 

1,659

NET INTEREST INCOME

 

123

 

203

 

14,928

 

20,862

Provision for expected credit loss expense

 

(2,261)

 

(4,342)

 

7,850

 

15,239

NET INTEREST INCOME AFTER PROVISION

 

2,384

 

4,545

 

7,078

 

5,623

NONINTEREST INCOME:

Net refund transfer fees

 

1,280

 

1,152

 

19,922

 

19,888

Interchange fee income

 

63

 

37

 

232

 

178

Other

 

1

 

8

 

78

 

90

Total noninterest income

 

1,344

 

1,197

 

20,232

 

20,156

NONINTEREST EXPENSE:

Salaries and employee benefits

 

1,043

 

1,460

 

4,268

 

4,208

Technology, equipment, and communication

 

86

 

131

 

260

 

461

Occupancy

 

 

 

1

 

7

Marketing and development

 

45

 

55

 

160

 

196

FDIC insurance expense

 

 

 

150

 

Bank franchise tax expense

 

9

 

2

 

14

 

1,729

Legal and professional fees

303

8

1,382

173

Other

 

172

 

89

 

1,491

 

1,455

Total noninterest expense

 

1,658

 

1,745

 

7,726

 

8,229

INCOME FROM DISCONTINUED OPERATIONS BEFORE INCOME TAX EXPENSE

 

2,070

 

3,997

 

19,584

 

17,550

INCOME TAX EXPENSE

 

473

 

883

 

4,840

 

4,004

INCOME FROM DISCONTINUED OPERATIONS

$

1,597

$

3,114

$

14,744

$

13,546

Through its TRS business, 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 business occurs during the first half of each year. During the second half of each year, TRS generates limited revenue and incurs costs preparing for the next 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

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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 2021 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, or check, 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:
othere is no recourse to the taxpayer, 
ono negative credit reporting on the taxpayer, and
ono collection efforts against the taxpayer.

During 2020, EAs were generally repaid within 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considered an EA delinquent if it remained unpaid 21 days in 2020 and 35 days in 2021 after the taxpayer’s tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management’s annual analysis of tax return processing times. Provisions on EAs are estimated when advances are made. 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.

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

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

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

In 2005, Republic Bancorp Capital Trust, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. On September 30, 2021, as permitted under the terms of RBCT’s governing documents, Republic redeemed these securities at the par amount of approximately $40 million, without penalty. Republic’s capital ratios remained well above “well capitalized” levels following the redemption of the TPS, which were treated as part of Republic’s Tier I Capital while outstanding.

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;
statements relating to the completion of the Sale Transaction and the potential timing thereof; 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 the Company’s operations and credit losses;
the ability of borrowers who received COVID-19 loan accommodations to resume repaying their loans upon maturity of such accommodations;
natural disasters impacting the Company’s 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;

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inflation;
recession;
future acquisitions;
integrations of acquired businesses;
changes in technology;
changes in applicable laws and regulations or the interpretation and enforcement thereof;
changes in fiscal, monetary, regulatory and tax policies;
changes in accounting standards;
monetary fluctuations;
changes to the Company’s overall internal control environment;
success in gaining regulatory approvals when required;
the Company’s ability to qualify for future R&D federal tax credits;
risks related to the completion of the proposed Sale Transaction and the potential timing thereof;
disruption from the proposed Sale Transaction making it difficult to maintain business and operational relationships, including retaining and hiring key personnel and maintaining relationships with the Bank’s customers, vendors and others with whom the Bank does business;
the risk of litigation and/or regulatory actions related to the proposed Sale Transaction;
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, 2020 and Part II Item 1A “Risk Factors” of the current filing.

Accounting Standards Update

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

A summary of the Company's significant accounting policies is set forth in Part II “Item 8. Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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

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

Republic believes its critical accounting policies and estimates relate to its ACLL and Provision.

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ACLL and Provision — As of September 30, 2021, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.

Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaced 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.

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, 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. For its CRE loan pool, the Company employed a one-year forecast of CRE vacancy rates through March 31, 2021 but discontinued use of this forecast during the second quarter of 2021 in favor of a one-year forecast of general CRE values. This change in forecast method had no material impact on the Company’s ACLL.

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

Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix or term, delinquency level, 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 the U.S. national unemployment rate and CRE values. Subsequent to the one-year forecasts, loss rates are assumed to immediately revert back to long-term historical averages.

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

See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 1“Summary of Significant Accounting Policies” of Part II Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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BUSINESS SEGMENT COMPOSITION

As of September 30, 2021, 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.

(I)  Traditional Banking segment

The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of September 30, 2021, Republic had 42 full-service banking centers 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 — 7

Metropolitan Cincinnati, Ohio — 2

Metropolitan Nashville, Tennessee — 2

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

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

Retail Mortgage Lending — Through its retail banking centers and its online 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, residential real estate properties. For those loans originated through the Bank’s retail banking centers, the collateral is predominately located in the Bank’s market footprint, while loans originated through the Consumer Direct channel are generally secured by owner occupied-collateral located outside of the Bank’s market footprint.

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 areas nearby 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.

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Aircraft Lending In October 2017, the Bank created an Aircraft Lending division. Aircraft loans are typically made to purchase or refinance personal aircrafts, 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:

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

Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank’s Treasury Management department.

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

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

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

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

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

(II)  Warehouse Lending segment

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

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 for loans generated in states within its footprint and generally sells servicing for loans generated in states outside of its footprint. 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.”

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(IV)  Tax Refund Solutions segment

Tax Refund Solutions segment — On May 13, 2021, the Bank entered into the Purchase Agreement with Green Dot providing for the Sale Transaction. As a result of the Purchase Agreement and the proposed Sale Transaction, the results for the Company, RPG, and its TRS segment are presented within this filing to reflect continuing versus discontinued operations. RPG’s continuing operations include its RCS segment, its RPS division, and certain overhead costs previously allocated to TRS that will remain with RPG. Discontinued operations are those contracted to be sold. These discontinued operations have historically contained the majority of TRS’s revenue and expense. Interest income and expense for continuing and discontinued operations also include intercompany interest charged and earned based on the Company’s funds transfer pricing methodology.

On October 4, 2021, Green Dot announced that it had been unable to obtain the Federal Reserve’s approval of or non-objection to the Sale Transaction and that, as a result, Green Dot would not consummate the Sale Transaction. On October 5, 2021, the Bank filed a lawsuit against Green Dot in the Delaware Court of Chancery alleging breach of contract. In so doing, the Bank seeks, among other relief, specific performance to require that Green Dot proceed with the Sale Transaction as the parties had agreed to in the Purchase Agreement. Due to the inherent uncertainties of legal proceedings, at this time, the Company cannot predict the outcome of these proceedings and their impact on the Company’s financial condition and results of operations.

See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” of Part I Item 1 “Financial Statements.”

Republic Payment Solutions division — RPS is currently managed and operated within the TRS segment’s continuing operations. The RPS division offers general-purpose reloadable prepaid cards as an issuing bank 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’s continuing operations. 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.”

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

RCS line-of-credit products – Using separate third-party service providers, the Bank originates two line-of-credit products to generally subprime borrowers in multiple states. The first of these two products (the “LOC I”) has been originated by the Bank since 2014. The second (the “LOC II”) was introduced in January 2021.

oRCS’s LOC I represents the substantial majority of RCS activity. Elastic Marketing, LLC and Elevate Decision Sciences, LLC, are third-party service providers for the product and are subject to the Bank’s oversight and supervision. Together, these companies provide the Bank with certain marketing, servicing, technology, and support services, while a separate third party provides customer support, servicing, and other services on the Bank’s behalf. The Bank is the lender for this 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 product. 

The Bank sells participation interests in this 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 LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.

oIn January 2021, RCS began originating balances through its LOC II. One of RCS’s existing third-party service providers, subject to the Bank’s oversight and supervision, provides the Bank with marketing services and loan

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servicing for the LOC II product. The Bank is the lender for this product and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this product. 

The Bank sells participation interests in this product. These participation interests are a 95% 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 5% participation interest in each advance, it maintains 100% ownership of the underlying LOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.

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

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

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.”

OVERVIEW (Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020)

Total Company net income for the third quarter of 2021 was $20.0 million, a $380,000, or 2%, decrease from the same period in 2020. Diluted EPS was $0.99 for the three months ended September 30, 2021, an increase of approximately 1% compared to $0.98 for the same period in 2020. The 3% difference between the 2% decrease in net income and the 1% increase in Diluted EPS of the Company represents the benefit of the Company’s on-going stock buyback program. As of September 30, 2021, the stock buyback program has reduced the number of shares outstanding by approximately 748,000 shares since the buyback was implemented in early 2021. The decrease in net income reflected a $1.5 million decrease in net income from discontinued operations, driven by a change in the timing of Easy Advance recoveries, as the Company received a higher rate and a higher volume of EA recoveries during the third quarter of 2020 compared to the third quarter of 2021.

Net income from continuing operations was $18.4 million for the third quarter of 2021, a $1.1 million, or 7%, increase from the same period in 2020. Diluted EPS from continuing operations was $0.91 for the three months ended September 30, 2021, an increase of approximately 10% over the $0.83 for the same period in 2020. The overall increase in net income from continuing operations generally reflected an increase in RPG program fees, a positive reduction in Provision, offset by a reduction in Mortgage Banking income.

The following are general highlights by reportable segment. Discontinued operations for the periods discussed relate entirely to the TRS segment.

See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” of Part I Item 1 “Financial Statements.”

Traditional Banking segment

Net income increased $6.4 million for the third quarter of 2021 compared to the same period in 2020.

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Net interest income increased $1.5 million, or 4%, for the third quarter of 2021 compared to the same period in 2020. The Traditional Bank’s net interest margin remained at 3.22% for the third quarter of 2021.

Provision decreased $5.9 million to a net credit of $44,000 for the third quarter of 2021 compared to a net charge of $5.9 million for the same period in 2020.

Noninterest income increased $970,000, or 14%, for the third quarter of 2021 compared to the same period in 2020.

Total noninterest expense decreased $488,000, or 1%, for the third quarter of 2021 compared to same period in 2020.

Warehouse Lending segment

Net income remained at $4.2 million for the third quarter of 2021 compared to the same period in 2020.

Net interest income decreased $1.1 million, or 14%, for the third quarter of 2021 compared to the same period in 2020.

The Warehouse Provision was a net credit of $223,000 for the third quarter of 2021 compared to a net credit of $3,000 for the same period in 2020.

Average committed Warehouse lines increased to $1.4 billion during the third quarter of 2021 from $1.3 billion during the same period in 2020.

Average line usage was 51% during the third quarter of 2021 compared to 68% during the same period in 2020.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income decreased $5.5 million, or 51%, during the third quarter of 2021 compared to the same period in 2020.

Overall, Republic’s originations of secondary market loans totaled $170 million during the third quarter of 2021 compared to $204 million during the same period in 2020, with the Company’s cash gain-as-a-percent-of-loans-sold decreasing from 4.49% to 2.94% from period to period.

Tax Refund Solutions segment

Continuing Operations

Net loss from continuing operations was $272,000 for the third quarter of 2021 compared to a net loss of $123,000 for the same period in 2020.

Discontinued Operations

Net income from discontinued operations decreased $1.5 million for the third quarter of 2021 compared to the same period in 2020.

Overall, TRS recorded a net credit to the Provision from discontinued operations of $2.3 million during the third quarter of 2021 compared to a net credit to the Provision of $4.3 million for the same period in 2020.

Noninterest income from discontinued operations increased $147,000, or 12%, for the third quarter of 2021 compared to the same period in 2020.

Net RT revenue from discontinued operations increased to $1.3 million for the third quarter of 2021 compared to $1.2 million for the same period in 2020.

Noninterest expense from discontinued operations was $1.7 million for the third quarter of 2021, equal to $1.7 million for the same period in 2020.

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Republic Credit Solutions segment

Net income decreased $422,000, or 12%, for the third quarter of 2021 compared to the same period in 2020.

Net interest income increased $321,000, or 6%, for the third quarter of 2021 compared to the same period in 2020.

Overall, RCS recorded a net charge to the Provision of $3.8 million during the third quarter of 2021 compared to a net credit of $12,000 for the same period in 2020.

Noninterest income increased $2.9 million from the third quarter of 2020 to the third quarter of 2021.

Noninterest expense was $1.0 million for the third quarter of 2021 compared to $1.2 million for the same period in 2020.

RESULTS OF OPERATIONS (Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020)

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.

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 lower since the first quarter of 2020 and the onset of COVID-19 pandemic, as the FOMC reduced the FFTR to approximately 25 basis points during 2020. The FOMC has provided on-going guidance that it is unlikely the FFTR will be increased in the near term.

Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Bank’s net interest income and net interest margin in the near term, while additional decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Bank’s net interest income and net interest margin in the near term. Increases in short-term interest rates, however, could have a negative impact on net interest income and net interest margin if the Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Company’s net interest income and net interest margin. Unknown variables, which may impact the Company’s net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.

Total Company net interest income from continuing operations increased $260,000 during the third quarter of 2021 compared to the same period in 2020. Total Company net interest margin from continuing operations decreased to 3.55% during the third quarter of 2021 compared to 3.57% for the same period in 2020. Net interest income from discontinued operations was $123,000 during the third quarter of 2021 compared to $203,000 during the third quarter of 2020.

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

Traditional Banking segment

The Traditional Banking’s net interest income increased $1.5 million, or 4%, for the third quarter of 2021 compared to the same period in 2020. Traditional Banking’s net interest margin remained at 3.22% for the third quarter of 2021 compared to the same period in 2020.

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Table 1 — Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)

The Company earns fees and a coupon interest of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believes Traditional Bank net interest income excluding PPP fees and interest is a more appropriate measure to analyze the challenges within the Traditional Bank’s net interest income and net interest margin. The following table reconciles Traditional Bank net interest income and net interest margin to Traditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure. Net interest margin excluding PPP fees and interest presented below also excludes average PPP loans of $186 million and $513 million for the quarters ended September 30, 2021 and 2020.

Net Interest Income

Net Interest Margin

Three Months Ended Sep. 30,

Three Months Ended Sep. 30,

(dollars in thousands)

2021

2020

$ Change

% Change

2021

2020

Change

Traditional Banking - GAAP

$

40,297

$

38,753

$

1,544

4

%

3.22

%

3.22

%

%

Less: PPP fees and interest

5,668

3,497

2,171

62

0.35

(0.06)

0.41

Traditional Banking ex PPP fees and interest - non-GAAP

$

34,629

$

35,256

$

(627)

(2)

%

2.87

3.28

(0.41)

The increase in the Traditional Bank’s net interest income and static net interest margin during the third quarter of 2021 was primarily attributable to the following factors:

The Traditional Bank recognized $5.7 million of fees and interest on its PPP portfolio during the third quarter of 2021 compared to $3.5 million of similar fees and interest during the same period in 2020. The $2.2 million increase in PPP fees and interest was driven significantly by the forgiveness, payoff, and paydown of $130 million of PPP loans during the third quarter of 2021. As of September 30, 2021, net PPP loans of $126 million remained on the Traditional Bank’s balance sheet, including $19 million in loan balances originated during 2020, $111 million in loan balances originated during 2021, and $4 million of unaccreted PPP fees reported as a credit offset to these originated balances. Unaccreted PPP fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated.

Traditional Bank net interest income, excluding PPP fees and interest, decreased $627,000, or 2%, from the third quarter 2020, as the Traditional Bank’s net interest margin, excluding PPP loans and related fees and interest, declined from 3.28% for the third quarter of 2020 to 2.87% for the third quarter of 2021. The decline in the net interest margin was substantially driven by a 66-basis point decline in the Traditional Bank’s yield on its average non-PPP interest-earning assets from the third quarter of 2020 to the third quarter of 2021, as the majority of the Traditional Bank’s growth in non-PPP interest-earning assets during the previous 12 months was in lower-yielding cash instead of loans.

Warehouse Lending segment

Net interest income from the Warehouse segment decreased $1.1 million, or 14%, from the third quarter of 2020 to the third quarter of 2021 driven primarily by a decrease in average outstanding balances, while the net interest margin for the Warehouse segment increased from 3.41% to 3.51% during the same time periods.

Overall average outstanding Warehouse balances declined from $860 million during the third quarter of 2020 to $717 million for the third quarter of 2021, as home-mortgage refinancing dipped from record highs during 2020. Committed Warehouse lines-of-credit grew to $1.4 billion as of September 30, 2021 from $1.3 billion as of September 30, 2020, while average usage rates for Warehouse lines were 51% and 68%, respectively, during the third quarters of 2021 and 2020.

The net interest margin for the Warehouse segment improved from quarter to quarter due to a decline in the segment’s assigned cost of funds while many of the segment’s lines-of-credit reached contractual floors for their interest rates, allowing the yield for the Warehouse portfolio to remain higher than it otherwise would have been by contractual formula. Due to increasing competitive pressures, however, the Company began lowering the contractual interest-rate floors on its Warehouse lines during the third quarter of 2021. Management expects these lower floors to have a negative impact on the Warehouse net interest margin going forward.

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Republic Credit Solutions segment

RCS’s net interest income increased $321,000, or 6%, from the third quarter of 2020 to the third quarter of 2021. The increase was driven primarily by an increase in fee income from RCS’s LOC I product. Loan fees on this product, recorded as interest income on loans, increased to $4.2 million during the third quarter of 2021 compared to $4.0 million during the same period in 2020 and accounted for 77% and 76% of all RCS interest income on loans during the periods. The increase in loan fees was the direct result of a change in marketing strategy for the product from period to period.

Future loan fee income from RCS’s LOC I product may be negatively impacted by the on-going COVID-19 pandemic.

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Table 2 — Total Company Average Balance Sheets and Interest Rates from Continuing Operations

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

    

Average

    

    

Average

    

Average

    

    

Average

 

(dollars in thousands)

    

Balance

    

Interest

    

Rate

    

Balance

    

Interest

    

Rate

ASSETS (1)

Interest-earning assets:

 

Federal funds sold and other interest-earning deposits

$

924,859

$

359

 

0.16

%  

  

  

$

313,281

$

94

 

0.12

%  

Investment securities, including FHLB stock (2)

555,934

1,928

 

1.39

600,943

2,363

 

1.57

Intercompany funds loaned to discontinued operations

5,964

4

0.27

2,316

1

0.17

RCS LOC I product (3) (7)

19,231

4,166

86.65

17,369

3,996

92.03

Other RPG loans (7)

 

109,317

 

1,212

 

4.43

 

97,379

 

1,137

 

4.67

Outstanding Warehouse lines of credit (4) (7)

717,036

6,698

3.74

860,420

7,966

3.70

Paycheck Protection Program loans (5) (7)

185,931

5,668

12.19

513,201

3,497

2.73

All other Core Bank loans (6) (7)

 

3,373,085

 

33,665

 

3.99

 

3,419,261

 

36,851

 

4.31

Total interest-earning assets

 

5,891,357

 

53,700

 

3.65

 

5,824,170

 

55,905

 

3.84

Allowance for credit losses

 

(61,562)

 

(55,213)

Noninterest-earning assets:

Noninterest-earning cash and cash equivalents

 

133,743

 

92,731

Premises and equipment, net

 

38,242

 

42,167

Bank owned life insurance

 

99,386

 

67,447

Other assets (2)

 

186,848

 

180,236

Total assets

$

6,288,014

$

6,151,538

LIABILITIES AND STOCKHOLDERS’ EQUITY (1)

Interest-bearing liabilities:

Transaction accounts

$

1,569,407

$

91

 

0.02

%  

$

1,366,830

$

178

 

0.05

%  

Money market accounts

 

822,190

96

 

0.05

 

734,203

 

235

 

0.13

Time deposits

 

298,179

835

 

1.12

 

409,088

 

2,025

 

1.98

Reciprocal money market and time deposits

188,357

 

124

 

0.26

 

292,948

 

378

 

0.52

Brokered deposits

 

30,001

 

2

 

0.03

 

135,994

 

60

 

0.18

Total interest-bearing deposits

 

2,908,134

 

1,148

 

0.16

 

2,939,063

 

2,876

 

0.39

SSUARs

 

242,867

21

 

0.03

 

213,010

22

 

0.04

Intercompany funds borrowed from discontinued operations

43,259

50

0.46

28,732

70

0.97

Federal Reserve PPP Liquidity Facility

 

53,338

48

0.36

Federal Home Loan Bank advances

 

25,000

6

 

0.10

 

126,250

658

 

2.08

Subordinated note

 

40,792

166

 

1.63

 

41,240

182

 

1.77

Total interest-bearing liabilities

 

3,260,052

 

1,391

 

0.17

 

3,401,633

 

3,856

 

0.45

Noninterest-bearing liabilities and Stockholders’ equity:

Noninterest-bearing deposits

 

2,074,941

 

1,817,820

Other liabilities

 

104,086

 

120,734

Stockholders’ equity

 

848,935

 

811,351

Total liabilities and stockholders’ equity

$

6,288,014

$

6,151,538

Net interest income

$

52,309

$

52,049

Net interest spread

 

3.48

%  

 

3.39

%  

Net interest margin

 

3.55

%  

 

3.57

%  

(1)The table above excludes average assets, average liabilities, interest income, and interest expense for discontinued operations; however, loans to and borrowings from discontinued operations are included above based on the Company’s funds transfer pricing methodology. Net interest income would be $52.4 million and $52.3 million and net interest margin would be 3.56% and 3.59% for the quarters ended September 30, 2021 and 2020 if continuing and discontinued operations were consolidated above.
(2)For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets.
(3)Interest income is entirely composed of loan fees.
(4)Interest income includes loan fees of $779,000 and $942,000 for the quarters ended September 30, 2021 and 2020.
(5)Interest income includes loan fees of $5.2 million and $2.1 million for the quarters ended September 30, 2021 and 2020.
(6)Interest income includes loan fees of $1.2 million and $680,000 for the quarters ended September 30, 2021 and 2020.
(7)Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all loan premiums, discounts, fees and costs.

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Table 3 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense from continuing operations 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 from Continuing Operations

Three Months Ended September 30, 2021

Compared to

Three Months Ended September 30, 2020

Total Net

Increase / (Decrease) Due to

(in thousands)

    

Change

    

Volume

    

Rate

    

Interest income:

Federal funds sold and other interest-earning deposits

$

265

$

230

$

35

Investment securities, including FHLB stock

(435)

(169)

(266)

Intercompany funds loaned to discontinued operations

3

2

1

RCS LOC I product

170

412

(242)

Other RPG loans

 

75

 

135

 

(60)

Outstanding Warehouse lines of credit

(1,268)

(1,339)

71

Paycheck Protection Program loans

2,171

(3,432)

5,603

All other Core Bank loans

 

(3,186)

 

(492)

 

(2,694)

Net change in interest income

 

(2,205)

 

(4,653)

 

2,448

Interest expense:

Transaction accounts

 

(87)

 

24

 

(111)

Money market accounts

 

(139)

 

26

 

(165)

Time deposits

 

(1,190)

 

(457)

 

(733)

Reciprocal money market and time deposits

(254)

 

(107)

 

(147)

Brokered deposits

 

(58)

 

(28)

 

(30)

SSUARs

 

(1)

 

3

 

(4)

Intercompany funds borrowed from discontinued operations

(20)

 

27

 

(47)

Federal Reserve PPP Liquidity Facility

(48)

 

(48)

 

Federal Home Loan Bank advances

 

(652)

 

(298)

 

(354)

Subordinated note

 

(16)

 

(5)

 

(11)

Net change in interest expense

 

(2,465)

 

(863)

 

(1,602)

Net change in net interest income

$

260

$

(3,790)

$

4,050

* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.

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Provision

Total Company Provision from continuing operations was a net charge of $3.6 million for the third quarter of 2021 compared to a net charge of $5.8 million for the same period in 2020. Provision from discontinued operations was a net credit of $2.3 million for the third quarter of 2021 compared to a net credit of $4.3 million for the same period in 2020.

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

Traditional Banking segment

The Traditional Banking Provision during the third quarter of 2021 was a net credit of $44,000 compared to a net charge of $5.9 million for the third quarter of 2020. An analysis of the Provision for the third quarter of 2021 compared to the same period in 2020 follows:

For the third quarter of 2021, the Traditional Bank’s net credit to the Provision was primarily driven by net loan loss recoveries of $167,000 for the quarter. Loan loss recoveries were positively impacted by a $286,000 recovery from one borrower.

During the third quarter of 2020, the Traditional Bank recorded $5.6 million of additional Provision due to the expected economic impact of the COVID-19 pandemic. Offsetting the increase in Provision due to the impact of the COVID-19 pandemic during the third quarter of 2020 was a reduction in Provision of $1.2 million consistent with an $83 million decrease in Traditional Bank non-PPP loan spot balances during the same quarter.

As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.42% as of September 30, 2021 compared to 1.34% as of December 31, 2020 and 1.26% as of September 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of September 30, 2021.

See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.

Warehouse Lending segment

Warehouse recorded a net credit to the Provision of $223,000 for the third quarter of 2021 compared to a net credit of $3,000 for the same period in 2020. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $89 million during the third quarter of 2021 compared to a decrease of $1 million during the third quarter of 2020.

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of September 30, 2021, December 31, 2020, and September 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of September 30, 2021.

Tax Refund Solutions segment

Discontinued Operations

TRS recorded a net credit to the Provision from discontinued operations of $2.3 million during the third quarter of 2021 compared to a net credit of $4.3 million for the same period in 2020. These credits to the Provision primarily reflected recoveries on EA loans charged off during the first six months of the year. While TRS experienced a higher rate of EAs charged-off during the first six months of 2020 than the comparable six months in 2021, it also experienced a higher rate of EA recoveries during the third quarter of 2020 than the comparable quarter of 2021. Management believes the higher rate of EAs charged-off through the first six months of 2020 and recovered during the third quarter of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax return processing by the IRS for certain types of tax returns that require further taxpayer communication and verification.

With the third quarter EA paydowns, the percent of unpaid EAs to total EAs originated was 3.19% as of September 30, 2021. This compares to 3.93% as of September 30, 2020, a positive difference of 74 basis points. With all unpaid EAs having been charged off as of June 30, 2021, any EA payments received during the fourth quarter of 2021 will continue to represent recovery credits directly to income from discontinued operations.

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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 a net charge to the Provision of $3.8 million during the third quarter of 2021 compared to a net credit to the Provision of $12,000 for the same period in 2020. The negative swing in the Provision was driven by a $6.0 million increase in outstanding balances for RCS’s lines of credit during the third quarter of 2021 compared to a $1.3 million decrease in similar balances during the third quarter of 2020. The Company reduced marketing for its LOC I product during the second and third quarters of 2020, then began incrementally increasing such marketing during the fourth quarter of 2020. The Company began offering its LOC II product during the first quarter of 2021.

While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 9.99% as of September 30, 2021, 7.94% as of December 31, 2020, and 7.82% as of September 30, 2020. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of September 30, 2021.

The following table presents net charges to the RCS Provision from continuing operations by product:

Table 4 — RCS Provision by Product

Three Months Ended Sep. 30,

(in thousands)

2021

2020

$ Change

% Change

Product:

Lines of credit

$

3,830

$

(40)

$

3,870

NM

%

Hospital receivables

(10)

28

(38)

(136)

Total

$

3,820

$

(12)

$

3,832

NM

%

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Table 5 — Summary of Loan and Lease Loss Experience

    

Three Months Ended

September 30, 

(dollars in thousands)

2021

    

2020

ACLL at beginning of period

$

60,291

$

55,097

Charge-offs:

Traditional Banking:

Residential real estate

 

(13)

Commercial & industrial

 

(35)

 

(255)

Home equity

 

 

(14)

Consumer

(279)

(227)

Total Traditional Banking

(314)

(509)

Warehouse lines of credit

 

 

Total Core Banking

(314)

(509)

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

 

Other TRS loans

 

(22)

Republic Credit Solutions

(1,064)

 

(684)

Total Republic Processing Group

(1,064)

(706)

Total charge-offs

 

(1,378)

 

(1,215)

Recoveries:

Traditional Banking:

Residential real estate

329

28

Commercial real estate

 

3

 

Commercial & industrial

 

16

 

80

Home equity

 

5

 

21

Consumer

128

77

Total Traditional Banking

481

206

Warehouse lines of credit

 

 

Total Core Banking

481

206

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

2,242

 

4,294

Other TRS loans

19

 

Republic Credit Solutions

75

 

83

Total Republic Processing Group

2,336

4,377

Total recoveries

 

2,817

 

4,583

Net loan recoveries (charge-offs)

 

1,439

 

3,368

Provision from continuing operations- Core Banking

 

(265)

 

5,780

Provision from continuing operations - RPG

3,820

(12)

Provision from discontinued operations - RPG

 

(2,261)

 

(4,342)

Total Provision

 

1,294

 

1,426

ACLL at end of period

$

63,024

$

59,891

Credit Quality Ratios - Total Company:

ACLL to total loans

 

1.45

%  

 

1.20

%  

ACLL to nonperforming loans

 

301

 

284

Net loan charge-offs (recoveries) to average loans

(0.13)

 

(0.27)

Net loan charge-offs from continuing operations to average loans

 

0.07

 

0.07

Credit Quality Ratios - Core Banking:

ACLL to total loans

 

1.22

%  

 

1.05

%  

ACLL to nonperforming loans

 

254

 

245

Net loan charge-offs (recoveries) to average loans

(0.02)

0.03

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Noninterest Income

Total Company noninterest income from continuing operations decreased $1.4 million during the third quarter of 2021 compared to the same period in 2020. Noninterest income from discontinued operations increased $147,000, or 12% comparing the same periods.

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 $970,000, or 14%, for the third quarter of 2021 compared to the same period in 2020. Interchange Fee Income increased $326,000 from the third quarter of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased $262,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the third quarter of 2020, as a pandemic-driven rise in the consumer savings rates drove a reduction in the Bank’s overdraft-related fees. Both Interchange Fee Income and Service Charges on Deposits began to trend upward toward more normal levels during the first quarter of 2021 following the removal of many pandemic-related restrictions.

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 Accounts for the three months ended September 30, 2021 and 2020 were $1.6 million and $1.3 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended September 30, 2021 and 2020 were $304,000 and $99,000. The Bank suspended its daily overdraft charges during 2020 to soften the economic hardship of the COVID-19 pandemic on its clients. The Bank reinstituted the charging of its daily overdraft fee on September 1, 2020.

Mortgage Banking segment

Mortgage Banking income decreased from $10.8 million for the third quarter of 2020 to $5.3 million for the third quarter of 2021. For the third quarter of 2021, the Core Bank originated $170 million in secondary market loans and achieved an average cash gain-as-a-percent-of-loans-sold during the quarter of 2.94%, with both figures solid by normal historical comparisons. During the third quarter of 2020, however, secondary market originations were $204 million with comparable gains-as-a-percent-of-loans-sold of 4.49%. Favorable market conditions during the third quarter of 2020 brought on by the COVID pandemic drove gains-as-a-percent-of-loans-sold to all-time record highs for the Core Bank and, in general, the entire mortgage industry.

Republic Credit Solutions segment

RCS’s noninterest income increased $2.9 million during the third quarter of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS’s noninterest income. Pandemic-driven restrictions negatively impacted RCS program fees during the third quarter of 2020, with those program fees beginning to normalize during 2021 following the removal of restrictions.

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The following table presents RCS program fees by product:

Table 6 — RCS Program Fees by Product

Three Months Ended Sep. 30,

(in thousands)

2021

2020

$ Change

% Change

Product:

Lines of credit

$

2,046

$

752

$

1,294

172

%

Hospital receivables

62

45

17

38

Installment loans*

1,659

47

1,612

NM

Total

$

3,767

$

844

$

2,923

346

%

*

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 from continuing operations decreased $1.2 million during the third quarter of 2021 compared to the same period in 2020. Noninterest expense from discontinued operations decreased $87,000 comparing the same periods.

The following were the most significant components comprising the increase in noninterest expense by reportable segment:

Traditional Banking segment

Traditional Banking noninterest expense decreased $488,000, or 1%, for the third quarter of 2021 compared to the same period in 2020. The following primarily drove the change in noninterest expense:

Bank Franchise Tax expense decreased $661,000. As previously reported, Kentucky enacted HB354 in March 2019 and as a result, the Bank transitioned from a capital-based bank franchise tax to corporate income tax on January 1, 2021 for Kentucky state taxes.

Other expenses decreased $717,000. Within this decrease, Provision for credit losses on off-balance sheet credit exposures decreased $283,000, driven by lower expected usage rates on the Bank’s committed credit lines coupled with a generally improving economic outlook. Additionally, within the other expenses line item, the following expenses experienced decreases: fraud-related expenses, supplies, freight, core deposit amortization, and ATM promotions, with most of these decreases generally driven by the impact of the ongoing pandemic.

Salaries and Benefits increased from $21.1 million during the third quarter of 2020 to $21.7 million for the third quarter of 2021, driven primarily by annual merit increases, which averaged approximately 3%, along with higher equity-based compensation expenses. These increases to compensation expense were partially offset by lower salaries resulting from a reduction in full-time equivalent employees, which decreased from 976 FTEs as of December 31, 2020 to 949 FTEs as of September 30, 2021.

Warehouse Lending segment

Noninterest expense at the Warehouse segment decreased $819,000 during the third quarter of 2021 compared to the same period in 2020, primarily due to higher incentive compensation expense recorded during 2020, generally due to higher Warehouse client loan volumes during 2020.

Mortgage Banking segment

Noninterest expense at the Mortgage Banking segment increased $425,000, or 15%, during the third quarter of 2021 compared to the same period in 2020, primarily due to higher mortgage commissions recorded during 2021, as the Company broadened the base of associates eligible to receive commissions during 2021.

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OVERVIEW (Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020)

Total Company net income for the first nine months of 2021 was $70.0 million, a $7.1 million, or 11%, increase from the same period in 2020. Diluted EPS increased to $3.39 for the nine months of September 30, 2021 compared to $3.02 for the same period in 2020.

Net income from continuing operations was $55.2 million for the first nine months of 2021, a $5.9 million increase from the same period in 2020. Diluted EPS from continuing operations increased to $2.68 for the nine months ended September 30, 2021 compared to $2.37 for the same period in 2020. The increase in net income and net income from continuing operations primarily reflected a positive reduction in Provision partially offset by a decrease in Mortgage Banking income and net interest income.

The following are general highlights by reportable segment. Discontinued operations for the periods discussed relate entirely to the TRS segment.

See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” of Part I Item 1 “Financial Statements.”

Traditional Banking segment

Net income increased $12.9 million, or 100%, for the first nine months of 2021 compared to the same period in 2020.

Net interest income increased $1.3 million, or 1%, for the first nine months of 2021 compared to the same period in 2020.

Provision had a $14.7 million positive swing to a net credit of $126,000 for the first nine months of 2021 compared to a net charge of $14.5 million for the same period in 2020.

Noninterest income increased $2.4 million, or 12%, for the first nine months of 2021 compared to the same period in 2020.

Total noninterest expense increased $442,000 for the first nine months of 2021 compared to same period in 2020.

Total Traditional Bank loans decreased $239 million, or 6%, during the first nine months of 2021, driven primarily by a $266 million decrease in PPP loans.

Total nonperforming loans to total loans for the Traditional Banking segment was 0.58% as of September 30, 2021 compared to 0.63% as of December 31, 2020.

Delinquent loans to total loans for the Traditional Banking segment was 0.22% as of September 30, 2021 compared to 0.26% as of December 31, 2020.

Total Traditional Bank deposits increased $188 million, or 4%, during the first nine months of 2021.

Warehouse Lending segment

Net income increased $2.5 million, or 24%, for the first nine months of 2021 compared to the same period in 2020.

Net interest income increased $1.7 million, or 9%, for the first nine months of 2021 compared to the same period in 2020.

The Warehouse Provision was a net credit of $530,000 for the first nine months of 2021 compared to a net charge of $778,000 for the same period in 2020.

Average committed Warehouse lines increased to $1.4 billion during the first nine months of 2021 from $1.2 billion during the same period in 2020.

Average line usage was 52% during the first nine months of 2021 compared to 65% during the same period in 2020.

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Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income decreased $7.3 million, or 31%, during the first nine months of 2021 compared to the same period in 2020.

Overall, Republic’s originations of secondary market loans totaled $525 million during the first nine months of 2021 compared to $548 million during the same period in 2020, with the Company’s gain-as-a-percent-of-loans-sold decreasing from 4.57% to 3.11% from period to period.

Tax Refund Solutions segment

Continuing Operations

Net loss from continuing operations was $834,000 for the first nine months of 2021 compared to a net loss of $1.7 million for the same period in 2020. The higher loss during the first nine months of 2020 primarily reflected general operating losses related to TRS’s prepaid card division, with such losses substantially occurring prior to May 1, 2020. On May 1, 2020, the RPS division added a large depository relationship that significantly improved profitability on a subsequent basis.

Discontinued Operations

Net income from discontinued operations increased $1.2 million, or 9%, for the first nine months of 2021 compared to the same period in 2020.

Net interest income from discontinued operations decreased $5.9 million, or 28%, for the first nine months of 2021 compared to the same period in 2020.

Total EA originations were $250 million during the first nine months of 2021 compared to $388 million for the first nine months of 2020.

Overall, TRS recorded a net charge to the Provision from discontinued operations of $7.9 million during the first nine months of 2021 compared to a net charge to the Provision of $15.2 million for the same period in 2020.

Noninterest income from discontinued operations increased $76,000 for the first nine months of 2021 compared to the same period in 2020.

Net RT revenue increased $54,000 for the first nine months of 2021 compared to the same period in 2020.

Noninterest expense from discontinued operations was $7.7 million for the first nine months of 2021 compared to $8.2 million for the same period in 2020.

Republic Credit Solutions segment

Net income decreased $2.9 million, or 21%, for the first nine months of 2021 compared to the same period in 2020.

Net interest income decreased $2.9 million, or 16%, for the first nine months of 2021 compared to the same period in 2020.

Overall, RCS recorded a net charge to the Provision of $5.0 million during the first nine months of 2021 compared to a net charge of $251,000 for the same period in 2020.

Noninterest income increased $4.3 million, or 116%, from the first nine months of 2020 to the first nine months of 2021.

Noninterest expense was $3.0 million for the first nine months of 2021 and $3.0 million for the same period in 2020.

Total nonperforming loans to total loans for the RCS segment was 0.59% as of September 30, 2021 compared to 0.04% as of December 31, 2020.

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Delinquent loans to total loans for the RCS segment was 8.31% as of September 30, 2021 compared to 9.23% as of December 31, 2020.

RESULTS OF OPERATIONS (Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020)

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.

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 lower since the first quarter of 2020 and the onset of COVID-19 pandemic, as the FOMC reduced the FFTR to approximately 25 basis points during 2020. The FOMC has provided on-going guidance that it is unlikely the FFTR will be increased in the near term.

Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Bank’s net interest income and net interest margin in the near term, while additional decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Bank’s net interest income and net interest margin in the near term. Increases in short-term interest rates, however, could have a negative impact on net interest income and net interest margin if the Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Company’s net interest income and net interest margin. Unknown variables, which may impact the Company’s net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.

Total Company net interest income from continuing operations decreased $1.0 million, or 1%, during the first nine months of 2021 compared to the same period in 2020. Total Company net interest margin from continuing operations decreased to 3.46% during the first nine months of 2021 compared to 3.69% for the same period in 2020. Net interest income from discontinued operations was $14.9 million during the first nine months of 2021 compared to $20.9 million during the same period in 2020.

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

Traditional Banking segment

The Traditional Banking’s net interest income increased $1.3 million for the first nine months of 2021 compared to the same period in 2020. Traditional Banking’s net interest margin was 3.21% for the first nine months of 2021, a decrease of 20 basis points from the same period in 2020.

Table 7 — Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)

The Company earns fees and a coupon interest rate of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believes Traditional Bank net interest income excluding PPP fees and coupon interest is a more appropriate measure to analyze the challenges within the Traditional Bank’s net interest income and net interest margin. The following table reconciles Traditional Bank net interest income and net interest margin to Traditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure. Net interest margin excluding PPP fees and interest presented below also excludes average PPP loans of $299 million and $301 million for the nine months ended September 30, 2021 and 2020.

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Net Interest Income

Net Interest Margin

Nine Months Ended Sep. 30,

Nine Months Ended Sep. 30,

(dollars in thousands)

2021

2020

$ Change

% Change

2021

2020

Change

Traditional Banking - GAAP

$

119,677

$

118,409

$

1,268

1

%

3.21

%

3.41

%

(0.20)

%

Less: PPP fees and interest

16,949

6,149

10,800

176

0.28

(0.05)

0.33

Traditional Banking ex PPP fees and interest - non-GAAP

$

102,728

$

112,260

$

(9,532)

(8)

%

2.93

3.46

(0.53)

The decrease in the Traditional Bank’s net interest income and net interest margin during the first nine months of 2021 was primarily attributable to the following factors:

Traditional Bank net interest income, excluding PPP fees and interest, decreased $9.5 million, or 8%, from the first nine months of 2020, as the Traditional Bank’s net interest margin, excluding PPP loans and related fees and interest, declined from 3.46% for the first nine months of 2020 to 2.93% for the first nine months of 2021. The decline in the net interest margin was substantially driven by an 83-basis point decline in the Traditional Bank’s yield on its average non-PPP interest-earning assets from the first nine months of 2020 to the first nine months of 2021, as the majority of the Traditional Bank’s growth in interest-earning assets during the previous 12 months was in lower-yielding cash or cash equivalents instead of loans.

Partially offsetting the Traditional Bank’s margin compression, the Traditional Bank recognized $16.9 million of fees and interest on its PPP portfolio during the first nine months of 2021 compared to $6.1 million of similar income during the same period in 2020. The $10.8 million increase in PPP fees and interest was driven significantly by the forgiveness, payoff, and paydown of $480 million of PPP loans during the first nine months of 2021. As of September 30, 2021, net PPP loans of $126 million remained on the Traditional Bank’s balance sheet, including $19 million in loan balances originated during 2020, $111 million in loan balances originated during 2021, and $4 million of unaccreted PPP fees reported as a credit offset to these originated balances. Unaccreted PPP fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated.

Warehouse Lending segment

Net interest income increased $2.5 million, or 24%, for the first nine months of 2021 compared to the same period in 2020.

Average committed Warehouse lines increased to $1.4 billion during the first nine months of 2021 from $1.2 billion during the same period in 2020, while overall usage rates on Warehouse lines of credit were 52% and 65%, respectively for the same periods. In addition, the Warehouse net interest margin increased to 3.47% for the first nine months of 2021 compared to 3.07% for the first nine months of 2020, as many of the Bank’s Warehouse clients reached contractual interest rate floors on their lines-of-credit during the first nine months of 2020 preventing further declines in the segment’s loan yields, while the segment’s cost of funds continued to decline. Due to increasing competitive pressures, the Company began lowering the contractual interest-rate floors on its Warehouse lines during 2021. Management expects these lower floors to have a negative impact on the Warehouse net interest margin going forward.

Tax Refund Solutions segment

Discontinued Operations

TRS’s net interest income from discontinued operations decreased $5.9 million for the first nine months of 2021 compared to the same period in 2020. TRS’s EA product earned $13.2 million in interest income during the first nine months of 2021, a $6.4 million decrease from the first nine months of 2020 resulting primarily from a $138 million decrease in EA originations from period to period. Management believes that economic impact (stimulus) payments, pandemic health risks, and a two-week delay in the start to the 2021 tax season, all, in varying degrees, negatively impacted demand for its EA product during the first nine months of 2021.

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

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Republic Credit Solutions segment

RCS’s net interest income decreased $2.9 million, or 16%, from the first nine months of 2020 to the first nine months of 2021. The decrease was driven primarily by a decline in fee income from RCS’s LOC I product. Loan fees on this product, recorded as interest income on loans, decreased to $11.5 million during the first nine months of 2021 compared to $14.7 million during the same period in 2020 and accounted for 76% and 78% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in balances for RCS’s LOC I product following a reduction of marketing for this product during the second and third quarters of 2020. While the marketing for this product was reinstated during the fourth quarter of 2020, management believes the ongoing impact of government stimulus payments continued to reduce demand for this product during the first six months of 2021.

Future loan fee income from RCS’s LOC I product will likely continue to be negatively impacted by the on-going COVID-19 pandemic.

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Table 8 — Total Company Average Balance Sheets and Interest Rates from Continuing Operations

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Average

    

    

Average

    

Average

    

    

Average

    

(dollars in thousands)

Balance

Interest

Rate

Balance

Interest

Rate

ASSETS (1)

Interest-earning assets:

Federal funds sold and other interest-earning deposits

$

792,858

$

774

 

0.13

%  

  

$

273,604

$

818

 

0.40

%  

Investment securities, including FHLB stock (2)

560,780

5,860

 

1.39

575,575

8,191

 

1.90

Intercompany funds loaned to discontinued operations

108,228

199

0.25

103,442

1,131

1.46

RCS LOC I product (3) (7)

16,885

11,505

90.85

21,300

14,692

91.97

Other RPG loans (7)

 

105,292

3,539

 

4.48

 

92,803

3,519

 

5.06

Outstanding Warehouse lines of credit (4) (7)

744,522

20,892

3.74

770,454

22,305

3.86

Paycheck Protection Program loans (5) (7)

299,458

16,949

7.55

300,733

6,149

2.73

All other Core Bank loans (6) (7)

 

3,349,804

100,548

 

4.00

 

3,508,851

117,637

 

4.47

Total interest-earning assets

 

5,977,827

 

160,266

 

3.57

 

5,646,762

 

174,442

 

4.12

Allowance for credit loss

 

(60,682)

 

(52,652)

Noninterest-earning assets:

Noninterest-earning cash and cash equivalents

 

117,763

 

94,679

Premises and equipment, net

 

38,845

 

43,836

Bank owned life insurance

 

88,414

 

67,061

Other assets (2)

 

173,927

 

148,773

Total assets

$

6,336,094

$

5,948,459

LIABILITIES AND STOCKHOLDERS’ EQUITY (1)

Interest-bearing liabilities:

Transaction accounts

$

1,551,690

$

266

 

0.02

%  

$

1,253,811

$

1,019

 

0.11

%  

Money market accounts

 

776,448

292

 

0.05

 

741,205

1,725

 

0.31

Time deposits

 

305,456

2,871

 

1.25

 

417,171

6,370

 

2.04

Reciprocal money market and time deposits

273,312

585

0.29

263,681

1,432

0.72

Brokered deposits

 

38,864

23

 

0.08

 

176,127

 

1,752

 

1.33

Total interest-bearing deposits

 

2,945,770

 

4,037

 

0.18

 

2,851,995

 

12,298

 

0.57

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

 

201,992

 

37

 

0.02

 

199,556

 

158

 

0.11

Intercompany funds borrowed from discontinued operations

102,190

 

313

 

0.41

 

132,497

 

1,543

 

1.55

Federal Reserve PPP Liquidity Facility

 

 

 

58,683

 

153

 

0.35

Federal Home Loan Bank advances

 

30,989

 

47

 

0.20

 

253,157

 

3,128

 

1.65

Subordinated note

 

41,089

 

507

 

1.65

 

41,240

 

829

 

2.68

Total interest-bearing liabilities

 

3,322,030

 

4,941

 

0.20

 

3,537,128

 

18,109

 

0.68

Noninterest-bearing liabilities and Stockholders’ equity:

Noninterest-bearing deposits

 

2,061,144

 

1,506,109

Other liabilities

 

108,035

 

109,339

Stockholders’ equity

 

844,885

 

795,883

Total liabilities and stock-holders’ equity

$

6,336,094

$

5,948,459

Net interest income

$

155,325

$

156,333

Net interest spread

 

3.37

%  

 

3.44

%  

Net interest margin

 

3.46

%  

 

3.69

%  

(1)The table above excludes average assets, average liabilities, interest income, and interest expense for discontinued operations; however, loans to and borrowings from discontinued operations are included above based on the Company’s funds transfer pricing methodology. Net interest income would be $170.3 million and $177.2 million and net interest margin would be 3.84% and 4.21% for the nine months ended September 30, 2021 and 2020 if continuing and discontinued operations were consolidated above.
(2)For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets.
(3)Interest income is composed entirely of loan fees.
(4)Interest income includes loan fees of $2.4 million and $2.4 million for the nine months ended September 30, 2021 and 2020.
(5)Interest income includes loan fees of $14.6 million and $3.7 million for the nine months ended September 30, 2021 and 2020.
(6)Interest income includes loan fees of $3.0 million and $2.4 million for the nine months ended September 30, 2021 and 2020.
(7)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 9 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 9 — Total Company Volume/Rate Variance Analysis from Continuing Operations

Nine Months Ended September 30, 2021

Compared to

Nine Months Ended September 30, 2020

Total Net

Increase / (Decrease) Due to

(in thousands)

Change

    

Volume

    

Rate

Interest income:

Federal funds sold and other interest-earning deposits

$

(44)

$

781

$

(825)

Investment securities, including FHLB stock

(2,331)

(205)

(2,126)

Intercompany funds loaned to discontinued operations

(932)

50

(982)

RCS LOC I product

(3,187)

(7,321)

4,134

Other RPG loans

 

20

 

444

 

(424)

Outstanding Warehouse lines of credit

(1,413)

(739)

(674)

Paycheck Protection Program loans

10,800

(26)

10,826

All other Core Bank loans

 

(17,089)

 

(5,164)

 

(11,925)

Net change in interest income

 

(14,176)

 

(12,180)

 

(1,996)

Interest expense:

Transaction accounts

 

(753)

 

198

 

(951)

Money market accounts

 

(1,433)

 

78

 

(1,511)

Time deposits

 

(3,499)

 

(1,436)

 

(2,063)

Reciprocal money market and time deposits

(847)

 

51

 

(898)

Brokered deposits

 

(1,729)

 

(784)

 

(945)

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

 

(121)

 

2

 

(123)

Intercompany funds borrowed from discontinued operations

(1,230)

 

(292)

 

(938)

Federal Reserve PPP Liquidity Facility

(153)

 

(153)

 

Federal Home Loan Bank advances

 

(3,081)

 

(1,540)

 

(1,541)

Subordinated note

 

(322)

 

(3)

 

(319)

Net change in interest expense

 

(13,168)

 

(3,879)

 

(9,289)

Net change in net interest income

$

(1,008)

$

(8,301)

$

7,293

* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.

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Provision

Total Company Provision from continuing operations was a net charge of $4.4 million for the first nine months of 2021 compared to a net charge of $15.6 million for the same period in 2020. Total Company Provision from discontinued operations was a net charge of $7.9 million for the first nine months of 2021 compared to a net charge of $15.2 million for the same period in 2020.

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

Traditional Banking segment

The Traditional Banking Provision during the first nine months of 2021 was a net credit of $126,000 compared to a net charge of $14.5 million for the first nine months of 2020. An analysis of the Provision for the first nine months of 2021 compared to the same period in 2020 follows:

For the first nine months of 2021, there was a minimal net credit to the Traditional Bank Provision, generally based on an improving economic outlook in conjunction with limited net charge-offs incurred by the Traditional Bank since making significant life-of-loan reserves during 2020 following the onset of the pandemic. The net credit recorded during the first nine months of 2021 primarily included nominal ACLL releases for the residential real estate, CRE, and HELOC portfolios offset by additional reserves for certain Special Mention loans with continued signs of pandemic-related hardship through September 30, 2021.

During the first nine months of 2020, the Traditional Bank recorded $17.7 million of additional Provision due to the expected economic impact of the COVID-19 pandemic. Offsetting the increase in Provision due to the impact of the COVID-19 pandemic during the first nine months of 2020 was a reduction in Provision of $3.2 million consistent with a $254 million decrease in Traditional Bank loan spot balances from December 31, 2019 to September 30, 2020.

As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.42% as of September 30, 2021 compared to 1.34% as of December 31, 2020 and 1.26% as of September 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of September 30, 2021.

See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.

Warehouse Lending segment

Warehouse recorded a net credit to the Provision of $530,000 for the first nine months of 2021 compared to a net charge of $778,000 for the same period in 2020. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $212 million during the first nine months of 2021 compared to an increase of $311 million during the first nine months of 2020.

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of September 30, 2021, December 31, 2020, and September 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of September 30, 2021.

Tax Refund Solutions segment

Discontinued Operations

TRS recorded a net charge to the Provision from discontinued operations of $7.9 million during the first nine months of 2021 compared to a net charge of $15.2 million for the same period in 2020. Substantially all TRS Provision in both periods was related to its EA product.

TRS’s Provision for EA loan losses was $8.0 million, or 3.19% of its $250 million in EAs originated during the first nine months of 2021, compared to a Provision of $15.2 million, or 3.93% of its $388 million in EAs originated during the first nine months of 2020. The lower Provision during the first nine months of 2021 resulted from repayment rates on EA loans from the U.S. Treasury that exceeded those during the first nine months of 2020. Management believes the slower repayment rates from the U.S. Treasury during

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the first nine months of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax-return processing by the IRS for certain types of tax returns that required further taxpayer communication and verification.

EAs are only originated during the first two months of each year, with all uncollected EAs charged off by June 30th of each year. EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans.

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 10 below, RCS recorded a net charge to the Provision of $5.0 million during the first nine months of 2021 compared to a net charge to the Provision of $251,000 for the same period in 2020. The increase in the Provision was driven by an increase in outstanding balances for RCS’s lines of credit during the first nine months of 2021 compared to a decrease in similar balances during the same period in 2020. The Company reduced marketing for its LOC I product during the second and third quarters of 2020, then began incrementally increasing such marketing during the fourth quarter of 2020. The Company began offering its LOC II product during the first quarter of 2021.

While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 9.99% as of September 30, 2021, 7.94% as of December 31, 2020, and 7.82% as of September 30, 2020. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of September 30, 2021.

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

Table 10 — RCS Provision by Product

Nine Months Ended Sep. 30,

(in thousands)

2021

2020

$ Change

% Change

Product:

Lines of credit

$

5,036

$

214

$

4,822

NM

%

Hospital receivables

1

37

(36)

(97)

Total

$

5,037

$

251

$

4,786

NM

%

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Table 11 — Summary of Loan and Lease Loss Experience

Nine Months Ended

September 30, 

(dollars in thousands)

2021

    

2020

ACLL at beginning of period

$

61,067

$

43,351

Adoption of ASC 326

6,734

Charge-offs:

Traditional Banking:

Residential real estate

 

(40)

Commercial real estate

 

(428)

 

(270)

Commercial & industrial

 

(35)

 

(447)

Home equity

 

 

(14)

Consumer

(649)

(960)

Total Traditional Banking

(1,112)

(1,731)

Warehouse lines of credit

 

 

Total Core Banking

(1,112)

(1,731)

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

(10,256)

 

(19,575)

Other TRS loans

(51)

 

(94)

Republic Credit Solutions

(2,427)

 

(5,401)

Total Republic Processing Group

(12,734)

(25,070)

Total charge-offs

 

(13,846)

 

(26,801)

Recoveries:

Traditional Banking:

Residential real estate

376

116

Commercial real estate

 

82

 

472

Commercial & industrial

 

27

 

124

Home equity

 

46

 

108

Consumer

371

399

Total Traditional Banking

902

1,219

Warehouse lines of credit

 

 

Total Core Banking

902

1,219

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

2,272

 

4,336

Other TRS loans

27

 

1

Republic Credit Solutions

247

 

553

Total Republic Processing Group

2,546

4,890

Total recoveries

 

3,448

 

6,109

Net loan charge-offs

 

(10,398)

 

(20,692)

Provision from continuing operations- Core Banking

 

(532)

 

15,008

Provision from continuing operations - RPG

5,037

251

Provision from discontinued operations - RPG

 

7,850

 

15,239

Total Provision

 

12,355

 

30,498

ACLL at end of period

$

63,024

$

59,891

Credit Quality Ratios - Total Company:

ACLL to total loans

 

1.45

%  

 

1.20

%  

ACLL to nonperforming loans

 

301

 

284

Net loan charge-offs to average loans

 

0.30

 

0.58

Net loan charge-offs from continuing operations to average loans

0.07

0.15

Credit Quality Ratios - Core Banking:

ACLL to total loans

 

1.22

%  

 

1.05

%  

ACLL to nonperforming loans

 

254

 

245

Net loan charge-offs to average loans

0.01

0.01

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Noninterest Income

Total Company noninterest income from continuing operations increased $236,000 during the first nine months of 2021 compared to the same period in 2020. Total Company noninterest income from discontinued operations increased $76,000 during the first nine months of 2021 compared to the same period in 2020.

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 $2.4 million, or 12%, for the first nine months of 2021 compared to the same period in 2020. Interchange Fee Income increased $1.4 million from the first nine months of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased $612,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the first nine months of 2020, as a pandemic-driven rise in the consumer savings rate drove a reduction in the Bank’s overdraft-related fees. Both Interchange Fee Income and Service Charges on Deposits began to trend upward toward more normal levels during the first quarter of 2021 following the removal of pandemic-related restrictions.

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 nine months ended September 30, 2021 and 2020 were $4.0 million and $4.1 million. The total daily overdraft charges, net of refunds, included in interest income for the nine months ended September 30, 2021 and 2020 were $810,000 and $517,000. The Bank suspended its daily overdraft charges during the first nine months of 2020 to soften the economic hardship of the COVID-19 pandemic on its clients. The Bank reinstituted the charging of its daily overdraft fee on September 1, 2020.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income decreased $7.3 million, or 31%, during the first nine months of 2021 compared to the same period in 2020. For the first nine months of 2021, the Core Bank originated $525 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 3.11%, with comparable originations of $548 million and comparable gains of 4.57% during the first nine months of 2020. Favorable market conditions drove a higher gain percentage for the Core Bank and the mortgage industry, in general, during the last nine months of 2020 and for a portion of the first nine months of 2021. These favorable conditions began to normalize during February 2021 causing the Core Bank’s gain-as-a-percentage-of-loans-sold to trend toward more normal historical levels at or near 2.50%. Management believes this trend will likely continue during the remainder of 2021.

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Republic Credit Solutions segment

RCS’s noninterest income increased $4.3 million, or 116%, during the first nine months of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS’s noninterest income. Pandemic-driven restrictions negatively impacted RCS program fees during the first nine months of 2020, with those program fees beginning to normalize during 2021 following the removal of restrictions.

The following table presents RCS program fees by product:

Table 12 — RCS Program Fees by Product

Nine Months Ended Sep. 30,

(in thousands)

2021

2020

$ Change

% Change

Product:

Lines of credit

$

4,168

$

2,199

$

1,969

90

%

Hospital receivables

173

53

120

226

Installment loans*

3,589

1,424

2,165

NM

Total

$

7,930

$

3,676

$

4,254

116

%

*

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 from continuing operations increased $905,000, or 1%, during the first nine months of 2021 compared to the same period in 2020. Total Company noninterest expense from discontinued operations decreased $503,000 during the first nine months of 2021 compared to the same period in 2020.

The following were the most significant components comprising the increase in noninterest expense by reportable segment:

Traditional Banking segment

Traditional Banking noninterest expense increased $442,000 for the first nine months of 2021 compared to the same period in 2020. The following primarily drove the change in noninterest expense:

Salaries and benefits expense increased approximately $2.4 million, or 4%, primarily driven by annual merit increases and increases in contract labor, equity compensation, payroll taxes, and health benefits from period to period.

Technology, Equipment, and Communication expense increased $683,000, as the Traditional Bank strategically added 24 Interactive Teller Machines over the previous 12 months, bringing its ITM fleet to over 70 ITMs as of September 30, 2021.

Interchange-related expense increased $430,000, or 13%, as transaction volume began rising to normal levels during the first quarter of 2021 following the removal of pandemic-related restrictions.

Partially offsetting the increases above, Bank Franchise Tax expense decreased $1.6 million. As previously reported, Kentucky enacted HB354 in March 2019 and as a result, the Bank transitioned from a capital-based bank franchise tax to the Kentucky corporate income tax on January 1, 2021.

Other expenses decreased $1.9 million. Within this decrease, Provision for credit losses on off-balance sheet credit exposures decreased $518,000, driven by lower expected usage rates on the Bank’s committed credit lines coupled with a generally improving economic outlook. Additionally, within the other expenses line item, the following expenses experienced decreases: fraud-related expenses, supplies, freight, and ATM promotions, with most of these decreases generally driven by the impact of the ongoing pandemic.

Mortgage Banking segment

Noninterest expense at the Mortgage Banking segment increased $1.9 million, or 25%, during the first nine months of 2021 compared to the same period in 2020, primarily due to higher mortgage commissions recorded during 2021.

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COMPARISON OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

Cash and Cash Equivalents

Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Republic had $1.0 billion in cash and cash equivalents as of September 30, 2021 compared to $486 million as of December 31, 2020. The growth in cash balances was driven by continued growth in deposit balances along with a continued general decline in loans. Given the near-term risk of inflation and rising market interest rates, combined with the requirement that the term of the investments would have to be extended in order to pick up a meaningful increase in the overall yield, management chose to not redeploy significant excess cash into the investment portfolio through September 30, 2021. During the fourth quarter of 2021, however, management began evaluating potential changes to its existing strategy for redeploying excess cash as a result of a recent steepening of the yield curve.

For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This yield was a weighted-average 0.13% for the first nine months of 2021. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.

Table 13 — Loan Portfolio Composition

(in thousands)

    

    

September 30, 2021

    

December 31, 2020

 

$ Change

% Change

Traditional Banking:

Residential real estate:

Owner occupied

$

827,898

$

879,800

$

(51,902)

(6)

%

Nonowner occupied

 

294,818

 

264,780

30,038

11

Commercial real estate

 

1,393,241

 

1,349,085

44,156

3

Construction & land development

 

105,968

 

98,674

7,294

7

Commercial & industrial

 

333,795

 

325,596

8,199

3

Paycheck Protection Program

 

126,271

 

392,319

(266,048)

(68)

Lease financing receivables

 

9,427

 

10,130

(703)

(7)

Aircraft

 

130,398

 

101,375

29,023

29

Home equity

 

215,282

 

240,640

(25,358)

(11)

Consumer:

Credit cards

14,781

 

14,196

585

4

Overdrafts

753

 

587

166

28

Automobile loans

17,533

 

30,300

(12,767)

(42)

Other consumer

6,223

 

8,167

(1,944)

(24)

Total Traditional Banking

3,476,388

3,715,649

(239,261)

(6)

Warehouse lines of credit*

 

750,682

 

962,796

(212,114)

(22)

Total Core Banking

4,227,070

4,678,445

(451,375)

(10)

Republic Processing Group*:

Tax Refund Solutions:

 

 

Easy Advances

 

 

NA

Other TRS loans

1

1

NA

Republic Credit Solutions

 

116,711

 

110,893

5,818

5

Total Republic Processing Group

 

116,712

 

110,893

5,819

5

Total loans**

4,343,782

4,789,338

(445,556)

(9)

Allowance for credit losses

 

(63,024)

 

(61,067)

(1,957)

3

Total loans, net

$

4,280,758

$

4,728,271

$

(447,513)

(9)

%

*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.

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Gross loans decreased by $446 million, or 9%, during the first nine months of 2021 to $4.3 billion as of September 30, 2021. The most significant components comprising the change in loans by reportable segment follow:

Traditional Banking segment

Period-end balances for Traditional Banking loans decreased $239 million, or 6%, from December 31, 2020 to September 30, 2021. The following primarily drove the change in loan balances during the first nine months of 2021:

During the first nine months of 2021, the Core Bank’s PPP portfolio decreased $266 million, primarily reflecting the forgiveness and payoff of $382 million of 2020 PPP originations and the net increase of $111 million of 2021 PPP loans during the first nine months of 2021.

The CARES Act was enacted in March 2020 and provided for the SBA’s PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID-19 pandemic. The Economic Aid Act was enacted in December 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As of September 30, 2021, net PPP loans of $126 million remained on the Traditional Bank’s balance sheet, including $19 million in loan balances originated during 2020, $111 million in loan balances originated during 2021, and $4 million of unaccreted PPP fees reported as a credit offset to these originated balances. Unaccreted PPP fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated. While no guarantee can be made as to the overall remaining 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.

PPP loans have a stated maturity of two to five years, an annualized fixed coupon rate of 1.0% to the client, are 100% guaranteed by the SBA, and 100% forgivable to the client if certain program metrics are met. The Bank earns an origination fee of 1%, 3%, or 5% based on the size of the loan.

The owner-occupied residential real estate and home equity categories decreased $52 million and $25 million during the first nine months of 2021. These decreases largely reflect the impact of a sharp drop in long-term market interest rates during the previous 12 months that drove an increase in refinance volume for residential mortgages, with much of the refinance activity going into fixed-rate products sold on the secondary market.

Offsetting the decreases above, the CRE category increased $44 million and the Aircraft category increased $29 million, as lending activity began normalizing following the removal of pandemic-driven restrictions during the first nine months of 2021.

Warehouse Lending segment

Outstanding Warehouse period end balances decreased $212 million from December 31, 2020 to September 30, 2021. 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 66% during 2020.

Allowance for Credit Losses

As of September 30, 2021, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.

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The Company’s ACLL increased $2 million from $61 million as of December 31, 2020 to $63 million as of September 30, 2021. As a percent of total loans, the total Company’s ACLL increased to 1.45% as of September 30, 2021 compared to 1.27% as of December 31, 2020. An analysis of the ACL by reportable segment follows:

Traditional Banking segment

The Traditional Banking ACLL decreased approximately $212,000 to $49 million as of September 30, 2021 driven primarily by net charge-offs during the first nine months of 2021.  

The Traditional Bank decreased its ACLS $124,000 during the first nine months of 2021 to $54,000 based on improved PD and LGD expectations on its corporate bond portfolios.

The Traditional Bank decreased its ACLC $52,000 during the first nine months of 2021 to $937,000 based on an improving economic outlook.

Warehouse Lending segment

The Warehouse ACLL decreased to approximately $1.9 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing September 30, 2021 to December 31, 2020. As of September 30, 2021, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first nine months of 2021. 

Republic Credit Solutions segment

The RCS ACLL increased $3 million from $9 million as of December 31, 2020 to $12 million as of September 30, 2021, with this increase driven by growth in balances on RCS’s line-of-credit products.

RCS maintained an ACLL for two distinct credit products offered as of September 30, 2021, including its line-of-credit products and its healthcare-receivables products. As of September 30, 2021, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 49% for its line-of-credit products. 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.

Asset Quality

COVID-19 Loan Accommodations

The CARES Act provided several forms of economic relief designed to defray the impact of COVID-19. In April 2020, through its own independent relief efforts and CARES Act provisions, the Company began offering loan accommodations through deferrals and forbearances. These accommodations were generally under three-month terms for commercial clients, with residential and consumer accommodations in line with prevailing regulatory and legal parameters. Loans that received an accommodation were generally not considered troubled debt restructurings by the Company if such loans were not greater than 30 days past due as of December 31, 2019.

As of September 30, 2021, $3 million, or less than 1% of the Company’s Traditional Bank portfolio remained under a COVID-19 hardship accommodation.

The ultimate long-term impact of the above accommodated loan balances on the Company’s Classified, Special Mention, nonperforming, and delinquent loans is currently uncertain. When evaluating its borrowers for further accommodation, the Bank considers prudent options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by applicable federal, state, and local laws; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s Classified, Special Mention, nonperforming, and delinquent loans would increase and negatively impact the Company’s overall operating performance.

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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 PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans increased approximately $12 million during the first nine months of 2021, driven primarily by commercial-purpose loans within the hospitality and leisure industry downgraded to Special Mention during the first nine months of 2021. As previously mentioned, the ultimate long-term impact of loans accommodated due to COVID-19 on the Company’s Classified and Special Mention loans is currently uncertain.

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 14 — Classified and Special Mention Loans

(in thousands)

    

September 30, 2021

    

December 31, 2020

$ Change

% Change

 

Loss

$

$

$

Doubtful

 

 

Substandard

 

24,501

 

30,193

(5,692)

(19)

%  

PCD - Substandard

 

1,739

 

1,887

(148)

(8)

Total Classified Loans

 

26,240

 

32,080

(5,840)

(18)

Special Mention

 

107,227

 

89,206

18,021

20

PCD - Special Mention

 

831

 

895

(64)

(7)

Total Special Mention Loans

 

108,058

 

90,101

17,957

20

Total Classified and Special Mention Loans

$

134,298

$

122,181

$

12,117

10

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 $7 million as of September 30, 2021 and December 31, 2020.

Nonperforming loans to total loans remained at 0.48% from December 31, 2020 to September 30, 2021. As previously mentioned, the ultimate long-term impact of loans accommodated due to COVID-19 on the Company’s nonperforming loans is currently uncertain.

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Table 15 — Nonperforming Loans and Nonperforming Assets Summary

(in thousands)

    

September 30, 2021

    

December 31, 2020

    

Loans on nonaccrual status*

$

20,252

$

23,548

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

 

691

 

47

Total nonperforming loans

 

20,943

 

23,595

Other real estate owned

 

1,845

 

2,499

Total nonperforming assets

$

22,788

$

26,094

Credit Quality Ratios - Total Company:

Nonperforming loans to total loans

 

0.48

%  

 

0.49

%

Nonperforming assets to total loans (including OREO)

 

0.52

 

0.54

Nonperforming assets to total assets

 

0.37

 

0.42

Credit Quality Ratios - Core Bank:

Nonperforming loans to total loans

 

0.48

%  

0.50

%

Nonperforming assets to total loans (including OREO)

 

0.52

 

0.56

Nonperforming assets to total assets

 

0.39

 

0.45

*

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 16 — Nonperforming Loan Composition

September 30, 2021

December 31, 2020

Percent of

Percent of

   

Total

Total

(in thousands)

Balance

Loan Class

Balance

Loan Class

   

   

Traditional Banking:

Residential real estate:

   

Owner occupied

   

$

11,708

1.41

%  

  

$

14,328

1.63

%  

Nonowner occupied

 

   

 

99

0.03

 

81

0.03

Commercial real estate

 

   

 

6,607

0.47

 

6,762

0.50

Construction & land development

 

   

 

 

Commercial & industrial

 

   

 

93

0.03

 

55

0.02

Paycheck Protection Program

 

Lease financing receivables

 

   

 

 

Aircraft

 

Home equity

 

   

 

1,657

0.77

  

 

2,141

0.89

Consumer:

   

Credit cards

5

0.04

Overdrafts

Automobile loans

84

0.48

170

0.56

Other consumer

4

0.06

11

0.13

Total Traditional Banking

20,252

0.58

23,553

0.63

Warehouse lines of credit

 

   

 

 

Total Core Banking

20,252

0.48

23,553

0.50

Republic Processing Group:

Tax Refund Solutions:

 

   

 

 

Easy Advances

 

   

 

 

Other TRS loans

Republic Credit Solutions

 

   

 

691

0.59

 

42

0.04

Total Republic Processing Group

   

 

691

0.59

 

42

0.04

   

Total nonperforming loans

   

$

20,943

0.48

%  

$

23,595

0.49

%  

   

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Table 17 — Stratification of Nonperforming Loans

Number of Nonperforming Loans and Recorded Investment

 

    

    

    

    

Balance

    

    

    

    

 

September 30, 2021

Balance

> $100 &

Balance 

Total

 

(dollars in thousands)

No.

<= $100

No.

<= $500

No.

> $500

No.

Balance

 

 

 

 

 

Traditional Banking:

Residential real estate:

Owner occupied

 

143

$

5,002

 

25

$

4,511

 

2

$

2,195

 

170

$

11,708

Nonowner occupied

 

3

 

99

 

 

 

 

 

3

 

99

Commercial real estate

 

 

 

4

 

895

 

3

 

5,712

 

7

 

6,607

Construction & land development

 

 

 

 

 

 

 

 

Commercial & industrial

 

4

 

93

 

 

 

 

 

4

 

93

Paycheck Protection Program

Lease financing receivables

 

 

 

 

 

 

 

 

Aircraft

 

 

 

 

 

 

 

Home equity

 

27

 

741

 

4

 

916

 

 

 

31

 

1,657

Consumer:

Credit cards

 

 

 

 

 

 

 

NM

 

Overdrafts

 

 

 

 

 

 

 

Automobile loans

10

 

84

 

 

 

 

 

10

 

84

Other consumer

4

4

4

 

4

Total Traditional Banking

191

6,023

33

6,322

5

7,907

229

20,252

Warehouse lines of credit

 

 

 

 

 

 

 

 

Total Core Banking

191

6,023

33

6,322

5

7,907

229

20,252

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

 

Other TRS loans

 

Republic Credit Solutions

NM

691

NM

 

691

Total Republic Processing Group

NM

691

NM

691

Total

 

191

$

6,714

 

33

$

6,322

 

5

$

7,907

 

229

$

20,943

Number of Nonperforming Loans and Recorded Investment

 

    

    

    

    

Balance

    

    

    

    

 

December 31, 2020

Balance

> $100 &

Balance 

Total

 

(dollars in thousands)

No.

<= $100

No.

<= $500

No.

> $500

No.

Balance

 

Traditional Banking:

Residential real estate:

Owner occupied

 

146

$

5,110

 

27

$

4,966

 

5

$

4,252

 

178

$

14,328

Nonowner occupied

 

3

 

81

 

 

 

 

 

3

 

81

Commercial real estate

 

2

 

45

 

3

 

925

 

3

 

5,792

 

8

 

6,762

Construction & land development

 

 

 

 

 

 

 

 

Commercial & industrial

 

2

 

55

 

 

 

 

 

2

 

55

Paycheck Protection Program

 

Lease financing receivables

 

 

 

 

 

 

 

 

Aircraft

 

 

 

 

Home equity

 

26

 

867

 

6

 

1,274

 

 

 

32

 

2,141

Consumer:

Credit cards

 

NM

 

5

 

 

 

 

 

NM

 

5

Overdrafts

 

 

 

 

 

 

 

Automobile loans

14

 

170

 

 

 

 

 

14

 

170

Other consumer

7

11

7

 

11

Total Traditional Banking

200

6,344

36

7,165

8

10,044

244

23,553

Warehouse lines of credit

 

 

 

 

 

 

 

 

Total Core Banking

200

6,344

36

7,165

8

10,044

244

23,553

Republic Processing Group:

Tax Refund Solutions:

Easy Advances

 

Other TRS loans

 

Republic Credit Solutions

NM

42

NM

 

42

Total Republic Processing Group

NM

42

NM

42

Total

 

200

$

6,386

 

36

$

7,165

 

8

$

10,044

 

244

$

23,595

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Table 18 — Rollforward of Nonperforming Loans

    

Three Months Ended

    

Nine Months Ended

 

September 30, 

September 30, 

(in thousands)

2021

2020

2021

2020

Nonperforming loans at the beginning of the period

$

22,344

$

20,419

$

23,595

$

23,489

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

 

1,248

 

3,721

 

2,641

 

8,169

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

 

(2,233)

 

(2,251)

 

(4,839)

 

(5,932)

Principal balance paydowns of loans nonperforming at both period ends

(384)

(360)

(1,098)

(4,660)

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

 

(32)

 

(444)

 

644

 

19

Nonperforming loans at the end of the period

$

20,943

$

21,085

$

20,943

$

21,085

*

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

Table 19 — Detail of Loans Removed from Nonperforming Status

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Loans charged off

$

$

$

$

(2)

Loans transferred to OREO

 

 

 

 

(2,109)

Loans refinanced at other institutions

 

(2,150)

 

(1,917)

 

(4,559)

 

(2,870)

Loans returned to accrual status

 

(83)

 

(334)

 

(280)

 

(951)

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

$

(2,233)

$

(2,251)

$

(4,839)

$

(5,932)

Based on the Bank’s review as of September 30, 2021, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.

Delinquent Loans

Total Company delinquent loans to total loans decreased to 0.40% as of September 30, 2021 from 0.42% as of December 31, 2020. Core Bank delinquent loans to total Core Bank loans decreased to 0.18% as of September 30, 2021 from 0.21% as of December 31, 2020. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of September 30, 2021 and December 31, 2020 were on nonaccrual status. As previously mentioned, the ultimate long-term impact of loans accommodated due to COVID-19 on the Company’s delinquent loans is currently uncertain.

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Table 20 — Delinquent Loan Composition* 

September 30, 2021

December 31, 2020

Percent of

Percent of

Total

Total

(in thousands)

    

Balance

Loan Class

Balance

Loan Class

Traditional Banking:

Residential real estate:

Owner occupied

   

$

2,128

0.26

%  

   

$

3,260

0.37

%  

Nonowner occupied

   

 

   

 

Commercial real estate

   

 

5,037

0.36

   

 

5,457

0.40

Construction & land development

   

 

   

 

Commercial & industrial

   

 

66

0.02

   

 

12

0.00

Paycheck Protection Program

   

 

Lease financing receivables

Aircraft

Home equity

259

0.12

702

0.29

Consumer:

Credit cards

45

0.30

73

0.51

Overdrafts

145

19.26

147

25.04

Automobile loans

11

0.06

56

0.18

Other consumer

1

0.02

6

0.07

Total Traditional Banking

7,692

0.22

9,713

0.26

Warehouse lines of credit

Total Core Banking

7,692

0.18

9,713

0.21

Republic Processing Group:

   

 

Tax Refund Solutions:

   

 

Easy Advances

   

 

   

 

Other TRS loans

   

 

   

 

Republic Credit Solutions

   

 

9,701

8.31

   

 

10,234

9.23

Total Republic Processing Group

   

 

9,701

8.31

   

 

10,234

9.23

   

   

Total delinquent loans

   

$

17,393

0.40

%  

   

$

19,947

0.42

%  

*     Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due.

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Table 21 — Rollforward of Delinquent Loans

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Delinquent loans at the beginning of the period

$

18,718

$

14,046

$

19,947

$

20,804

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

 

945

 

6,093

 

1,268

 

7,817

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

 

(3,109)

 

(2,205)

 

(3,179)

 

(8,488)

Principal balance paydowns of loans delinquent at both period ends

(34)

(788)

(81)

(2,977)

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

 

873

 

(93)

 

(562)

 

(103)

Delinquent loans at the end of period

$

17,393

$

17,053

$

17,393

$

17,053

*

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

Table 22 — Detail of Loans Removed from Delinquent Status

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

Loans charged off

$

$

$

(1)

$

(3)

Easy Advances paid off or charged off

Loans transferred to OREO

 

 

 

 

(2,109)

Loans refinanced at other institutions

 

(1,652)

 

(1,189)

 

(1,938)

 

(3,856)

Loans paid current

 

(1,457)

 

(1,016)

 

(1,240)

 

(2,520)

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

$

(3,109)

$

(2,205)

$

(3,179)

$

(8,488)

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 23 — Collateral-Dependent Loans and Troubled Debt Restructurings

(in thousands)

    

September 30, 2021

    

December 31, 2020

$ Change

% Change

 

Cashflow-dependent TDRs

$

6,227

$

10,938

$

(4,711)

(43)

%

Collateral-dependent TDRs

10,224

9,840

384

4

Total TDRs

16,451

20,778

(4,327)

(21)

Collateral-dependent loans (which are not TDRs)

 

14,781

 

20,806

(6,025)

(29)

Total recorded investment in TDRs and collateral-dependent loans

$

31,232

$

41,584

$

(10,352)

(25)

%

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

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Deposits

Table 24 — Deposit Composition

(in thousands)

    

September 30, 2021

    

December 31, 2020

$ Change

% Change

 

Core Bank:

Demand

$

1,342,395

$

1,217,263

$

125,132

10

%

Money market accounts

 

793,236

 

712,824

80,412

11

Savings

 

295,663

 

236,335

59,328

25

Individual retirement accounts (1)

 

46,196

 

47,889

(1,693)

(4)

Time deposits, $250 and over (1)

 

84,340

 

83,448

892

1

Other certificates of deposit (1)

 

163,345

 

199,214

(35,869)

(18)

Reciprocal money market and time deposits (1)

 

101,109

 

314,109

(213,000)

(68)

Brokered deposits (1)

 

30,001

 

25,010

4,991

20

Total Core Bank interest-bearing deposits

2,856,285

2,836,092

20,193

1

Total Core Bank noninterest-bearing deposits

 

1,691,413

 

1,503,662

187,751

12

Total Core Bank deposits

 

4,547,698

 

4,339,754

207,944

5

Republic Processing Group:

Money market accounts

5,114

6,673

(1,559)

(23)

Total RPG interest-bearing deposits

5,114

6,673

(1,559)

(23)

Brokered prepaid card deposits

323,250

257,856

65,394

25

Other noninterest-bearing deposits

38,822

110,021

(71,199)

(65)

Total RPG noninterest-bearing deposits

362,072

367,877

(5,805)

(2)

Total RPG deposits

367,186

374,550

(7,364)

(2)

Deposits of discontinued operations (2)

33,063

18,877

14,186

75

Total deposits

$

4,947,947

$

4,733,181

$

214,766

5

%

(1)Includes time deposit
(2)See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.

Total Company deposits increased $215 million, or 5%, from December 31, 2020 to $4.9 billion as of September 30, 2021.

Total Core Bank deposits increased $208 million, or 5%, with the following primarily driving growth:

Management believes its deposit balances continue to be the beneficiary of Federal government stimulus brought about by the COVID-19 pandemic. During the first nine months of 2021, the Federal government issued two rounds of economic stimulus payments. At this time, management is uncertain how long these stimulus funds may remain at the Bank.

The Core Bank originated $210 million of PPP loans during the first nine months of 2021, with PPP borrowers generally retaining their loan proceeds within a deposit account at the Bank.

Management believes that much of the growth in noninterest-bearing and interest-bearing deposits at the Core Bank has been, and continues to be, 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.

Offsetting the positive growth mentioned above, deposit balances were negatively impacted by a shift of approximately $140 million in balances from interest-bearing reciprocal money market accounts to SSUARs. This shift occurred as the Bank lowered its reciprocal money market account pricing to its clients due to the high cost of the additional fees associated with participation in the money market network, which allows clients to fully insure their deposits through FDIC insurance by spreading their funds across multiple banks.

Total RPG deposits from continuing operations decreased $7 million, or 2%, for the first nine months of 2021, with the following primarily driving growth:

RPG noninterest-bearing deposits growth was primarily driven by the following:

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RPG prepaid card balances within its RPS division increased $65 million, driven by government stimulus funds applied to prepaid card deposit balances. At this time, management is uncertain how long these stimulus funds may remain at the Bank.

RPG other noninterest-bearing deposits decreased $71 million, driven by an outflow of commercial settlement deposits associated with the RCS segment’s line-of-credit products.

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

SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank’s control.

SSUARs increased $50 million during the first nine months of 2021 to $261 million as of September 30, 2021 compared to $211 million as of December 31, 2020. As mentioned above, Bank clients shifted approximately $140 million in balances from interest-bearing reciprocal money market accounts to SSUARs after the Bank lowered its reciprocal money market account pricing due to the high cost to the Bank of participating in the money market network. The increase driven by this shift was partially offset by a $94 million decrease in SSUARs during the first nine months of 2021, driven by the exit of one corporate client following the acquisition of this client by another company. The substantial majority of SSUARs are indexed to immediately repricing indices such as the FFTR.

Federal Home Loan Bank Advances

FHLB advances declined by $210 million from December 31, 2020 to September 30, 2021, as the Bank continued to maintain sufficient deposit balances to meet its current liquidity needs. The Bank held $25 million in overnight advances at a rate of 0.14% as of September 30, 2021, compared to $225 million in overnight advances at a rate of 0.16% as of December 31, 2020. Given the overall amount of liquidity on the Company’s balance sheet as of September 30, 2021, management does not anticipate that FHLB term or overnight advances will likely be utilized to any material extent over the near term.

Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.

Interest Rate Swaps

The Bank 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 Company had a loan to deposit ratio (excluding brokered deposits) of 95% as of September 30, 2021 and 108% as of December 31, 2020. As of September 30, 2021 and December 31, 2020, the Company had cash and cash equivalents on-hand of $1.0 billion and $486 million. The Bank also had available borrowing capacity of $898 million and $683 million from the FHLB as of September 30, 2021 and December 31, 2020. In addition, the Bank’s liquidity resources included unencumbered debt securities of $187 million and $274 million as of September 30, 2021 and December 31, 2020 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. As of September 30, 2021 and December 31, 2020, these pledged investment securities had a fair value of $354

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million and $304 million. Republic’s banking centers and its website, www.republicbank.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.

As of September 30, 2021, the Bank had approximately $1.6 billion in deposits from 245 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $609 million, or 12%, of the Company’s total deposit balances as of September 30, 2021. 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.

Capital

Total stockholders’ equity increased from $823 million as of December 31, 2020 to $839 million as of September 30, 2021. The increase in stockholders’ equity was primarily attributable to net income earned during 2021 reduced primarily by cash dividends declared and Class A common stock repurchased.

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. As of September 30, 2021, RB&T could, without prior approval, declare dividends of approximately $176 million. Any payment of dividends in the future will depend, in large part, on the Company’s earnings, capital requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors.

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

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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 13.33% as of September 30, 2021 compared to 13.35% as of December 31, 2020. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

In 2005, Republic Bancorp Capital Trust, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. On September 30, 2021, as permitted under the terms of RBCT’s governing documents, Republic redeemed these securities at the par amount of approximately $40 million, without penalty. Republic’s capital ratios remained well above “well capitalized” levels following the redemption of the TPS, which were treated as part of Republic’s Tier I Capital while outstanding.

Table 25 — Capital Ratios (1)

As of September 30, 2021

As of December 31, 2020

 

(dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Total capital to risk-weighted assets

Republic Bancorp, Inc.

$

877,936

 

18.25

%  

$

896,053

 

18.52

%  

Republic Bank & Trust Company

 

849,951

 

17.67

 

796,114

 

16.46

Common equity tier 1 capital to risk-weighted assets

Republic Bancorp, Inc.

$

824,203

 

17.13

%  

$

803,682

 

16.61

%  

Republic Bank & Trust Company

 

796,218

 

16.56

 

743,743

 

15.38

Tier 1 (core) capital to risk-weighted assets

Republic Bancorp, Inc.

$

824,203

 

17.13

%  

$

843,682

 

17.43

%  

Republic Bank & Trust Company

 

796,218

 

16.56

 

743,743

 

15.38

Tier 1 leverage capital to average assets

Republic Bancorp, Inc.

$

824,203

 

13.13

%  

$

843,682

 

13.70

%  

Republic Bank & Trust Company

 

796,218

 

12.72

 

743,743

 

12.11

(1)The Company and the Bank elected in 2020 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 14 basis points lower than those presented in the table above as of September 30, 2021.

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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 September 30, 2021, 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 October 1, 2021 and ending September 30, 2022 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.

Table 26 — Bank Interest Rate Sensitivity (Continuing Operations)

Change in Rates

-100

    

+100

    

+200

    

+300

    

+400

    

Basis Points

Basis Points

Basis Points

Basis Points

Basis Points

% Change from base net interest income as of September 30, 2021

 

%  

 

(1.8)

%  

 

(1.7)

%  

 

2.8

%

 

7.3

%

% Change from base net interest income as of December 31, 2020

 

0.4

%  

 

(4.5)

%  

 

(7.0)

%  

 

(5.7)

%

 

(4.2)

%

The Bank’s dynamic simulation model run for September 2021 projected no change in the Bank’s net interest income plus secondary market loan fees for the “Down-100” scenario, a decrease in the “Up-100” and “Up-200” scenarios, and an increase in the “Up-300” and “Up-400” rate scenarios. The projections as of December 2020 reflected a modest increase in the Down-100 scenario and decreases in all Up-rate scenarios.

As compared to December 2020, the deterioration in the Down-100 rate scenario for September 2021 was generally because the Bank had less ability in September 2021 than December 2020 to reprice its liabilities downward.  The improvement in the Up-rate scenarios was primarily due to the following:

Growth in interest-earning cash balances from December 2020 to September 2021; and
A smaller projected falloff in secondary market fees for the September 2021 simulation than previously projected for the December 2020 simulation.

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LIBOR Exposure

In July 2017, the Financial Conduct Authority (the “FCA”), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, in November 2020, the FCA announced that many tenors of LIBOR would continue to be published through June 2023. Bank regulators have instructed banks to discontinue new originations referencing LIBOR as soon as possible, but no later than December 2021. To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability of LIBOR.

Management focuses on operational readiness, as well as instituting processes and systems to validate that contract risk is clearly identified and understood. New originations and any modifications or renewals of LIBOR-based contracts contain fallback language to assist in an orderly transition to an alternative reference rate. For Bank contracts that have a duration beyond December 31, 2021, and that reference LIBOR, all fallback provisions and variations are currently being identified and sorted into classifications based upon those provisions. Upon classification, the contracts are monitored and possibly remediated if fallback provisions are not deemed sufficiently robust. The Bank realizes that remediating certain contracts indexed to LIBOR may require consent from the counterparties, which could be difficult and costly to obtain in certain limited circumstances.

As of September 30, 2021, the Company had approximately $1.3 billion of assets that reference LIBOR, with short-term Warehouse balances representing $751 million of these assets and commercial and mortgage loans primarily making up the remainder. These amounts exclude derivative assets and liabilities on the Company’s consolidated balance sheet. As of September 30, 2021, the notional amount of the Company’s LIBOR-referenced interest rate derivative contracts was more than $250 million. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR.

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 September 30, 2021 Compared to Three Months Ended September 30, 2020) and “RESULTS OF OPERATIONS (Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020.”

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4.Controls and Procedures.

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

PART II — OTHER INFORMATION

Item 1.Legal Proceedings.

See Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements” for discussion regarding the Bank’s lawsuit against Green Dot.

In the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. There is no proceeding, pending, or threatened litigation in which Republic and the Bank are a defendant, 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

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, 2020. You should carefully consider the risk factors discussed in Republic’s 2020 Form 10-K, which could materially affect its business, financial condition or future results.

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

Details of Republic’s Class A Common Stock purchases during the third quarter of 2021 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

  

July 1 - July 31

 

198,409

 

$

46.89

 

198,409

439,871

August 1 - August 31

 

82,529

 

49.75

 

82,529

357,342

September 1 - September 30

 

106,094

 

49.29

 

106,094

251,248

Total

 

387,032

 

$

48.16

 

387,032

 

251,248

The Company repurchased 387,032 shares during the third quarter of 2021. On January 27, 2021, the Board of Directors of Republic Bancorp, Inc. increased the Company’s existing authorization to purchase shares of its Class A Common Stock to 1,000,000 shares, an increase of 941,577 shares from the buyback program that was previously in place. 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 September 30, 2021, the Company had 251,248 remaining shares that could be repurchased under its current share repurchase program.

During the third quarter of 2021, there were approximately 1,000 shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock by stockholders of Republic in accordance with the share-for-share conversion 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

Seventh Amendment to Office Lease dated as of September 1, 2021 to the Office Lease dated August 1, 1999, as amended, by and between Jaytee-Springhurst, LLC and Republic Bank & Trust Company

10.2

Termination of Employment Agreement dated September 15, 2021 between Republic Bank & Trust Company and Logan M. Pichel (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed September 15, 2021 (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

The following financial statements from the Company’s quarterly report on Form 10-Q were formatted in iXBRL(Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020, (iii) Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 and (v) Notes to Consolidated Financial Statements

104

Cover Page Interactive Data File formatted in iXBRL and contained in Exhibit 101.

*

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

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SIGNATURES

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

REPUBLIC BANCORP, INC.

(Registrant)

Principal Executive Officer:

Date: November 5, 2021

     

     

/s/ Steven E. Trager

By: Steven E. Trager

Chairman and Chief Executive Officer

Principal Financial Officer:

Date: November 5, 2021

/s/ Kevin Sipes

By: Kevin Sipes

Executive Vice President, Chief Financial

Officer and Chief Accounting Officer

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