10-Q 1 rbca-20180331x10q.htm 10-Q rbcaa_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended March 31, 2018

 

or

 

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

 

Commission File Number: 0-24649

 

Picture 1

 

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Kentucky

 

61-0862051

(State of other jurisdiction of incorporation or organization)

 

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

 

 

601 West Market Street, Louisville, Kentucky

 

40202

(Address of principal executive offices)

 

(Zip Code)

 

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

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒ Yes  ☐ No

 

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

 

 

 

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☐ 

Emerging growth company ☐

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes  ☒ No

 

The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of April 30, 2018, was 18,658,706 and 2,229,091.

 

 

 


 

2


 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 (in thousands)

 

 

 

 

 

 

 

 

 

March 31, 

    

December 31, 

 

 

2018

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

362,122

 

$

299,351

 

Available-for-sale debt securities

 

417,983

 

 

524,303

 

Held-to-maturity debt securities (fair value of $63,515 in 2018 and $65,133 in 2017)

 

62,844

 

 

64,227

 

Equity securities with readily determinable fair value

 

2,746

 

 

2,928

 

Mortgage loans held for sale, at fair value

 

4,496

 

 

5,761

 

Consumer loans held for sale, at fair value

 

2,419

 

 

2,677

 

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

 

7,380

 

 

8,551

 

Loans

 

4,052,500

 

 

4,014,034

 

Allowance for loan and lease losses

 

(52,341)

 

 

(42,769)

 

Loans, net

 

4,000,159

 

 

3,971,265

 

Federal Home Loan Bank stock, at cost

 

32,067

 

 

32,067

 

Premises and equipment, net

 

43,896

 

 

42,588

 

Premises, held for sale

 

2,896

 

 

3,017

 

Goodwill

 

16,300

 

 

16,300

 

Other real estate owned

 

160

 

 

115

 

Bank owned life insurance

 

63,727

 

 

63,356

 

Other assets and accrued interest receivable

 

59,139

 

 

48,856

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

5,078,334

 

$

5,085,362

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

$

1,241,127

 

$

1,022,042

 

Interest-bearing

 

2,476,496

 

 

2,411,116

 

Total deposits

 

3,717,623

 

 

3,433,158

 

 

 

 

 

 

 

 

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

 

175,682

 

 

204,021

 

Federal Home Loan Bank advances

 

440,000

 

 

737,500

 

Subordinated note

 

41,240

 

 

41,240

 

Other liabilities and accrued interest payable

 

50,535

 

 

37,019

 

 

 

 

 

 

 

 

Total liabilities

 

4,425,080

 

 

4,452,938

 

 

 

 

 

 

 

 

Commitments and contingent liabilities (Footnote 8)

 

 —

 

 

 —

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, no par value

 

 —

 

 

 —

 

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

 

4,902

 

 

4,902

 

Additional paid in capital

 

139,646

 

 

139,406

 

Retained earnings

 

510,123

 

 

487,700

 

Accumulated other comprehensive (loss) income

 

(1,417)

 

 

416

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

653,254

 

 

632,424

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

5,078,334

 

$

5,085,362

 

 

See accompanying footnotes to consolidated financial statements.

 

3


 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)  

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2018

 

2017

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

69,627

 

$

58,004

 

Taxable investment securities

 

 

2,634

 

 

2,155

 

Federal Home Loan Bank stock and other

 

 

1,572

 

 

724

 

Total interest income

 

 

73,833

 

 

60,883

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,360

 

 

1,879

 

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

 

 

213

 

 

25

 

Federal Home Loan Bank advances

 

 

2,274

 

 

2,292

 

Subordinated note

 

 

321

 

 

249

 

Total interest expense

 

 

6,168

 

 

4,445

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

67,665

 

 

56,438

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

17,255

 

 

12,351

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

 

 

50,410

 

 

44,087

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

3,555

 

 

3,247

 

Net refund transfer fees

 

 

16,352

 

 

15,382

 

Mortgage banking income

 

 

1,020

 

 

1,160

 

Interchange fee income

 

 

2,667

 

 

2,326

 

Program fees

 

 

1,696

 

 

1,091

 

Increase in cash surrender value of bank owned life insurance

 

 

371

 

 

391

 

Net gains on other real estate owned

 

 

132

 

 

142

 

Other

 

 

1,752

 

 

1,184

 

Total noninterest income

 

 

27,545

 

 

24,923

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

23,834

 

 

21,211

 

Occupancy and equipment, net

 

 

6,221

 

 

5,967

 

Communication and transportation

 

 

1,382

 

 

1,272

 

Marketing and development

 

 

916

 

 

1,004

 

FDIC insurance expense

 

 

525

 

 

450

 

Bank franchise tax expense

 

 

2,518

 

 

2,435

 

Data processing

 

 

2,386

 

 

1,652

 

Interchange related expense

 

 

1,007

 

 

1,058

 

Supplies

 

 

381

 

 

527

 

Other real estate owned expense

 

 

45

 

 

97

 

Legal and professional fees

 

 

1,043

 

 

752

 

Other

 

 

2,787

 

 

2,514

 

Total noninterest expense

 

 

43,045

 

 

38,939

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

 

34,910

 

 

30,071

 

INCOME TAX EXPENSE

 

 

7,441

 

 

10,054

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

27,469

 

$

20,017

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.32

 

$

0.97

 

Class B Common Stock

 

 

1.21

 

 

0.88

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

1.32

 

$

0.96

 

Class B Common Stock

 

 

1.20

 

 

0.88

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE:

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.242

 

$

0.209

 

Class B Common Stock

 

 

0.220

 

 

0.190

 

 

See accompanying footnotes to consolidated financial statements.

 

4


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2018

    

2017

 

 

 

 

 

 

 

 

Net income

$

27,469

 

$

20,017

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

199

 

 

28

 

Reclassification amount for derivative losses realized in income

 

26

 

 

66

 

Change in unrealized gain (loss) on available-for-sale debt securities (2018), debt and equity securities (2017)

 

(2,117)

 

 

706

 

Adjustment for adoption of ASU 2016-01

 

(428)

 

 

 —

 

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

 

(2)

 

 

53

 

Total other comprehensive (loss) income before income tax

 

(2,322)

 

 

853

 

Tax effect

 

489

 

 

(299)

 

Total other comprehensive (loss) income, net of tax

 

(1,833)

 

 

554

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

$

25,636

 

$

20,571

 

 

See accompanying footnotes to consolidated financial statements.

 

5


 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

 

 

 

    

Class A

    

Class B

    

    

 

    

Additional

    

    

 

    

Other

    

Total

 

 

Shares

 

Shares

 

 

 

 

Paid In

 

Retained

 

Comprehensive

 

Stockholders’

(in thousands)

 

Outstanding

 

Outstanding

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

18,607

 

2,243

 

$

4,902

 

$

139,406

 

$

487,700

 

$

416

 

$

632,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for adoption of ASU 2016-01

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(35)

 

 

(338)

 

 

(373)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018, as adjusted

 

18,607

 

2,243

 

$

4,902

 

$

139,406

 

$

487,665

 

$

78

 

$

632,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

27,469

 

 

 —

 

 

27,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in accumulated other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,495)

 

 

(1,495)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(4,517)

 

 

 —

 

 

(4,517)

Class B Shares

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(494)

 

 

 —

 

 

(494)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Class A Common Stock

 

 —

 

 —

 

 

 —

 

 

33

 

 

 —

 

 

 —

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred director compensation - Class A Common Stock

 

 2

 

 —

 

 

 —

 

 

55

 

 

 —

 

 

 —

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation - performance stock units

 

 —

 

 —

 

 

 —

 

 

26

 

 

 —

 

 

 —

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation - restricted stock

 

36

 

 —

 

 

 —

 

 

64

 

 

 —

 

 

 —

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation - stock options

 

 —

 

 —

 

 

 —

 

 

62

 

 

 —

 

 

 —

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

18,645

 

2,243

 

$

4,902

 

$

139,646

 

$

510,123

 

$

(1,417)

 

$

653,254

 

See accompanying footnotes to consolidated financial statements.

 

6


 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2018

    

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

27,469

 

$

20,017

 

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

 

 

 

 

 

 

Amortization (accretion) on investment securities, net

 

(106)

 

 

138

 

Accretion on loans and amortization of core deposit intangible, net

 

(702)

 

 

(583)

 

Unrealized losses on equity securities with readily determinable fair value

 

182

 

 

 —

 

Depreciation of premises and equipment

 

2,447

 

 

2,042

 

Amortization of mortgage servicing rights

 

362

 

 

353

 

Provision for loan and lease losses

 

17,255

 

 

12,351

 

Net gain on sale of mortgage loans held for sale

 

(777)

 

 

(977)

 

Origination of mortgage loans held for sale

 

(29,410)

 

 

(33,245)

 

Proceeds from sale of mortgage loans held for sale

 

31,452

 

 

40,691

 

Net gain on sale of consumer loans held for sale

 

(1,637)

 

 

(1,108)

 

Origination of consumer loans held for sale

 

(164,496)

 

 

(126,924)

 

Proceeds from sale of consumer loans held for sale

 

167,562

 

 

126,441

 

Net gain realized on sale of other real estate owned

 

(132)

 

 

(212)

 

Writedowns of other real estate owned

 

 —

 

 

70

 

Impairment of premises held for sale

 

104

 

 

58

 

Deferred director compensation expense - Class A Common Stock

 

55

 

 

55

 

Stock based compensation expense

 

152

 

 

410

 

Increase in cash surrender value of bank owned life insurance

 

(371)

 

 

(391)

 

Net change in other assets and liabilities:

 

 

 

 

 

 

Accrued interest receivable

 

310

 

 

209

 

Accrued interest payable

 

(59)

 

 

(90)

 

Other assets

 

(97)

 

 

(2,096)

 

Other liabilities

 

2,439

 

 

8,700

 

Net cash provided by operating activities

 

52,002

 

 

45,909

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchases of  available-for-sale debt securities

 

(69,940)

 

 

(54,390)

 

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

 

174,255

 

 

10,017

 

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

 

1,375

 

 

1,002

 

Net change in outstanding warehouse lines of credit

 

(8,387)

 

 

90,274

 

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

 

 —

 

 

(1,224)

 

Net change in other loans

 

(37,155)

 

 

8,800

 

Proceeds from sales of other real estate owned

 

266

 

 

501

 

Net purchases of premises and equipment

 

(3,738)

 

 

(3,193)

 

Net cash provided by investing activities

 

56,676

 

 

51,787

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in deposits

 

284,465

 

 

188,092

 

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

 

(28,339)

 

 

(29,098)

 

Payments of Federal Home Loan Bank advances

 

(347,500)

 

 

(435,000)

 

Proceeds from Federal Home Loan Bank advances

 

50,000

 

 

100,000

 

Repurchase of Class A Common Stock

 

 —

 

 

(544)

 

Net proceeds from Class A Common Stock options exercised

 

 —

 

 

33

 

Cash dividends paid

 

(4,533)

 

 

(4,301)

 

Net cash used in financing activities

 

(45,907)

 

 

(180,818)

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

62,771

 

 

(83,122)

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

299,351

 

 

289,309

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

362,122

 

$

206,187

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

$

6,227

 

$

4,535

 

Income taxes

 

365

 

 

331

 

 

 

 

 

 

 

 

SUPPLEMENTAL NONCASH DISCLOSURES:

 

 

 

 

 

 

Transfers from loans to real estate acquired in settlement of loans

$

179

 

$

330

 

 

See accompanying footnotes to consolidated financial statements.

 

7


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – MARCH 31, 2018 and 2017 AND DECEMBER 31, 2017 (UNAUDITED)

 

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation — The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company (“RB&T” or the “Bank”) and Republic Insurance Services, Inc. (the “Captive”).  All significant intercompany balances and transactions are eliminated in consolidation. All companies are collectively referred to as (“Republic” or the “Company”).

 

The Bank is a Kentucky-based, state chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the United States.

 

The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company.  The Captive provides property and casualty insurance coverage to the Company and the Bank as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.  

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.

 

As of March 31, 2018,  the Company was divided into five reportable segments: Traditional Banking, Warehouse Lending (“Warehouse”), Mortgage Banking, Tax Refund Solutions (“TRS”) and Republic Credit Solutions (“RCS”). Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute Republic Processing Group (“RPG”) operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.

 

Prior to the third quarter of 2017, management reported RPG as a segment consisting of its largest division, TRS, along with its relatively smaller divisions, Republic Payment Solutions (“RPS”) and RCS. During the third quarter of 2017, due to RCS’s growth in revenue relative to the total Company’s revenue, management identified TRS and RCS as separate reportable segments under the newly classified RPG operations. Also, as part of the updated segmentation, management is reporting the RPS division, which remained below thresholds to be classified a separate reportable segment, within the newly classified TRS segment. The reportable segments within RPG operations and divisions within those segments operate through the Bank. All prior periods have been reclassified to conform to the current presentation.

 

 

8


 

Core Bank

 

Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 2018, Republic had 45 full-service banking centers and one loan production office (“LPO”) with locations as follows:

 

Kentucky — 33

Metropolitan Louisville — 18

Central Kentucky — 9

Elizabethtown — 1

Frankfort — 1

Georgetown — 1

Lexington — 5

Shelbyville — 1

Western Kentucky — 2

Owensboro — 2

Northern Kentucky — 3

Covington — 1

Crestview Hills — 1

Florence — 1

Independence — 1 (closed April 3, 2018)

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 6

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3*


*Includes one LPO

 

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

 

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

 

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

 

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

 

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

 

9


 

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

 

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 Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and the Federal National Mortgage Association (“FNMA” or “Fannie Mae”). The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. A fee is received by the Bank for performing these standard servicing functions.

 

Republic Processing Group

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

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

The Easy Advance (“EA”) tax credit product is a loan that allows a taxpayer to receive an advance of a portion of their refund, with the taxpayer’s Tax Provider paying all fees to RB&T for the advance.  First offered by TRS in 2016, the EA has the following features: 

·

Offered only during the first two months of each year;

·

No EA fee is charged to the taxpayer customer;

·

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

·

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

·

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

·

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

·

If an insufficient refund to repay the EA occurs:

o

there is no recourse to the taxpayer customer, 

o

no negative credit reporting on the taxpayer customer, and

o

no collection efforts against the taxpayer customer.

Fees paid by the Tax Providers to the Company for the EA product are reported as interest income on loans.  EAs are generally repaid within three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority.  EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with provisions for all probable EA losses made in the first quarter of each year. Unpaid EAs are charged-off within 111 days after the taxpayer customer’s tax return is submitted to the applicable taxing authority, with the majority of charge-offs typically recorded during the second quarter of the year.

 

10


 

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 funding patterns. Because much of the loan volume occurs each year before that year’s tax refund funding patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund funding patterns change materially between years.     

 

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

 

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 with maturities of 30-days-or-more, and are dependent on various factors including the consumer’s ability to repay.  RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. Additional information regarding consumer loan products offered through RCS follows:

 

·

Line of credit – The Bank originates a line-of-credit product to generally subprime borrowers across the United States through one third-party service provider. RCS sells 90% of the balances generated within two business days of loan origination to its third-party service provider and retains the remaining 10% interest. The line-of-credit product represents the substantial majority of RCS activity.  Loan balances held for sale are carried at the lower of cost or fair value.

 

·

Credit card – The Bank originates a credit card product to generally subprime borrowers across the United States through one third-party service provider. RCS sells 90% of the balances generated within two business days of each transaction occurrence to its third-party service provider and retains the remaining 10% interest.  Loan balances held for sale are carried at the lower of cost or fair value.

 

·

Healthcare receivables – The Bank originates a healthcare-receivables product across the United States through two different third-party service providers. For one third-party service provider the Bank retains 100% of the receivables originated.  For the other third-party service provider, the Bank retains 100% of the receivables originated in some instances and sells 100% of the receivables in other instances within one month of origination.  Loan balances held for sale are carried at the lower of cost or fair value.

 

·

Installment loan – The Bank originates an installment-loan product across the United States through a third-party service provider and sells 100% of the balances generated approximately 21 days after origination back to this third-party.  Unlike RCS’s other products, the Company carries these installment loans held for sale at fair value, with this portfolio marked to market on a monthly basis.

 

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.”

 

 

11


 

Accounting Standards Updates (“ASUs”)

 

The following ASUs were issued prior to March 31, 2018 and are considered relevant to the Company’s financial statements. Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to the Company has been disclosed in prior Company financial statements, it will not be re-disclosed below.

 

 

 

 

 

 

 

 

 

 

 

 

ASU. No.

 

Topic

 

Nature of Update

 

Date Adoption Required

 

Method of Adoption

 

Expected Financial Statement Impact

2016-02

    

Leases (Topic 842)

    

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

    

January 1, 2019

    

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

    

During 2018, the Company completed another iteration of a pro forma impact analysis on the Company's financial statements of implementing this standard. Based on this analysis, the Company believes approximately $30 million of leases will be placed on its balance sheet, with this amount increasing both total assets and total liabilities.  Additionally, the Company's analysis reflected that this ASU would have minimal impact on the Company's performance metrics, including regulatory capital ratios and return on average assets. From a client perspective, the Company is currently reviewing the impact of this ASU on any debt covenants.

 

 

 

 

 

 

 

 

 

 

 

2016-13

 

Financial Instruments – Credit Losses (Topic 326)

 

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

 

January 1, 2020

 

Modified-retrospective approach.

 

As a result of this ASU, the Company expects a substantial, yet fully undetermined, increase in its allowance for credit losses. A committee formed by the Company to oversee its transition to a current expected credit losses (“CECL”) methodology has analyzed the Company’s loan-level data and preliminarily concluded that no additional loan level segmentation beyond its current methodology segmentation would be warranted under CECL.  The Company is also currently performing iterations of its allowance calculation under a “beta” CECL model provided by the same third-party software solution currently-employed to calculate the Company's allowance for loan and lease losses. 

 

 

 

 

 

 

 

 

 

 

 

2018-02

    

Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI")

    

This ASU provides the Company with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded.

    

January 1, 2019

    

Period of adoption or retrospectively.

    

Immaterial.

 

12


 

The following ASUs were adopted by the Company during the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

ASU. No.

 

Topic

 

Nature of Update

 

Date Adopted

 

Method of Adoption

 

Financial Statement Impact

2014-09

    

Revenue from Contracts with Customers (Topic 606)

    

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

    

January 1, 2018

    

Retrospective transition.

    

Because most financial instruments are not subject to this ASU, a substantial portion of the Company's revenue was not impacted by this standard.  Furthermore, this new standard did not have a material impact on the timing of revenue recognition for any of the Company's revenue during the first quarter of 2018 nor is it expected to going forward.  Additionally, the Company took the following actions in association with the adoption of this ASU:  1) amended its accounting policies and procedures to assure proper revenue recognition in conformity with this ASU; and 2) updated its revenue-recognition financial statement disclosures (see footnote 16 in this section of the filing). 

 

 

 

 

 

 

 

 

 

 

 

2016-01

    

Financial Instruments – Overall (Topic 825-10)

    

Among other things: Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.

    

January 1, 2018

    

Modified-retrospective approach.

    

The Company has updated its policies, procedures, and financial statement presentation and disclosures for this ASU.  As provided by this ASU, the Company now reports its financial instruments at exit price (see footnote 9 in this section of the filing) and recognizes changes in the fair value of applicable equity investments in net income (see footnote 2 in this section of the filing). 

 

 

 

 

 

 

 

 

 

 

 

2016-15

 

Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

 

This ASU provides cash flow statement classification guidance on eight reportable topics.

 

January 1, 2018

 

Retrospective transition.

 

Immaterial.

 

 

 

 

 

 

 

 

 

 

 

2016-18

 

Statement of Cash Flows (Topic 230)

 

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

 

January 1, 2018

 

Retrospective transition.

 

Immaterial.

 

 

 

 

 

 

 

 

 

 

 

2017-09

 

Compensation - Stock Compensation (Topic 718)

 

The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require the Company to apply modification accounting under Topic 718.

 

January 1, 2018

 

Prospectively.

 

Immaterial.

 

 

 

 

 

 

 

 

 

 

 

2018-05

    

Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB 118")

    

This ASU updates the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") for guidance issued by the SEC in SAB 118.  Among other things, SAB 118 allows companies a one-year measurement period to complete their accounting for the impact of the 2017 Tax Cuts and Jobs Act.

    

Upon addition to the ASC

    

Not Applicable.

    

For the Company's financial statement disclosures in accordance with SAB 118, see footnote 19 of the Company's Annual Report on Form 10-K for the year ended December 31, 2017 and footnote 14 in this section of the filing.

 

 

 

 

 

 

 

13


 

2. INVESTMENT SECURITIES

 

Available-for-Sale Debt Securities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

March 31, 2018 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value