10-Q 1 rbca-20190930x10q.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 September 30, 2019

 

or

 

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

 

Commission File Number: 0-24649

 

Picture 1

 

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Kentucky

 

61-0862051

(State of other jurisdiction of incorporation or organization)

 

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

 

 

601 West Market Street, Louisville, Kentucky

 

40202

(Address of principal executive offices)

 

(Zip Code)

 

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

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

 

 

 

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A Common 

RBCAA

The Nasdaq Stock Market

 

 

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

 

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

 

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

 

 

 

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐

 

Smaller reporting company ☐ 

Emerging growth company ☐

 

 

 

 

 

 

 

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

 

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

 

The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of October 31, 2019,  was 18,742,999 and 2,207,626.

 

 

 

2

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

The acronyms and 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.

 

 

 

 

 

 

 

 

 

 

 

 

Acronym or Term

   

Definition

   

Acronym or Term

   

Definition

   

Acronym or Term

   

Definition

 

 

 

 

 

 

 

 

 

 

 

ACH

 

Automated Clearing House

 

FDIA

 

Federal Deposit Insurance Act

 

PCI-1

 

PCI - Group 1

AFS

 

Available for Sale

 

FDIC

 

Federal Deposit Insurance Corporation

 

PCI-Sub

 

PCI - Substandard

Allowance

 

Allowance for Loan and Lease Losses

 

FFTR

 

Federal Funds Target Rate

 

Prime

 

The Wall Street Journal Prime Interest Rate

AOCI

 

Accumulated Other Comprehensive Income

 

FHLB

 

Federal Home Loan Bank

 

Provision

 

Provision for Loan and Lease Losses

APR

 

Annual Percentage Rate

 

FHLMC

 

Federal Home Loan Mortgage Corporation

 

PSU

 

Performance Stock Unit

ASC

 

Accounting Standards Codification

 

FICO

 

Fair Isaac Corporation

 

R&D

 

Research and Development

ASU

 

Accounting Standards Update

 

FNMA

 

Federal National Mortgage Association

 

RB&T / the Bank

 

Republic Bank & Trust Company

Basic EPS

 

Basic earnings per Class A Common Share

 

FRB

 

Federal Reserve Bank

 

RBCT

 

Republic Bancorp Capital Trust

BOLI

 

Bank Owned Life Insurance

 

FTE

 

Full Time Equivalent

 

RCS

 

Republic Credit Solutions

BPO

 

Brokered Price Opinion

 

FTP

 

Funds Transfer Pricing

 

Republic / the Company

 

Republic Bancorp, Inc.

C&D

 

Construction and Development

 

GAAP

 

Generally Accepted Accounting Principles in the United States

 

ROA

 

Return on Average Assets

C&I

 

Commercial and Industrial

 

HELOC

 

Home Equity Line of Credit

 

ROE

 

Return on Average Equity

CECL

 

Current Expected Credit Loss

 

HTM

 

Held to Maturity

 

RPG

 

Republic Processing Group

CMO

 

Collateralized Mortgage Obligation

 

IRS

 

Internal Revenue Service

 

RPS

 

Republic Payment Solutions

Core Bank

 

The Traditional Banking, Warehouse Lending, and Mortgage Banking reportable segments

 

LIBOR

 

London Interbank Offered Rate

 

RT

 

Refund Transfer

CRA

 

Community Reinvestment Act

 

Limestone

 

Limestone Bank

 

SEC

 

Securities and Exchange Commission

CRE

 

Commercial Real Estate

 

LPO

 

Loan Production Office

 

SSUAR

 

Securities Sold Under Agreements to Repurchase

Diluted EPS

 

Diluted earnings per Class A Common Share

 

LTV

 

Loan to Value

 

SVP

 

Senior Vice President

DTA

 

Deferred Tax Assets

 

MBS

 

Mortgage Backed Securities

 

TCJA

 

2017 Tax Cuts and Jobs Act

DTL

 

Deferred Tax Liabilities

 

MSRs

 

Mortgage Servicing Rights

 

TDR

 

Troubled Debt Restructuring

EA

 

Easy Advance

 

NA 

 

Not Applicable

 

The Captive

 

Republic Insurance Services, Inc.

EBITDA

 

Earnings Before Interest, Taxes, Depreciation and Amortization

 

NM

 

Not Meaningful

 

TPS

 

Trust Preferred Securities

EFTA

 

Electronic Fund Transfers Act

 

OCI

 

Other Comprehensive Income

 

TRS

 

Tax Refund Solutions

ESPP

 

Employee Stock Purchase Plan

 

OREO

 

Other Real Estate Owned

 

TRUP

 

TPS Investment

EVP

 

Executive Vice President

 

OTTI

 

Other than Temporary Impairment

 

Warehouse

 

Warehouse Lending

FASB

 

Financial Accounting Standards Board

 

PCI

 

Purchased Credit Impaired

 

 

 

 

3

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

397,072

 

$

351,474

 

Available-for-sale debt securities

 

572,015

 

 

475,738

 

Held-to-maturity debt securities (fair value of $63,872 in 2019 and $64,858 in 2018)

 

63,315

 

 

65,227

 

Equity securities with readily determinable fair value

 

3,367

 

 

2,806

 

Mortgage loans held for sale, at fair value

 

32,739

 

 

8,971

 

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

 

18,504

 

 

12,838

 

Loans held for sale in connection with sale of banking centers, at the lower of cost or fair value

 

130,770

 

 

 —

 

Loans (loans carried at fair value of $1,187 in 2019 and $1,922 in  2018)

 

4,664,054

 

 

4,148,227

 

Allowance for loan and lease losses

 

(46,932)

 

 

(44,675)

 

Loans, net

 

4,617,122

 

 

4,103,552

 

Federal Home Loan Bank stock, at cost

 

32,242

 

 

32,067

 

Premises and equipment, net

 

45,264

 

 

43,126

 

Premises, held for sale

 

1,471

 

 

1,694

 

Right-of-use assets

 

36,051

 

 

 —

 

Goodwill

 

16,300

 

 

16,300

 

Other real estate owned

 

119

 

 

160

 

Bank owned life insurance

 

66,037

 

 

64,883

 

Other assets and accrued interest receivable

 

71,259

 

 

61,568

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

6,103,647

 

$

5,240,404

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

$

1,031,553

 

$

1,003,969

 

Interest-bearing

 

2,703,199

 

 

2,452,176

 

Deposits held for assumption in connection with sale of banking centers

 

142,384

 

 

 —

 

Total deposits

 

3,877,136

 

 

3,456,145

 

 

 

 

 

 

 

 

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

 

167,949

 

 

182,990

 

Operating lease liabilities

 

37,391

 

 

 —

 

Federal Home Loan Bank advances

 

1,170,000

 

 

810,000

 

Subordinated note

 

41,240

 

 

41,240

 

Other liabilities and accrued interest payable

 

65,484

 

 

60,095

 

 

 

 

 

 

 

 

Total liabilities

 

5,359,200

 

 

4,550,470

 

 

 

 

 

 

 

 

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

 

4,908

 

 

4,900

 

Additional paid in capital

 

141,904

 

 

141,018

 

Retained earnings

 

594,479

 

 

545,013

 

Accumulated other comprehensive income (loss)

 

3,156

 

 

(997)

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

744,447

 

 

689,934

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

6,103,647

 

$

5,240,404

 

 

See accompanying footnotes to consolidated financial statements.

 

4

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

2019

 

2018

 

2019

 

2018

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

$

62,896

 

$

56,296

 

$

199,935

 

$

179,867

 

Taxable investment securities

 

3,221

 

 

2,964

 

 

10,096

 

 

8,306

 

Federal Home Loan Bank stock and other

 

1,942

 

 

1,830

 

 

6,325

 

 

5,106

 

Total interest income

 

68,059

 

 

61,090

 

 

216,356

 

 

193,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

8,042

 

 

4,562

 

 

21,693

 

 

11,856

 

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

 

298

 

 

317

 

 

1,049

 

 

752

 

Federal Home Loan Bank advances

 

3,839

 

 

2,782

 

 

10,631

 

 

7,779

 

Subordinated note

 

394

 

 

396

 

 

1,252

 

 

1,110

 

Total interest expense

 

12,573

 

 

8,057

 

 

34,625

 

 

21,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

55,486

 

 

53,033

 

 

181,731

 

 

171,782

 

Provision for loan and lease losses

 

3,153

 

 

4,077

 

 

24,844

 

 

26,264

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

 

52,333

 

 

48,956

 

 

156,887

 

 

145,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

3,749

 

 

3,579

 

 

10,650

 

 

10,708

 

Net refund transfer fees

 

317

 

 

149

 

 

21,046

 

 

19,974

 

Mortgage banking income

 

3,064

 

 

1,360

 

 

7,019

 

 

3,696

 

Interchange fee income

 

3,031

 

 

2,757

 

 

9,045

 

 

8,315

 

Program fees

 

1,317

 

 

1,686

 

 

3,428

 

 

4,705

 

Increase in cash surrender value of bank owned life insurance

 

394

 

 

385

 

 

1,154

 

 

1,135

 

Net gains on other real estate owned

 

267

 

 

248

 

 

487

 

 

700

 

Other

 

672

 

 

1,301

 

 

2,524

 

 

4,073

 

Total noninterest income

 

12,811

 

 

11,465

 

 

55,353

 

 

53,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

24,822

 

 

22,846

 

 

75,184

 

 

69,446

 

Occupancy and equipment, net

 

6,571

 

 

6,279

 

 

19,627

 

 

18,891

 

Communication and transportation

 

1,017

 

 

1,047

 

 

3,249

 

 

3,670

 

Marketing and development

 

1,420

 

 

1,449

 

 

3,800

 

 

3,648

 

FDIC insurance expense

 

 —

 

 

360

 

 

743

 

 

1,230

 

Bank franchise tax expense

 

935

 

 

710

 

 

4,366

 

 

4,088

 

Data processing

 

2,344

 

 

2,350

 

 

6,657

 

 

7,179

 

Interchange related expense

 

1,138

 

 

1,138

 

 

3,755

 

 

3,243

 

Supplies

 

292

 

 

314

 

 

1,358

 

 

998

 

Other real estate owned and other repossession expense

 

130

 

 

 2

 

 

324

 

 

63

 

Legal and professional fees

 

1,026

 

 

935

 

 

2,756

 

 

2,706

 

Other

 

2,716

 

 

3,782

 

 

9,529

 

 

9,727

 

Total noninterest expense

 

42,411

 

 

41,212

 

 

131,348

 

 

124,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME  BEFORE INCOME TAX EXPENSE

 

22,733

 

 

19,209

 

 

80,892

 

 

73,935

 

INCOME TAX EXPENSE

 

4,325

 

 

1,798

 

 

14,961

 

 

13,389

 

NET INCOME

$

18,408

 

$

17,411

 

$

65,931

 

$

60,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

$

0.88

 

$

0.84

 

$

3.17

 

$

2.92

 

Class B Common Stock

 

0.80

 

 

0.76

 

 

2.88

 

 

2.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

$

0.88

 

$

0.83

 

$

3.15

 

$

2.90

 

Class B Common Stock

 

0.80

 

 

0.76

 

 

2.87

 

 

2.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying footnotes to consolidated financial statements.

 

5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  (UNAUDITED)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

2019

    

2018

 

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

18,408

 

$

17,411

 

$

65,931

 

$

60,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

(3)

 

 

54

 

 

(218)

 

 

330

 

Reclassification amount for net derivative losses realized in income

 

(2)

 

 

 1

 

 

(34)

 

 

36

 

Change in unrealized (loss) gain on AFS debt securities

 

86

 

 

(467)

 

 

5,759

 

 

(3,130)

 

Adjustment for adoption of ASU 2016-01

 

 —

 

 

 —

 

 

 —

 

 

(428)

 

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

 

(24)

 

 

(2)

 

 

(58)

 

 

(19)

 

Total other comprehensive income (loss) before income tax

 

57

 

 

(414)

 

 

5,449

 

 

(3,211)

 

Tax effect

 

(163)

 

 

88

 

 

(1,296)

 

 

676

 

Total other comprehensive income (loss), net of tax

 

(106)

 

 

(326)

 

 

4,153

 

 

(2,535)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

$

18,302

 

$

17,085

 

$

70,084

 

$

58,011

 

 

See accompanying footnotes to consolidated financial statements.

 

6

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, July 1, 2019

 

18,740

 

2,208

 

$

4,907

 

$

141,525

 

$

581,734

 

$

3,262

 

$

731,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

18,408

 

 

 —

 

 

18,408

 

Net change in accumulated other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(106)

 

 

(106)

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares ($0.264 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(4,961)

 

 

 —

 

 

(4,961)

 

Class B Shares ($0.240 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(530)

 

 

 —

 

 

(530)

 

Stock options exercised, net of shares withheld

 

 3

 

 —

 

 

 1

 

 

(73)

 

 

 —

 

 

 —

 

 

(72)

 

Conversion of Class B to Class A Common Shares

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Repurchase of Class A Common Stock

 

(4)

 

 —

 

 

(1)

 

 

(28)

 

 

(172)

 

 

 —

 

 

(201)

 

Net change in notes receivable on Class A Common Stock

 

 —

 

 —

 

 

 —

 

 

(46)

 

 

 —

 

 

 —

 

 

(46)

 

Deferred compensation - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors

 

 —

 

 —

 

 

 —

 

 

49

 

 

 —

 

 

 —

 

 

49

 

Designated key employees

 

 —

 

 —

 

 

 —

 

 

76

 

 

 —

 

 

 —

 

 

76

 

Employee stock purchase plan - Class A Common Stock

 

 3

 

 —

 

 

 —

 

 

137

 

 

 —

 

 

 —

 

 

137

 

Stock-based awards - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance stock units

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Restricted stock

 

 2

 

 —

 

 

 1

 

 

184

 

 

 —

 

 

 —

 

 

185

 

Stock options

 

 —

 

 —

 

 

 —

 

 

80

 

 

 —

 

 

 —

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2019

 

18,744

 

2,208

 

$

4,908

 

$

141,904

 

$

594,479

 

$

3,156

 

$

744,447

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 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

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2018

 

18,677

 

2,215

 

$

4,903

 

$

140,114

 

$

520,784

 

$

(1,793)

 

$

664,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 —

 

 

 —

 

 

17,411

 

 

 

 

17,411

 

Net change in accumulated other comprehensive income

 

 

 

 

 —

 

 

 —

 

 

 

 

(326)

 

 

(326)

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares ($0.242 per share)

 

 

 —

 

 

 

 

 

 

(4,517)

 

 

 

 

(4,517)

 

Class B Shares ($0.220 per share)

 

 

 —

 

 

 

 

 

 

(487)

 

 

 

 

(487)

 

Stock options exercised, net of shares withheld

 

 1

 

 —

 

 

 —

 

 

35

 

 

 —

 

 

 

 

35

 

Conversion of Class B to Class A Common Shares

 

 2

 

(2)

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Class A Common Stock

 

 

 —

 

 

 —

 

 

(25)

 

 

 

 

 

 

(25)

 

Deferred compensation - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors

 

 —

 

 —

 

 

 —

 

 

62

 

 

 —

 

 

 —

 

 

62

 

Designated key employees

 

 —

 

 —

 

 

 —

 

 

284

 

 

 —

 

 

 —

 

 

284

 

Employee stock purchase plan - Class A Common Stock

 

 3

 

 —

 

 

 1

 

 

123

 

 

 —

 

 

 —

 

 

124

 

Stock-based awards - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance stock units

 

 —

 

 

 

 —

 

 

53

 

 

 

 

 

 

53

 

Restricted stock

 

(1)

 

 

 

 —

 

 

132

 

 

 —

 

 

 

 

132

 

Stock options

 

 —

 

 —

 

 

 —

 

 

56

 

 

 

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

18,682

 

2,213

 

$

4,904

 

$

140,834

 

$

533,191

 

$

(2,119)

 

$

676,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying footnotes to consolidated financial statements.

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2019

 

18,675

 

2,213

 

$

4,900

 

$

141,018

 

$

545,013

 

$

(997)

 

$

689,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for adoption of ASU 2016-02

 

 —

 

 —

 

 

 —

 

 

 —

 

 

126

 

 

 —

 

 

126

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

65,931

 

 

 —

 

 

65,931

 

Net change in accumulated other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,153

 

 

4,153

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares ($0.792 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(14,826)

 

 

 —

 

 

(14,826)

 

Class B Shares ($0.720 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,591)

 

 

 —

 

 

(1,591)

 

Stock options exercised, net of shares withheld

 

37

 

 —

 

 

 9

 

 

(183)

 

 

 —

 

 

 —

 

 

(174)

 

Conversion of Class B to Class A Common Shares

 

 5

 

(5)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Repurchase of Class A Common Stock

 

(12)

 

 —

 

 

(2)

 

 

(404)

 

 

(174)

 

 

 —

 

 

(580)

 

Net change in notes receivable on Class A Common Stock

 

 —

 

 —

 

 

 —

 

 

(238)

 

 

 —

 

 

 —

 

 

(238)

 

Deferred compensation - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors

 

 5

 

 —

 

 

 —

 

 

155

 

 

 —

 

 

 —

 

 

155

 

Designated key employees

 

 —

 

 —

 

 

 —

 

 

302

 

 

 —

 

 

 —

 

 

302

 

Employee stock purchase plan - Class A Common Stock

 

 8

 

 —

 

 

 —

 

 

372

 

 

 —

 

 

 —

 

 

372

 

Stock-based awards - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance stock units

 

23

 

 —

 

 

 —

 

 

(57)

 

 

 —

 

 

 —

 

 

(57)

 

Restricted stock

 

 3

 

 —

 

 

 1

 

 

659

 

 

 —

 

 

 —

 

 

660

 

Stock options

 

 —

 

 —

 

 

 —

 

 

280

 

 

 —

 

 

 —

 

 

280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2019

 

18,744

 

2,208

 

$

4,908

 

$

141,904

 

$

594,479

 

$

3,156

 

$

744,447

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 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

 

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)

 

Net income

 

 

 

 

 —

 

 

 —

 

 

60,546

 

 

 

 

60,546

 

Net change in accumulated other comprehensive income

 

 

 

 

 —

 

 

 —

 

 

 

 

(2,197)

 

 

(2,197)

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares ($0.726 per share)

 

 

 —

 

 

 

 

 

 

(13,552)

 

 

 

 

(13,552)

 

Class B Shares ($0.660 per share)

 

 

 —

 

 

 

 

 

 

(1,468)

 

 

 

 

(1,468)

 

Stock options exercised, net of shares withheld

 

 3

 

 —

 

 

 —

 

 

83

 

 

 —

 

 

 

 

83

 

Conversion of Class B to Class A Common Shares

 

30

 

(30)

 

 

 

 

 

 

 

 

 

 

 

Net change in notes receivable on Class A Common Stock

 

 

 —

 

 

 —

 

 

44

 

 

 

 

 

 

44

 

Deferred compensation - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors

 

 5

 

 —

 

 

 1

 

 

164

 

 

 —

 

 

 —

 

 

165

 

Designated key employees

 

 —

 

 —

 

 

 —

 

 

284

 

 

 —

 

 

 —

 

 

284

 

Employee stock purchase plan - Class A Common Stock

 

 3

 

 —

 

 

 1

 

 

123

 

 

 —

 

 

 —

 

 

124

 

Stock-based awards - Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance stock units

 

 —

 

 

 

 —

 

 

106

 

 

 

 

 

 

106

 

Restricted stock

 

34

 

 

 

 —

 

 

450

 

 

 —

 

 

 

 

450

 

Stock options

 

 —

 

 —

 

 

 —

 

 

174

 

 

 

 

 

 

174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

18,682

 

2,213

 

$

4,904

 

$

140,834

 

$

533,191

 

$

(2,119)

 

$

676,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying footnotes to consolidated financial statements.

 

 

8

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 

(in thousands)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

 

2019

    

2018

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

65,931

 

$

60,546

 

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

 

 

 

 

 

 

Net amortization on investment securities

 

(95)

 

 

(204)

 

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

 

(2,622)

 

 

(2,744)

 

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

 

(561)

 

 

211

 

Depreciation of premises and equipment

 

6,989

 

 

7,020

 

Amortization of mortgage servicing rights

 

1,275

 

 

1,092

 

Provision for loan and lease losses

 

24,844

 

 

26,264

 

Net gain on sale of mortgage loans held for sale

 

(6,452)

 

 

(2,985)

 

Origination of mortgage loans held for sale

 

(247,071)

 

 

(133,273)

 

Proceeds from sale of mortgage loans held for sale

 

229,755

 

 

134,157

 

Net gain on sale of consumer loans held for sale

 

(3,869)

 

 

(4,429)

 

Origination of consumer loans held for sale

 

(534,268)

 

 

(582,871)

 

Proceeds from sale of consumer loans held for sale

 

532,471

 

 

576,646

 

Net gain realized on sale of other real estate owned

 

(487)

 

 

(700)

 

Impairment of premises held for sale

 

198

 

 

356

 

Deferred compensation expense - Class A Common Stock

 

457

 

 

449

 

Stock-based awards expense - Class A Common Stock

 

883

 

 

730

 

Increase in cash surrender value of bank owned life insurance

 

(1,154)

 

 

(1,135)

 

Net change in other assets and liabilities:

 

 

 

 

 

 

Accrued interest receivable

 

269

 

 

(1,614)

 

Accrued interest payable

 

1,278

 

 

 6

 

Other assets

 

(6,011)

 

 

2,314

 

Other liabilities

 

(1,836)

 

 

5,870

 

Net cash provided by operating activities

 

59,924

 

 

85,706

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchases of available-for-sale debt securities

 

(350,036)

 

 

(159,880)

 

Purchases of held-to-maturity debt securities

 

 —

 

 

(4,934)

 

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

 

259,569

 

 

236,138

 

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

 

1,897

 

 

3,213

 

Net change in outstanding warehouse lines of credit

 

(504,893)

 

 

(35,242)

 

Net change in other loans

 

(163,133)

 

 

(108,750)

 

Proceeds from redemption of Federal Home Loan Bank stock

 

2,102

 

 

 —

 

Purchase of Federal Home Loan Bank stock

 

(2,277)

 

 

 —

 

Proceeds from sales of other real estate owned

 

1,892

 

 

1,153

 

Net purchases of premises and equipment

 

(9,102)

 

 

(7,716)

 

Net cash used in investing activities

 

(763,981)

 

 

(76,018)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in deposits

 

420,991

 

 

133,527

 

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

 

(15,041)

 

 

(40,253)

 

Payments of Federal Home Loan Bank advances

 

(590,000)

 

 

(417,500)

 

Proceeds from Federal Home Loan Bank advances

 

950,000

 

 

395,000

 

Repurchase of Class A Common Stock

 

(580)

 

 

 —

 

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

 

372

 

 

124

 

Net proceeds from Class A Common Stock options exercised

 

(174)

 

 

83

 

Cash dividends paid

 

(15,913)

 

 

(14,508)

 

Net cash provided by financing activities

 

749,655

 

 

56,473

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

45,598

 

 

66,161

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

351,474

 

 

299,351

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

397,072

 

$

365,512

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

$

33,348

 

$

21,491

 

Income taxes

 

11,506

 

 

10,196

 

 

 

 

 

 

 

 

SUPPLEMENTAL NONCASH DISCLOSURES:

 

 

 

 

 

 

Transfers from loans to real estate acquired in settlement of loans

$

1,414

 

$

408

 

Transfers from loans held for sale to held for investment

 

 —

 

 

2,237

 

Transfers from loans held for investment to held for sale

 

130,770

 

 

1,392

 

Unfunded commitments in low-income-housing investments

 

 —

 

 

12,574

 

Right-of-use assets recorded upon adoption of ASU 2016-02

 

41,726

 

 

 —

 

 

See accompanying footnotes to consolidated financial statements.

 

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – SEPTEMBER 30,  2019 AND 2018 AND DECEMBER 31, 2018 (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 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 is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018.

 

As of September 30, 2019, 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. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.

 

10

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, 2019, Republic had 45 full-service banking centers and two LPOs with locations as follows:

 

Kentucky — 32

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

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 8**

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3**


* The Company agreed to sell banking center(s) in July 2019. See Note 18 in this section of the filing for additional information.

** Includes an LPO

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

 

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

 

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

 

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

 

The Traditional Bank has acquired 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.

 

11

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

 

Republic Processing Group

Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the 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.

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

The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EA’s product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA and therefore on the Company’s financial condition and results of operations.  For the 2018 and 2019 fiscal years, the EA product had the following features:

 

EA features consistent during 2018 and 2019:

 

·

Offered only during the first two months of each year;

·

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

·

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

·

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

·

If an insufficient refund to repay the EA occurs:

o

there is no recourse to the taxpayer, 

o

no negative credit reporting on the taxpayer, and

o

no collection efforts against the taxpayer.

EA features modified from 2018 to 2019:

 

·

During 2019, 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.  This compares to a maximum loan amount of $3,500 during 2018; and

·

During 2018, EA fees were charged only to the Tax Providers.  In 2019, the fee charged to the Tax Providers was lowered; and a direct fee to the taxpayer was charged.  The APR to the taxpayer for his or her portion of the total fee equated to less than 36% for all offering tiers.

12

The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. 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 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.

 

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

 

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

  

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

 

·

RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United States with certain services provided by Elevate Credit, Inc., its third-party servicer provider. RCS sells participation interests equal to 90% of the balances generated within three business days to a third-party special purpose entity 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.

 

·

RCS healthcare receivables product – The Bank originates healthcare-receivables products across the United States 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 are carried at the lower of cost or fair value.

 

From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted through RCS a credit-card product to generally subprime borrowers across the United States through one third-party marketer/servicer. For outstanding cards, RCS sold 90% of the balances generated within two business days of each transaction occurrence to a special purpose entity related to its third-party marketer/servicer and retained the remaining 10% interest. During the fourth quarter of 2018, the Bank and its third-party marketer/servicer finalized an agreement to sell 100% of the existing portfolio to an unrelated third party. The sale of the RCS credit-card portfolio receivables was settled in January 2019 and all accounts and related assets were transferred in March 2019.

 

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

 

13

Accounting Standards Updates Issued

 

The following ASUs were issued prior to September 30, 2019 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

 

Permitted Adoption Methods

 

Expected Financial Statement Impact

2016-13

 

Financial Instruments – Credit Losses (Topic 326)

 

This ASU 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 an as yet 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. 

 

 

 

 

 

 

 

 

 

 

 

2019-05

 

Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief

 

This ASU provides the fair value option for certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses.

 

January 1, 2020

 

Modified-retrospective approach.

 

Immaterial

 

 

 

 

 

 

 

 

 

 

 

2019-07

 

Codification Updates to SEC Sections

 

This ASU amends certain SEC sections within the FASB Codification to update and simplify disclosure.

 

Upon addition to the FASB Codification

 

NA

 

Immaterial

 

 

 

 

 

 

 

 

 

 

 

 

Accounting Standards Updates Adopted

 

The following ASUs were adopted by the Company during the nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

ASU. No.

 

Topic

 

Nature of Update

 

Date Adopted

 

Method of Adoption

 

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.

    

The Company adopted this ASU on January 1, 2019 and upon adoption recorded $40 million of right-of-use lease assets and $42 million of operating lease liabilities on its balance sheet. The adoption of this ASU did not have a meaningful impact on the Company's performance metrics, including regulatory capital ratios and return on average assets.  Additionally, the Company does not believe that the adoption of this ASU by its clients will have a significant impact on the Company's ability to underwrite credit when client financial statements are presented inclusive of the requirements of this ASU.  See Note 7 in this section of the filing regarding disclosures by the Company to comply with this ASU.

 

 

 

 

 

 

 

 

 

 

 

2018-10

    

Codification Improvements to Topic 842, Leases

    

This ASU affects narrow aspects of the guidance issued in the amendments in ASU 2016-02.

 

January 1, 2019

    

Adoption should conform to the adoption of ASU 2016-02 above.

    

See Note 7 in this section of the filing regarding disclosures by the Company to comply with this ASU.

 

 

 

 

 

 

 

 

 

 

 

2018-11

    

Leases (Topic 842): Targeted Improvements

    

This ASU provides the Company with an additional (and optional) transition method to adopt ASU 2016-02.   This ASU also provides the Company with a practical expedient to not separate non-lease components from the associated lease component under certain circumstances.

 

January 1, 2019

    

Adoption should conform to the adoption of ASU 2016-02 above.

    

The Company elected the optional transition method permitted by this ASU, allowing the Company to adopt ASU 2016-02, effective January 1, 2019 with a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019.

 

 

 

 

 

 

 

 

 

 

 

2017-12

 

Derivatives and Hedging (Topic 815)

 

The amendments in this ASU make certain targeted improvements to simplify the application of hedge accounting.

 

January 1, 2019

 

Prospectively.

 

Immaterial

 

 

14

2. INVESTMENT SECURITIES

 

Available-for-Sale Debt Securities

 

The gross amortized cost and fair value of AFS debt securities and the related gross unrealized gains and losses recognized in AOCI were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

September 30, 2019 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

257,468

 

$

78

 

$

(244)

 

$

257,302

 

Private label mortgage backed security

 

 

2,289

 

 

1,306

 

 

 —

 

 

3,595

 

Mortgage backed securities - residential

 

 

227,929

 

 

2,935

 

 

(170)

 

 

230,694

 

Collateralized mortgage obligations

 

 

66,441

 

 

281

 

 

(142)

 

 

66,580

 

Corporate bonds

 

 

10,000

 

 

 —

 

 

(156)

 

 

9,844

 

Trust preferred security

 

 

3,564

 

 

436

 

 

 —

 

 

4,000

 

Total available-for-sale debt securities

 

$

567,691

 

$

5,036

 

$

(712)

 

$

572,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2018 (in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

218,502

 

$

25

 

$

(1,654)

 

$

216,873

 

Private label mortgage backed security

 

 

2,348

 

 

1,364

 

 

 —

 

 

3,712

 

Mortgage backed securities - residential

 

 

168,992

 

 

1,470

 

 

(1,253)

 

 

169,209

 

Collateralized mortgage obligations

 

 

73,740

 

 

222

 

 

(1,151)

 

 

72,811

 

Corporate bonds

 

 

10,000

 

 

 —

 

 

(942)

 

 

9,058

 

Trust preferred security

 

 

3,533

 

 

542

 

 

 —

 

 

4,075

 

Total available-for-sale debt securities

 

$

477,115

 

$

3,623

 

$

(5,000)

 

$

475,738

 

 

Held-to-Maturity Debt Securities

 

The carrying value, gross unrecognized gains and losses, and fair value of HTM debt securities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

September 30, 2019 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities - residential

 

$

105

 

$

 7

 

$

 —

 

$

112

 

Collateralized mortgage obligations

 

 

17,724

 

 

132

 

 

(30)

 

 

17,826

 

Corporate bonds

 

 

45,024

 

 

447

 

 

 —

 

 

45,471

 

Obligations of state and political subdivisions

 

 

462

 

 

 1

 

 

 —

 

 

463

 

Total held-to-maturity debt securities

 

$

63,315

 

$

587

 

$

(30)

 

$

63,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Gross

    

Gross

    

    

 

 

 

 

Carrying

 

Unrecognized

 

Unrecognized

 

Fair

 

December 31, 2018 (in thousands)

 

Value

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities - residential

 

$

132

 

$

 8

 

$

 —

 

$

140

 

Collateralized mortgage obligations

 

 

19,544

 

 

178

 

 

(46)

 

 

19,676

 

Corporate bonds

 

 

45,088

 

 

16

 

 

(514)

 

 

44,590

 

Obligations of state and political subdivisions

 

 

463

 

 

 —

 

 

(11)

 

 

452

 

Total held-to-maturity debt securities

 

$

65,227

 

$

202

 

$

(571)

 

$

64,858

 

 

Sales of Available-for-Sale Debt Securities

 

During the three and nine months ended September 30, 2019 and 2018, there were no gains or losses on sales or calls of AFS debt securities.

 

15

Debt Securities by Contractual Maturity

 

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2019 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, 2019 (in thousands)

 

Cost

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

172,143

 

$

172,120

 

$

5,130

 

$

5,127

 

Due from one year to five years

 

 

95,325

 

 

95,026

 

 

35,410

 

 

35,819

 

Due from five years to ten years

 

 

 —

 

 

 —

 

 

4,946

 

 

4,988

 

Due beyond ten years

 

 

3,564

 

 

4,000

 

 

 —

 

 

 —

 

Private label mortgage backed security

 

 

2,289

 

 

3,595

 

 

 —

 

 

 —

 

Mortgage backed securities - residential

 

 

227,929

 

 

230,694

 

 

105

 

 

112

 

Collateralized mortgage obligations

 

 

66,441

 

 

66,580

 

 

17,724

 

 

17,826

 

Total debt securities

 

$

567,691

 

$

572,015

 

$

63,315

 

$

63,872

 

 

 

Unrealized-Loss Analysis on Debt Securities

 

Debt securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual debt securities have been in a continuous unrealized loss position, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

September 30, 2019 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

40,191

 

$

(162)

 

$

74,906

 

$

(82)

 

$

115,097

 

$

(244)

 

Mortgage backed securities - residential

 

 

38,001

 

 

(40)

 

 

20,167

 

 

(130)

 

 

58,168

 

 

(170)

 

Collateralized mortgage obligations

 

 

8,079

 

 

(16)

 

 

10,738

 

 

(126)

 

 

18,817

 

 

(142)

 

Corporate bonds

 

 

 —

 

 

 —

 

 

9,844

 

 

(156)

 

 

9,844

 

 

(156)

 

Total available-for-sale debt securities

 

$

86,271

 

$

(218)

 

$

115,655

 

$

(494)

 

$

201,926

 

$

(712)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

December 31, 2018 (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

 

$

71,627

 

$

(598)

 

$

106,136

 

$

(1,056)

 

$

177,763

 

$

(1,654)

 

Mortgage backed securities - residential

 

 

43,691

 

 

(484)

 

 

32,003

 

 

(769)

 

 

75,694

 

 

(1,253)

 

Collateralized mortgage obligations

 

 

16,487

 

 

(473)

 

 

31,071

 

 

(678)

 

 

47,558

 

 

(1,151)

 

Corporate bonds

 

 

9,058

 

 

(942)

 

 

 —

 

 

 —

 

 

9,058

 

 

(942)

 

Total available-for-sale debt securities

 

$

140,863

 

$

(2,497)

 

$

169,210

 

$

(2,503)

 

$

310,073

 

$

(5,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

September 30, 2019 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

$

4,132

 

$

(4)

 

$

4,965

 

$

(26)

 

$

9,097

 

$

(30)

 

Total held-to-maturity debt securities:

 

$

4,132

 

$

(4)

 

$

4,965

 

$

(26)

 

$

9,097

 

$

(30)

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

    

 

 

    

Unrealized

    

 

 

    

Unrealized

    

 

 

    

Unrealized

 

December 31, 2018 (in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

$

 —

 

$

 —

 

$

5,539

 

$

(46)

 

$

5,539

 

$

(46)

 

Corporate bonds

 

 

39,499

 

 

(514)

 

 

 —

 

 

 —

 

 

39,499

 

 

(514)

 

Obligations of state and political subdivisions

 

 

105

 

 

(1)

 

 

347

 

 

(10)

 

 

452

 

 

(11)

 

Total held-to-maturity debt securities:

 

$

39,604

 

$

(515)

 

$

5,886

 

$

(56)

 

$

45,490

 

$

(571)

 

 

At September 30, 2019, the Bank’s security portfolio consisted of 172 securities, 32 of which were in an unrealized loss position.

 

At December 31, 2018, the Bank’s security portfolio consisted of 182 securities, 65 of which were in an unrealized loss position.

 

At September 30, 2019 and December 31, 2018, 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.

 

Corporate Bonds

 

From 2013 to 2018, the Bank purchased various floating-rate corporate bonds. These bonds were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 9% and 10% of the Bank’s investment portfolio as of September 30, 2019 and December 31, 2018. During 2018, one of these bonds was downgraded to BBB+ (S&P/Fitch), driving a significant decrease in the bond’s market value. As of September 30, 2019, this bond reflected an unrealized loss of $156,000. The Bank does not intend to sell this bond, and it is likely that it will not be required to sell this bond before the bond’s anticipated recovery, therefore, management does not consider this bond to have OTTI.

 

Mortgage Backed Securities and Collateralized Mortgage Obligations

 

At September 2019, with the exception of the $3.6 million private label mortgage backed security, all other mortgage backed securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FHLMC and FNMA. At September 30, 2019 and December 31, 2018, there were gross unrealized losses of $312,000 and $2.4 million related to AFS mortgage backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to have OTTI.

 

Trust Preferred Security

 

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

 

Other-Than-Temporary Impairment

 

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

 

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

Any rating changes by a rating agency; and

·

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

17

 

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

 

The Bank owns one private label mortgage backed security with a total carrying value of $3.6 million at September 30, 2019. 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.

 

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, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

444,309

 

$

240,590

 

Fair value

 

 

444,316

 

 

240,700

 

 

 

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, 2019 (in thousands)

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

 

$

 —

 

$

882

 

$

 —

 

$

882

 

Community Reinvestment Act mutual fund

 

 

 

2,500

 

 

 —

 

 

(15)

 

 

2,485

 

Total equity securities with readily determinable fair values

 

 

$

2,500

 

$

882

 

$

(15)

 

$

3,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2018 (in thousands)

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

 

$

 —

 

$

410

 

$

 —

 

$

410

 

Community Reinvestment Act mutual fund

 

 

 

2,500

 

 

 —

 

 

(104)

 

 

2,396

 

Total equity securities with readily determinable fair values

 

 

$

2,500

 

$

410

 

$

(104)

 

$

2,806

 

 

18

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, 2019

    

Three Months Ended September 30, 2018

    

(in thousands)

 

 

Realized

 

Unrealized

 

Total

 

Realized

 

Unrealized

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

 

$

 —

 

$

95

 

$

95

 

$

 —

 

$

(57)

 

$

(57)

 

Community Reinvestment Act mutual fund

 

 

 

 —

 

 

19

 

 

19

 

 

 —

 

 

(19)

 

 

(19)

 

Total equity securities with readily determinable fair value

 

 

$

 —

 

$

114

 

$

114

 

$

 —

 

$

(76)

 

$

(76)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (Losses) Recognized on Equity Securities

 

 

 

 

Nine Months Ended September 30, 2019

    

Nine Months Ended September 30, 2018

 

(in thousands)

 

 

Realized

 

Unrealized

 

Total

 

Realized

 

Unrealized

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

 

$

 —

 

$

472

 

$

472

 

$

 —

 

$

(141)

 

$

(141)

 

Community Reinvestment Act mutual fund

 

 

 

 —

 

 

89

 

 

89

 

 

 —

 

 

(70)

 

 

(70)

 

Total equity securities with readily determinable fair value

 

 

$

 —

 

$

561

 

$

561

 

$

 —

 

$

(211)

 

$

(211)

 

 

19

 

 

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 the Lower of Cost or Fair Value

 

RCS originates for sale 90% of its line-of-credit product and a portion of its hospital receivables product. Prior to the third quarter of 2018, RCS also originated for sale 90% of its credit-card product. During the third quarter of 2018, the Bank and its third-party marketer/servicer agreed to sell 100% of the existing RCS credit-card portfolio to an unrelated third party. As a result, the Bank reclassified 100% of its RCS credit-card portfolio into a held-for-sale category and charged this portfolio down to its estimated net realizable value. The Bank and its third-party marketer/servicer settled the sale of the RCS credit-card portfolio in January 2019. Ordinary gains or losses on the sale of RCS products are reported as a component of “Program fees.”

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

    

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

37,609

 

$

13,684

 

$

12,838

 

$

8,551

 

Origination of consumer loans held for sale

 

 

187,856

 

 

209,462

 

 

534,268

 

 

565,886

 

Loans transferred to held for investment

 

 

 —

 

 

1,392

 

 

 —

 

 

1,392

 

Proceeds from the sale of consumer loans held for sale

 

 

(208,211)

 

 

(205,078)

 

 

(532,471)

 

 

(559,607)

 

Net gain on sale of consumer loans held for sale

 

 

1,250

 

 

1,577

 

 

3,869

 

 

4,815

 

Balance, end of period

 

$

18,504

 

$

21,037

 

$

18,504

 

$

21,037

 

 

 

Loans Held for Sale in Connection with Sale of Banking Centers, at the Lower of Cost or Fair Value

 

See additional detail regarding loans held for sale in connection with Sale of Banking Centers under Footnote 18 “Agreement to  Sell Four  Banking Centers” in this section of the filing.

 

 

 

 

20

4. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The composition of the loan portfolio follows:

 

 

 

 

 

 

 

(in thousands)

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

Owner occupied

$

889,554

 

$

907,005

 

Owner occupied - correspondent*

 

71,654

 

 

94,827

 

Nonowner occupied

 

255,808

 

 

242,846

 

Commercial real estate

 

1,266,290

 

 

1,248,940

 

Construction & land development

 

192,535

 

 

175,178

 

Commercial & industrial

 

464,614

 

 

430,355

 

Lease financing receivables

 

14,820

 

 

15,031

 

Home equity

 

296,339

 

 

332,548

 

Consumer:

 

 

 

 

 

 

Credit cards

 

17,722

 

 

19,095

 

Overdrafts

 

1,075

 

 

1,102

 

Automobile loans

 

59,403

 

 

63,475

 

Other consumer

 

60,655

 

 

46,642

 

Total Traditional Banking

 

3,590,469

 

 

3,577,044

 

Warehouse lines of credit*

 

973,588

 

 

468,695

 

Total Core Banking

 

4,564,057

 

 

4,045,739

 

 

 

 

 

 

 

 

Republic Processing Group*:

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

Other TRS loans

 

846

 

 

13,744

 

Republic Credit Solutions

 

99,151

 

 

88,744

 

Total Republic Processing Group

 

99,997

 

 

102,488

 

 

 

 

 

 

 

 

Total loans**

 

4,664,054

 

 

4,148,227

 

Allowance for loan and lease losses

 

(46,932)

 

 

(44,675)

 

 

 

 

 

 

 

 

Total loans, net

$

4,617,122

 

$

4,103,552

 


*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, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

Contractually receivable

$

4,663,081

 

$

4,147,249

 

Unearned income(1)

 

(1,226)

 

 

(1,038)

 

Unamortized premiums(2)

 

425

 

 

588

 

Unaccreted discounts(3)

 

(2,673)

 

 

(3,400)

 

Net unamortized deferred origination fees and costs(4)

 

4,447

 

 

4,828

 

Carrying value of loans

$

4,664,054

 

$

4,148,227

 


(1)

Unearned income relates to lease financing receivables.

(2)

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

(3)

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

(4)

Primarily attributable to the Traditional Banking segment.

 

21

Purchased Credit-Impaired Loans

 

The following table reconciles the contractually required and carrying amounts of all PCI loans:

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Contractually required principal

 

$

3,759

 

$

4,251

 

Non-accretable amount

 

 

(1,356)

 

 

(1,521)

 

Accretable amount

 

 

(50)

 

 

(50)

 

Carrying value of loans

 

$

2,353

 

$

2,680

 

 

The following table presents a rollforward of the accretable amount on all PCI loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

    

2018

 

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(50)

 

$

(100)

 

$

(50)

 

$

(140)

 

Transfers between non-accretable and accretable*

 

 

(88)

 

 

(168)

 

 

(230)

 

 

(409)

 

Net accretion into interest income on loans, including loan fees

 

 

88

 

 

168

 

 

230

 

 

449

 

Balance, end of period

 

$

(50)

 

$

(100)

 

$

(50)

 

$

(100)

 


*Transfers are primarily attributable to changes in estimated cash flows of the underlying loans.

 

22

Credit Quality Indicators

 

The following tables include loans by risk category based on the Bank’s internal analyses. Risk categories are defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

Special

 

 

 

 

Doubtful /

 

PCI Loans -

 

PCI Loans -

 

Total Rated

 

(in thousands)

 

Pass

 

Mention

 

Substandard

 

Loss

 

Group 1

 

Substandard

 

Loans*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 —

 

$

12,733

 

$

12,334

 

$

 

$

141

 

$

1,326

 

$

26,534

 

Owner occupied - correspondent

 

 

 

 

 —

 

 

1,328

 

 

 

 

 —

 

 

 —

 

 

1,328

 

Nonowner occupied

 

 

 —

 

 

489

 

 

1,241

 

 

 

 

 —

 

 

 —

 

 

1,730

 

Commercial real estate

 

 

1,252,223

 

 

3,555

 

 

9,662

 

 

 

 

850

 

 

 —

 

 

1,266,290

 

Construction & land development

 

 

190,156

 

 

2,321

 

 

58

 

 

 

 

 —

 

 

 —

 

 

192,535

 

Commercial & industrial

 

 

460,391

 

 

906

 

 

3,294

 

 

 

 

23

 

 

 —

 

 

464,614

 

Lease financing receivables

 

 

14,820

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

14,820

 

Home equity

 

 

 —

 

 

 —

 

 

2,783

 

 

 —

 

 

 4

 

 

 6

 

 

2,793

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

 

 

 

 —

 

 

188

 

 

 

 

 —

 

 

 —

 

 

188

 

Other consumer

 

 

 —

 

 

 —

 

 

372

 

 

 

 

 —

 

 

 3

 

 

375

 

Total Traditional Banking

 

 

1,917,590

 

 

20,004

 

 

31,260

 

 

 —

 

 

1,018

 

 

1,335

 

 

1,971,207

 

Warehouse lines of credit

 

 

973,588

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

973,588

 

Total Core Banking

 

 

2,891,178

 

 

20,004

 

 

31,260

 

 

 —

 

 

1,018

 

 

1,335

 

 

2,944,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 

 

 —

 

 

 

 

 —

 

 

 

 

 —

 

Other TRS loans

 

 

 —

 

 

 —

 

 

118

 

 

 —

 

 

 —

 

 

 —

 

 

118

 

Republic Credit Solutions

 

 

 

 

 —

 

 

109

 

 

 

 

 —

 

 

 

 

109

 

Total Republic Processing Group

 

 

 —

 

 

 —

 

 

227

 

 

 —

 

 

 —

 

 

 —

 

 

227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rated loans

 

$

2,891,178

 

$

20,004

 

$

31,487

 

$

 —

 

$

1,018

 

$

1,335

 

$

2,945,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

Special

 

 

 

 

Doubtful /

 

PCI Loans -

 

PCI Loans -

 

Total Rated

 

(in thousands)

 

Pass

 

Mention

 

Substandard

 

Loss

 

Group 1

 

Substandard

 

Loans*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 —

 

$

14,536

 

$

11,690

 

$

 

$

170

 

$

1,476

 

$

27,872

 

Owner occupied - correspondent

 

 

 

 

 —

 

 

382

 

 

 

 

 —

 

 

 —

 

 

382

 

Nonowner occupied

 

 

 —

 

 

575

 

 

1,889

 

 

 

 

 —

 

 

 —

 

 

2,464

 

Commercial real estate

 

 

1,239,576

 

 

5,281

 

 

3,162

 

 

 

 

921

 

 

 —

 

 

1,248,940

 

Construction & land development

 

 

175,113

 

 

 —

 

 

65

 

 

 

 

 —

 

 

 —

 

 

175,178

 

Commercial & industrial

 

 

428,897

 

 

813

 

 

620

 

 

 

 

25

 

 

 —

 

 

430,355

 

Lease financing receivables

 

 

15,031

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

15,031

 

Home equity

 

 

 —

 

 

 —

 

 

1,361

 

 

 —

 

 

 5

 

 

81

 

 

1,447

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 

 

 

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

 

 

 

 —

 

 

91

 

 

 

 

 —

 

 

 —

 

 

91

 

Other consumer

 

 

 —

 

 

 —

 

 

462

 

 

 

 

 —

 

 

 2

 

 

464

 

Total Traditional Banking

 

 

1,858,617

 

 

21,205

 

 

19,722

 

 

 —

 

 

1,121

 

 

1,559

 

 

1,902,224

 

Warehouse lines of credit

 

 

468,695

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

468,695

 

Total Core Banking

 

 

2,327,312

 

 

21,205

 

 

19,722

 

 

 —

 

 

1,121

 

 

1,559

 

 

2,370,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Other TRS loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Republic Credit Solutions

 

 

 

 

 —

 

 

138

 

 

 

 

 —

 

 

 

 

138

 

Total Republic Processing Group

 

 

 —

 

 

 —

 

 

138

 

 

 —

 

 

 —

 

 

 —

 

 

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total rated loans

 

$

2,327,312

 

$

21,205

 

$

19,860

 

$

 —

 

$

1,121

 

$

1,559

 

$

2,371,057

 

 


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

23

Allowance for Loan and Lease Losses

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance Rollforward

 

 

 

 

Three Months Ended September 30, 

 

 

 

 

2019

 

 

2018

 

 

 

 

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

 

 

$

5,016

 

$

(296)

 

$

(17)

 

$

121

 

$

4,824

 

 

$

6,035

 

$

(136)

 

$

(46)

 

$

18

 

$

5,871

 

Owner occupied - correspondent

 

 

 

197

 

 

(18)

 

 

 —

 

 

 —

 

 

179

 

 

 

263

 

 

(15)

 

 

 —

 

 

 —

 

 

248

 

Nonowner occupied

 

 

 

1,775

 

 

40

 

 

 —

 

 

 5

 

 

1,820

 

 

 

1,552

 

 

42

 

 

(1)

 

 

 —

 

 

1,593

 

Commercial real estate

 

 

 

10,566

 

 

1,390

 

 

(1,407)

 

 

 —

 

 

10,549

 

 

 

9,815

 

 

187

 

 

 —

 

 

 1

 

 

10,003

 

Construction & land development

 

 

 

2,910

 

 

(93)

 

 

 —

 

 

 —

 

 

2,817

 

 

 

2,825

 

 

(160)

 

 

 —

 

 

 3

 

 

2,668

 

Commercial & industrial

 

 

 

4,221

 

 

155

 

 

 —

 

 

 1

 

 

4,377

 

 

 

2,318

 

 

281

 

 

(75)

 

 

 4

 

 

2,528

 

Lease financing receivables

 

 

 

181

 

 

(25)

 

 

 —

 

 

 —

 

 

156

 

 

 

160

 

 

 —

 

 

 —

 

 

 —

 

 

160

 

Home equity

 

 

 

3,124

 

 

(102)

 

 

 —

 

 

23

 

 

3,045

 

 

 

3,658

 

 

(81)

 

 

(14)

 

 

59

 

 

3,622

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

1,028

 

 

54

 

 

(77)

 

 

18

 

 

1,023

 

 

 

805

 

 

148

 

 

(94)

 

 

 9

 

 

868

 

Overdrafts

 

 

 

894

 

 

491

 

 

(363)

 

 

53

 

 

1,075

 

 

 

878

 

 

372

 

 

(332)

 

 

65

 

 

983

 

Automobile loans

 

 

 

708

 

 

(32)

 

 

(23)

 

 

 —

 

 

653

 

 

 

664

 

 

110

 

 

(7)

 

 

 2

 

 

769

 

Other consumer

 

 

 

549

 

 

(9)

 

 

(84)

 

 

79

 

 

535

 

 

 

776

 

 

(52)

 

 

(102)

 

 

70

 

 

692

 

Total Traditional Banking

 

 

 

31,169

 

 

1,555

 

 

(1,971)

 

 

300

 

 

31,053

 

 

 

29,749

 

 

696

 

 

(671)

 

 

231

 

 

30,005

 

Warehouse lines of credit

 

 

 

1,814

 

 

620

 

 

 —

 

 

 —

 

 

2,434

 

 

 

1,585

 

 

(183)

 

 

 —

 

 

 —

 

 

1,402

 

Total Core Banking

 

 

 

32,983

 

 

2,175

 

 

(1,971)

 

 

300

 

 

33,487

 

 

 

31,334

 

 

513

 

 

(671)

 

 

231

 

 

31,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 

 —

 

 

(2,098)

 

 

 —

 

 

2,098

 

 

 —

 

 

 

 —

 

 

(1,036)

 

 

 —

 

 

1,036

 

 

 —

 

Other TRS loans

 

 

 

232

 

 

90

 

 

(90)

 

 

 2

 

 

234

 

 

 

67

 

 

 8

 

 

 —

 

 

 —

 

 

75

 

Republic Credit Solutions

 

 

 

12,768

 

 

2,986

 

 

(2,799)

 

 

256

 

 

13,211

 

 

 

13,646

 

 

4,592

 

 

(6,204)

 

 

308

 

 

12,342

 

Total Republic Processing Group

 

 

 

13,000

 

 

978

 

 

(2,889)

 

 

2,356

 

 

13,445

 

 

 

13,713

 

 

3,564

 

 

(6,204)

 

 

1,344

 

 

12,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

45,983

 

$

3,153

 

$

(4,860)

 

$

2,656

 

$

46,932

 

 

$

45,047

 

$

4,077

 

$

(6,875)

 

$

1,575

 

$

43,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance Rollforward

 

 

 

Nine Months Ended September 30, 

 

 

 

2019

 

 

2018

 

 

 

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

 

 

$

5,798

 

$

(953)

 

$

(401)

 

$

380

 

$

4,824

 

 

$

6,182

 

$

(443)

 

$

(85)

 

$

217

 

$

5,871

Owner occupied - correspondent

 

 

 

237

 

 

(58)

 

 

 —

 

 

 —

 

 

179

 

 

 

292

 

 

(44)

 

 

 —

 

 

 —

 

 

248

Nonowner occupied

 

 

 

1,662

 

 

218

 

 

(73)

 

 

13

 

 

1,820

 

 

 

1,396

 

 

491

 

 

(320)

 

 

26

 

 

1,593

Commercial real estate

 

 

 

10,030

 

 

1,922

 

 

(1,407)

 

 

 4

 

 

10,549

 

 

 

9,043

 

 

831

 

 

 —

 

 

129

 

 

10,003

Construction & land development

 

 

 

2,555

 

 

262

 

 

 —

 

 

 —

 

 

2,817

 

 

 

2,364

 

 

274

 

 

 —

 

 

30

 

 

2,668

Commercial & industrial

 

 

 

2,873

 

 

1,498

 

 

 —

 

 

 6

 

 

4,377

 

 

 

2,198

 

 

491

 

 

(200)

 

 

39

 

 

2,528

Lease financing receivables

 

 

 

158

 

 

(2)

 

 

 —

 

 

 —

 

 

156

 

 

 

174

 

 

(14)

 

 

 —

 

 

 —

 

 

160

Home equity

 

 

 

3,477

 

 

(480)

 

 

(13)

 

 

61

 

 

3,045

 

 

 

3,754

 

 

(372)

 

 

(48)

 

 

288

 

 

3,622

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

1,140

 

 

133

 

 

(303)

 

 

53

 

 

1,023

 

 

 

607

 

 

507

 

 

(282)

 

 

36

 

 

868

Overdrafts

 

 

 

1,102

 

 

760

 

 

(956)

 

 

169

 

 

1,075

 

 

 

974

 

 

685

 

 

(891)

 

 

215

 

 

983

Automobile loans

 

 

 

724

 

 

(55)

 

 

(23)

 

 

 7

 

 

653

 

 

 

687

 

 

90

 

 

(11)

 

 

 3

 

 

769

Other consumer

 

 

 

591

 

 

(74)

 

 

(198)

 

 

216

 

 

535

 

 

 

1,162

 

 

(338)

 

 

(358)

 

 

226

 

 

692

Total Traditional Banking

 

 

 

30,347

 

 

3,171

 

 

(3,374)

 

 

909

 

 

31,053

 

 

 

28,833

 

 

2,158

 

 

(2,195)

 

 

1,209

 

 

30,005

Warehouse lines of credit

 

 

 

1,172

 

 

1,262

 

 

 —

 

 

 —

 

 

2,434

 

 

 

1,314

 

 

88

 

 

 —

 

 

 —

 

 

1,402

Total Core Banking

 

 

 

31,519

 

 

4,433

 

 

(3,374)

 

 

909

 

 

33,487

 

 

 

30,147

 

 

2,246

 

 

(2,195)

 

 

1,209

 

 

31,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 

 —

 

 

11,322

 

 

(13,425)

 

 

2,103

 

 

 —

 

 

 

 —

 

 

11,360

 

 

(12,478)

 

 

1,118

 

 

 —

Other TRS loans

 

 

 

107

 

 

496

 

 

(371)

 

 

 2

 

 

234

 

 

 

12

 

 

113

 

 

(55)

 

 

 5

 

 

75

Republic Credit Solutions

 

 

 

13,049

 

 

8,593

 

 

(9,306)

 

 

875

 

 

13,211

 

 

 

12,610

 

 

12,545

 

 

(13,669)

 

 

856

 

 

12,342

Total Republic Processing Group

 

 

 

13,156

 

 

20,411

 

 

(23,102)

 

 

2,980

 

 

13,445

 

 

 

12,622

 

 

24,018

 

 

(26,202)

 

 

1,979

 

 

12,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

44,675

 

$

24,844

 

$

(26,476)

 

$

3,889

 

$

46,932

 

 

$

42,769

 

$

26,264

 

$

(28,397)

 

$

3,188

 

$

43,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming Loans and Nonperforming Assets

 

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

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

September 30, 2019

    

December 31, 2018

    

 

 

 

 

 

 

 

 

 

 

Loans on nonaccrual status*

 

$

20,574

 

$

15,993

 

 

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

 

 

175

 

 

145

 

 

Total nonperforming loans

 

 

20,749

 

 

16,138

 

 

Other real estate owned

 

 

119

 

 

160

 

 

Total nonperforming assets

 

$

20,868

 

$

16,298

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.44

%  

 

0.39

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.45

 

 

0.39

 

 

Nonperforming assets to total assets

 

 

0.34

 

 

0.31

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.45

%  

 

0.40

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.45

 

 

0.40

 

 

Nonperforming assets to total assets

 

 

0.35

 

 

0.32

 

 


*Loans on nonaccrual status include impaired loans.

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

 

25

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due 90-Days-or-More

 

 

 

Nonaccrual

 

 

and Still Accruing Interest*

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

    

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

9,728

 

$

10,800

 

 

$

 —

 

$

 —

 

Owner occupied - correspondent

 

 

1,328

 

 

382

 

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

26

 

 

669

 

 

 

 —

 

 

 —

 

Commercial real estate

 

 

4,690

 

 

2,318

 

 

 

 —

 

 

 —

 

Construction & land development

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Commercial & industrial

 

 

3,014

 

 

630

 

 

 

 —

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Home equity

 

 

1,659

 

 

1,095

 

 

 

 —

 

 

 —

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Overdrafts

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Automobile loans

 

 

116

 

 

75

 

 

 

 —

 

 

 —

 

Other consumer

 

 

13

 

 

24

 

 

 

 —

 

 

13

 

Total Traditional Banking

 

 

20,574

 

 

15,993

 

 

 

 —

 

 

13

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Total Core Banking

 

 

20,574

 

 

15,993

 

 

 

 —

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Other TRS loans

 

 

 —

 

 

 —

 

 

 

109

 

 

 4

 

Republic Credit Solutions

 

 

 —

 

 

 —

 

 

 

66

 

 

128

 

Total Republic Processing Group

 

 

 —

 

 

 —

 

 

 

175

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20,574

 

$

15,993

 

 

$

175

 

$

145

 


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

 

Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Nonaccrual loans are typically returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future contractual payments are reasonably assured. 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.

 

26

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, 2019

Days

 

Days

 

Days

 

Total

 

Total

 

 

 

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent*

 

Delinquent**

 

Current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,293

 

$

376

 

$

2,462

 

$

4,131

 

$

885,423

 

$

889,554

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

958

 

 

958

 

 

70,696

 

 

71,654

 

Nonowner occupied

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

255,808

 

 

255,808

 

Commercial real estate

 

 

597

 

 

2,335

 

 

979

 

 

3,911

 

 

1,262,379

 

 

1,266,290

 

Construction & land development

 

 

150

 

 

 —

 

 

 —

 

 

150

 

 

192,385

 

 

192,535

 

Commercial & industrial

 

 

143

 

 

 —

 

 

2,572

 

 

2,715

 

 

461,899

 

 

464,614

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,820

 

 

14,820

 

Home equity

 

 

132

 

 

350

 

 

702

 

 

1,184

 

 

295,155

 

 

296,339

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

58

 

 

26

 

 

 —

 

 

84

 

 

17,638

 

 

17,722

 

Overdrafts

 

 

248

 

 

 4

 

 

 1

 

 

253

 

 

822

 

 

1,075

 

Automobile loans

 

 

46

 

 

51

 

 

 —

 

 

97

 

 

59,306

 

 

59,403

 

Other consumer

 

 

 6

 

 

 7

 

 

 —

 

 

13

 

 

60,642

 

 

60,655

 

Total Traditional Banking

 

 

2,673

 

 

3,149

 

 

7,674

 

 

13,496

 

 

3,576,973

 

 

3,590,469

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

973,588

 

 

973,588

 

Total Core Banking

 

 

2,673

 

 

3,149

 

 

7,674

 

 

13,496

 

 

4,550,561

 

 

4,564,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

 

55

 

 

72

 

 

109

 

 

236

 

 

610

 

 

846

 

Republic Credit Solutions

 

 

5,497

 

 

1,077

 

 

66

 

 

6,640

 

 

92,511

 

 

99,151

 

Total Republic Processing Group

 

 

5,552

 

 

1,149

 

 

175

 

 

6,876

 

 

93,121

 

 

99,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,225

 

$

4,298

 

$

7,849

 

$

20,372

 

$

4,643,682

 

$

4,664,054

 

Delinquency ratio***

 

 

0.18

%  

 

0.09

%  

 

0.17

%  

 

0.44

%  

 

 

 

 

 

 

 


*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.

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30 - 59

    

60 - 89

    

90 or More

    

    

 

    

    

 

    

    

 

 

December 31, 2018

Days

 

Days

 

Days

 

Total

 

Total

 

 

 

 

(dollars in thousands)

 

Delinquent

 

Delinquent

 

Delinquent*

 

Delinquent**

 

Current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,137

 

$

748

 

$

3,640

 

$

5,525

 

$

901,480

 

$

907,005

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

94,827

 

 

94,827

 

Nonowner occupied

 

 

349

 

 

 —

 

 

659

 

 

1,008

 

 

241,838

 

 

242,846

 

Commercial real estate

 

 

511

 

 

 —

 

 

588

 

 

1,099

 

 

1,247,841

 

 

1,248,940

 

Construction & land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

175,178

 

 

175,178

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

25

 

 

25

 

 

430,330

 

 

430,355

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15,031

 

 

15,031

 

Home equity

 

 

558

 

 

 —

 

 

226

 

 

784

 

 

331,764

 

 

332,548

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

82

 

 

46

 

 

 1

 

 

129

 

 

18,966

 

 

19,095

 

Overdrafts

 

 

223

 

 

 5

 

 

 2

 

 

230

 

 

872

 

 

1,102

 

Automobile loans

 

 

 —

 

 

28

 

 

 —

 

 

28

 

 

63,447

 

 

63,475

 

Other consumer

 

 

27

 

 

 7

 

 

13

 

 

47

 

 

46,595

 

 

46,642

 

Total Traditional Banking

 

 

2,887

 

 

834

 

 

5,154

 

 

8,875

 

 

3,568,169

 

 

3,577,044

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

468,695

 

 

468,695

 

Total Core Banking

 

 

2,887

 

 

834

 

 

5,154

 

 

8,875

 

 

4,036,864

 

 

4,045,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

 

 2

 

 

 4

 

 

 4

 

 

10

 

 

13,734

 

 

13,744

 

Republic Credit Solutions

 

 

5,734

 

 

1,215

 

 

128

 

 

7,077

 

 

81,667

 

 

88,744

 

Total Republic Processing Group

 

 

5,736

 

 

1,219

 

 

132

 

 

7,087

 

 

95,401

 

 

102,488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,623

 

$

2,053

 

$

5,286

 

$

15,962

 

$

4,132,265

 

$

4,148,227

 

Delinquency ratio***

 

 

0.21

%  

 

0.05

%  

 

0.13

%  

 

0.38

%  

 

 

 

 

 

 


*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.

 

Impaired Loans

 

Information regarding the Bank’s impaired loans follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Loans with no allocated Allowance

 

$

28,021

 

$

19,555

 

Loans with allocated Allowance

 

 

20,536

 

 

21,880

 

Total recorded investment in impaired loans

 

$

48,557

 

$

41,435

 

 

 

 

 

 

 

 

 

Amount of the allocated Allowance

 

$

3,856

 

$

3,764

 

 

Approximately $2 million and $3 million of impaired loans at September 30, 2019 and December 31, 2018 were PCI loans. Approximately $2 million and $2 million of impaired loans at September 30, 2019 and December 31, 2018 were formerly PCI loans that became classified as “impaired” through a post-acquisition troubled debt restructuring.

28

The following tables present the balance in the Allowance and the recorded investment in loans by portfolio class based on impairment method:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

Loans

 

 

 

 

 

 

Individually

    

 

    

PCI with

    

    

 

  

Individually

    

 

    

PCI with

    

PCI without

    

    

 

    

 

 

 

September 30, 2019

 

Evaluated

 

Collectively

 

Post-Acquisition

 

Total

  

Evaluated

 

Collectively

 

Post-Acquisition

 

Post-Acquisition

 

Total

 

Allowance to

(dollars in thousands)

 

Excluding PCI

 

Evaluated

 

Impairment

 

Allowance

  

Excluding PCI

 

Evaluated

 

Impairment

 

Impairment

 

Loans

 

Total Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,266

 

$

3,325

 

$

233

 

$

4,824

  

$

23,848

 

$

864,239

 

$

1,467

 

$

 —

 

$

889,554

 

 

0.54

%  

Owner occupied - correspondent

 

 

 —

 

 

179

 

 

 —

 

 

179

  

 

1,329

 

 

70,325

 

 

 —

 

 

 —

 

 

71,654

 

 

0.25

 

Nonowner occupied

 

 

 —

 

 

1,820

 

 

 —

 

 

1,820

  

 

1,405

 

 

254,403

 

 

 —

 

 

 —

 

 

255,808

 

 

0.71

 

Commercial real estate

 

 

148

 

 

10,393

 

 

 8

 

 

10,549

  

 

12,879

 

 

1,252,561

 

 

850

 

 

 —

 

 

1,266,290

 

 

0.83

 

Construction & land development

 

 

 1

 

 

2,816

 

 

 —

 

 

2,817

  

 

58

 

 

192,477

 

 

 —

 

 

 —

 

 

192,535

 

 

1.46

 

Commercial & industrial

 

 

1,532

 

 

2,845

 

 

 —

 

 

4,377

  

 

3,309

 

 

461,282

 

 

 —

 

 

23

 

 

464,614

 

 

0.94

 

Lease financing receivables

 

 

 —

 

 

156

 

 

 —

 

 

156

  

 

 —

 

 

14,820

 

 

 —

 

 

 —

 

 

14,820

 

 

1.05

 

Home equity

 

 

231

 

 

2,814

 

 

 —

 

 

3,045

  

 

2,787

 

 

293,541

 

 

11

 

 

 —

 

 

296,339

 

 

1.03

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 —

 

 

1,023

 

 

 —

 

 

1,023

  

 

 —

 

 

17,722

 

 

 —

 

 

 —

 

 

17,722

 

 

5.77

 

Overdrafts

 

 

 —

 

 

1,075

 

 

 —

 

 

1,075

  

 

 —

 

 

1,075

 

 

 —

 

 

 —

 

 

1,075

 

 

100.00

 

Automobile loans

 

 

60

 

 

593

 

 

 —

 

 

653

  

 

188

 

 

59,215

 

 

 —

 

 

 —

 

 

59,403

 

 

1.10

 

Other consumer

 

 

353

 

 

182

 

 

 —

 

 

535

  

 

372

 

 

60,281

 

 

 2

 

 

 —

 

 

60,655

 

 

0.88

 

Total Traditional Banking

 

 

3,591

 

 

27,221

 

 

241

 

 

31,053

  

 

46,175

 

 

3,541,941

 

 

2,330

 

 

23

 

 

3,590,469

 

 

0.86

 

Warehouse lines of credit

 

 

 —

 

 

2,434

 

 

 —

 

 

2,434

  

 

 —

 

 

973,588

 

 

 —

 

 

 —

 

 

973,588

 

 

0.25

 

Total Core Banking

 

 

3,591

 

 

29,655

 

 

241

 

 

33,487

  

 

46,175

 

 

4,515,529

 

 

2,330

 

 

23

 

 

4,564,057

 

 

0.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

  

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

 

 —

 

 

234

 

 

 —

 

 

234

  

 

 —

 

 

846

 

 

 —

 

 

 —

 

 

846

 

 

27.66

 

Republic Credit Solutions

 

 

24

 

 

13,187

 

 

 —

 

 

13,211

  

 

52

 

 

99,099

 

 

 —

 

 

 —

 

 

99,151

 

 

13.32

 

Total Republic Processing Group

 

 

24

 

 

13,421

 

 

 —

 

 

13,445

  

 

52

 

 

99,945

 

 

 —

 

 

 —

 

 

99,997

 

 

13.45

 

Total

 

$

3,615

 

$

43,076

 

$

241

 

$

46,932

  

$

46,227

 

$

4,615,474

 

$

2,330

 

$

23

 

$

4,664,054

 

 

1.01

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

Loans

 

 

 

 

 

 

Individually

    

 

    

PCI with

    

    

 

  

Individually

    

 

    

PCI with

    

PCI without

    

    

 

    

 

 

 

December 31, 2018

 

Evaluated

 

Collectively

 

Post-Acquisition

 

Total

  

Evaluated

 

Collectively

 

Post-Acquisition

 

Post-Acquisition

 

Total

 

Allowance to

(dollars in thousands)

 

Excluding PCI

 

Evaluated

 

Impairment

 

Allowance

  

Excluding PCI

 

Evaluated

 

Impairment

 

Impairment

 

Loans

 

Total Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

2,052

 

$

3,365

 

$

381

 

$

5,798

  

$

24,860

 

$

880,500

 

$

1,645

 

$

 —

 

$

907,005

 

 

0.64

%  

Owner occupied - correspondent

 

 

 —

 

 

237

 

 

 —

 

 

237

  

 

382

 

 

94,445

 

 

 —

 

 

 —

 

 

94,827

 

 

0.25

 

Nonowner occupied

 

 

 4

 

 

1,658

 

 

 —

 

 

1,662

  

 

2,406

 

 

240,440

 

 

 —

 

 

 —

 

 

242,846

 

 

0.68

 

Commercial real estate

 

 

294

 

 

9,727

 

 

 9

 

 

10,030

  

 

8,104

 

 

1,239,915

 

 

919

 

 

 2

 

 

1,248,940

 

 

0.80

 

Construction & land development

 

 

 4

 

 

2,551

 

 

 —

 

 

2,555

  

 

65

 

 

175,113

 

 

 —

 

 

 —

 

 

175,178

 

 

1.46

 

Commercial & industrial

 

 

130

 

 

2,743

 

 

 —

 

 

2,873

  

 

1,020

 

 

429,310

 

 

 —

 

 

25

 

 

430,355

 

 

0.67

 

Lease financing receivables

 

 

 —

 

 

158

 

 

 —

 

 

158

  

 

 —

 

 

15,031

 

 

 —

 

 

 —

 

 

15,031

 

 

1.05

 

Home equity

 

 

286

 

 

3,117

 

 

74

 

 

3,477

  

 

1,361

 

 

331,101

 

 

86

 

 

 —

 

 

332,548

 

 

1.05

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 —

 

 

1,140

 

 

 —

 

 

1,140

  

 

 —

 

 

19,095

 

 

 —

 

 

 —

 

 

19,095

 

 

5.97

 

Overdrafts

 

 

 —

 

 

1,102

 

 

 —

 

 

1,102

  

 

 —

 

 

1,102

 

 

 —

 

 

 —

 

 

1,102

 

 

100.00

 

Automobile loans

 

 

91

 

 

633

 

 

 —

 

 

724

  

 

91

 

 

63,384

 

 

 —

 

 

 —

 

 

63,475

 

 

1.14

 

Other consumer

 

 

421

 

 

170

 

 

 —

 

 

591

  

 

449

 

 

46,190

 

 

 3

 

 

 —

 

 

46,642

 

 

1.27

 

Total Traditional Banking

 

 

3,282

 

 

26,601

 

 

464

 

 

30,347

  

 

38,738

 

 

3,535,626

 

 

2,653

 

 

27

 

 

3,577,044

 

 

0.85

 

Warehouse lines of credit

 

 

 —

 

 

1,172

 

 

 —

 

 

1,172

  

 

 —

 

 

468,695

 

 

 —

 

 

 —

 

 

468,695

 

 

0.25

 

Total Core Banking

 

 

3,282

 

 

27,773

 

 

464

 

 

31,519

  

 

38,738

 

 

4,004,321

 

 

2,653

 

 

27

 

 

4,045,739

 

 

0.78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

  

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

 

 —

 

 

107

 

 

 —

 

 

107

  

 

 —

 

 

13,744

 

 

 —

 

 

 —

 

 

13,744

 

 

0.78

 

Republic Credit Solutions

 

 

18

 

 

13,031

 

 

 —

 

 

13,049

  

 

44

 

 

88,700

 

 

 —

 

 

 —

 

 

88,744

 

 

14.70

 

Total Republic Processing Group

 

 

18

 

 

13,138

 

 

 —

 

 

13,156

  

 

44

 

 

102,444

 

 

 —

 

 

 —

 

 

102,488

 

 

12.84

 

Total

 

$

3,300

 

$

40,911

 

$

464

 

$

44,675

  

$

38,782

 

$

4,106,765

 

$

2,653

 

$

27

 

$

4,148,227

 

 

1.08

%  

 

 

 

 

 

29

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018. The difference between the “Unpaid Principal Balance” and “Recorded Investment” columns represents life-to-date partial write downs/charge offs taken on individual impaired credits.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2019

 

September 30, 2019

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Cash Basis

 

 

 

 

 

 

 

Cash Basis

 

 

    

Unpaid

    

    

 

    

    

 

    

Average

    

Interest

    

Interest

    

Average

    

Interest

    

Interest

    

 

 

Principal

 

Recorded

 

Allocated

 

Recorded

 

Income

 

Income

 

Recorded

 

Income

 

Income

 

(in thousands)

 

Balance

 

Investment

 

Allowance

 

Investment

 

Recognized

 

Recognized

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no allocated Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

12,573

 

$

11,860

 

$

 —

 

$

12,156

 

$

60

 

$

 —

 

$

11,097

 

$

169

 

$

 —

 

Owner occupied - correspondent

 

 

1,329

 

 

1,329

 

 

 —

 

 

1,088

 

 

 —

 

 

 —

 

 

855

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

1,472

 

 

1,405

 

 

 —

 

 

1,226

 

 

28

 

 

 —

 

 

1,651

 

 

72

 

 

 —

 

Commercial real estate

 

 

12,846

 

 

10,364

 

 

 —

 

 

7,078

 

 

98

 

 

 —

 

 

5,529

 

 

221

 

 

 —

 

Construction & land development

 

 

 —

 

 

 —

 

 

 —

 

 

30

 

 

 —

 

 

 —

 

 

15

 

 

 —

 

 

 —

 

Commercial & industrial

 

 

723

 

 

615

 

 

 —

 

 

614

 

 

 2

 

 

 —

 

 

616

 

 

 3

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

2,398

 

 

2,355

 

 

 —

 

 

2,127

 

 

17

 

 

 —

 

 

1,603

 

 

46

 

 

 —

 

Consumer

 

 

93

 

 

93

 

 

 —

 

 

59

 

 

 1

 

 

 —

 

 

45

 

 

 3

 

 

 —

 

Impaired loans with allocated Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

13,493

 

 

13,456

 

 

1,499

 

 

12,795

 

 

136

 

 

 —

 

 

14,547

 

 

401

 

 

 —

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

 —

 

 

 —

 

 

 —

 

 

216

 

 

 —

 

 

 —

 

 

122

 

 

 —

 

 

 —

 

Commercial real estate

 

 

3,364

 

 

3,364

 

 

156

 

 

3,484

 

 

38

 

 

 —

 

 

3,921

 

 

116

 

 

 —

 

Construction & land development

 

 

58

 

 

58

 

 

 1

 

 

29

 

 

 1

 

 

 —

 

 

47

 

 

 2

 

 

 —

 

Commercial & industrial

 

 

2,694

 

 

2,694

 

 

1,532

 

 

3,773

 

 

 3

 

 

 —

 

 

2,108

 

 

 7

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

443

 

 

443

 

 

231

 

 

448

 

 

 2

 

 

 —

 

 

494

 

 

 6

 

 

 —

 

Consumer

 

 

533

 

 

521

 

 

437

 

 

472

 

 

 4

 

 

 —

 

 

508

 

 

13

 

 

 —

 

Total impaired loans

 

$

52,019

 

$

48,557

 

$

3,856

 

$

45,595

 

$

390

 

$

 —

 

$

43,158

 

$

1,059

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31, 2018

 

September 30, 2018

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Cash Basis

 

 

 

 

 

 

 

Cash Basis

 

 

    

Unpaid

    

    

 

    

    

 

    

Average

    

Interest

    

Interest

    

Average

    

Interest

    

Interest

    

 

 

Principal

 

Recorded

 

Allocated

 

Recorded

 

Income

 

Income

 

Recorded

 

Income

 

Income

 

(in thousands)

 

Balance

 

Investment

 

Allowance

 

Investment

 

Recognized

 

Recognized

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no allocated Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

11,676

 

$

10,703

 

$

 —

 

$

11,098

 

$

55

 

$

 —

 

$

10,839

 

$

165

 

$

 —

 

Owner occupied - correspondent

 

 

382

 

 

382

 

 

 —

 

 

388

 

 

 —

 

 

 —

 

 

290

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

2,729

 

 

2,350

 

 

 —

 

 

2,572

 

 

22

 

 

 —

 

 

2,399

 

 

65

 

 

 —

 

Commercial real estate

 

 

5,688

 

 

4,607

 

 

 —

 

 

5,489

 

 

31

 

 

 —

 

 

4,996

 

 

88

 

 

 —

 

Construction & land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

267

 

 

 —

 

 

 —

 

Commercial & industrial

 

 

712

 

 

604

 

 

 —

 

 

852

 

 

 7

 

 

 —

 

 

609

 

 

23

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

919

 

 

876

 

 

 —

 

 

589

 

 

 2

 

 

 —

 

 

708

 

 

 6

 

 

 —

 

Consumer

 

 

33

 

 

33

 

 

 —

 

 

55

 

 

 1

 

 

 —

 

 

47

 

 

 2

 

 

 —

 

Impaired loans with allocated Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

16,215

 

 

15,802

 

 

2,433

 

 

18,094

 

 

152

 

 

 —

 

 

18,467

 

 

448

 

 

 —

 

Owner occupied - correspondent

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Nonowner occupied

 

 

78

 

 

56

 

 

 4

 

 

83

 

 

 1

 

 

 —

 

 

211

 

 

 3

 

 

 —

 

Commercial real estate

 

 

4,416

 

 

4,416

 

 

303

 

 

5,368

 

 

53

 

 

 —

 

 

5,922

 

 

160

 

 

 —

 

Construction & land development

 

 

65

 

 

65

 

 

 4

 

 

126

 

 

 1

 

 

 —

 

 

132

 

 

 2

 

 

 —

 

Commercial & industrial

 

 

416

 

 

416

 

 

130

 

 

64

 

 

 —

 

 

 —

 

 

126

 

 

 1

 

 

 —

 

Lease financing receivables

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

 

572

 

 

571

 

 

360

 

 

1,134

 

 

10

 

 

 —

 

 

968

 

 

29

 

 

 —

 

Consumer

 

 

554

 

 

554

 

 

530

 

 

648

 

 

 6

 

 

 —

 

 

684

 

 

18

 

 

 —

 

Total impaired loans

 

$

44,455

 

$

41,435

 

$

3,764

 

$

46,560

 

$

341

 

$

 —

 

$

46,665

 

$

1,010

 

$

 —

 

 

 

30

Troubled Debt Restructurings

 

A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of their debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Bank’s internal underwriting policy.

 

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

 

Nonaccrual loans modified as TDRs typically remain on nonaccrual status and continue to be reported as nonperforming loans for a minimum of six consecutive months. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. At September 30, 2019 and December 31, 2018, $9 million and $8 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, 2019 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate

 

52

 

$

4,399

 

151

 

$

16,424

 

203

 

$

20,823

 

Commercial real estate

 

 3

 

 

1,684

 

 8

 

 

4,162

 

11

 

 

5,846

 

Construction & land development

 

 —

 

 

 —

 

 1

 

 

58

 

 1

 

 

58

 

Commercial & industrial

 

 5

 

 

3,014

 

 2

 

 

17

 

 7

 

 

3,031

 

Consumer

 

 —

 

 

 —

 

375

 

 

403

 

375

 

 

403

 

Total troubled debt restructurings

 

60

 

$

9,097

 

537

 

$

21,064

 

597

 

$

30,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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, 2018 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate

 

60

 

$

6,378

 

156

 

$

17,232

 

216

 

$

23,610

 

Commercial real estate

 

 3

 

 

1,203

 

14

 

 

6,571

 

17

 

 

7,774

 

Construction & land development

 

 —

 

 

 —

 

 1

 

 

65

 

 1

 

 

65

 

Commercial & industrial

 

 2

 

 

571

 

 3

 

 

408

 

 5

 

 

979

 

Consumer

 

 —

 

 

 —

 

256

 

 

435

 

256

 

 

435

 

Total troubled debt restructurings

 

65

 

$

8,152

 

430

 

$

24,711

 

495

 

$

32,863

 

 

31

The Bank considers a TDR to be performing to its modified terms if the loan is in accrual status and not past due 30-days-or-more as of the reporting date. A summary of the categories of TDR loan modifications outstanding and respective performance under modified terms at September 30, 2019 and December 31, 2018 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, 2019 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 —

 

$

 —

 

 1

 

$

925

 

 1

 

$

925

 

Rate reduction

 

113

 

 

13,833

 

14

 

 

941

 

127

 

 

14,774

 

Principal deferral

 

 9

 

 

860

 

 2

 

 

179

 

11

 

 

1,039

 

Legal modification

 

47

 

 

3,150

 

17

 

 

935

 

64

 

 

4,085

 

Total residential TDRs

 

169

 

 

17,843

 

34

 

 

2,980

 

203

 

 

20,823

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 2

 

 

702

 

 —

 

 

 —

 

 2

 

 

702

 

Rate reduction

 

 2

 

 

1,197

 

 2

 

 

103

 

 4

 

 

1,300

 

Principal deferral

 

 9

 

 

3,631

 

 2

 

 

730

 

11

 

 

4,361

 

Legal modification

 

 —

 

 

 —

 

 2

 

 

2,572

 

 2

 

 

2,572

 

Total commercial TDRs

 

13

 

 

5,530

 

 6

 

 

3,405

 

19

 

 

8,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate reduction

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Principal deferral

 

373

 

 

390

 

 —

 

 

 —

 

373

 

 

390

 

Legal modification

 

 1

 

 

10

 

 1

 

 

 3

 

 2

 

 

13

 

Total consumer TDRs

 

374

 

 

400

 

 1

 

 

 3

 

375

 

 

403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

556

 

$

23,773

 

41

 

$

6,388

 

597

 

$

30,161

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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, 2018 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 —

 

$

 —

 

 1

 

$

970

 

 1

 

$

970

 

Rate reduction

 

145

 

 

16,892

 

12

 

 

978

 

157

 

 

17,870

 

Principal deferral

 

11

 

 

1,171

 

 4

 

 

1,871

 

15

 

 

3,042

 

Legal modification

 

35

 

 

1,500

 

 8

 

 

228

 

43

 

 

1,728

 

Total residential TDRs

 

191

 

 

19,563

 

25

 

 

4,047

 

216

 

 

23,610

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 2

 

 

752

 

 —

 

 

 —

 

 2

 

 

752

 

Rate reduction

 

 8

 

 

2,962

 

 —

 

 

 —

 

 8

 

 

2,962

 

Principal deferral

 

12

 

 

5,076

 

 —

 

 

 —

 

12

 

 

5,076

 

Legal modification

 

 —

 

 

 —

 

 1

 

 

28

 

 1

 

 

28

 

Total commercial TDRs

 

22

 

 

8,790

 

 1

 

 

28

 

23

 

 

8,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate reduction

 

 1

 

 

16

 

 —

 

 

 —

 

 1

 

 

16

 

Principal deferral

 

255

 

 

419

 

 —

 

 

 —

 

255

 

 

419

 

Legal modification

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

Total consumer TDRs

 

256

 

 

435

 

 —

 

 

 —

 

256

 

 

435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

469

 

$

28,788

 

26

 

$

4,075

 

495

 

$

32,863

 

 

As of September 30, 2019 and December 31, 2018, 79% and 88% of the Bank’s TDRs were performing according to their modified terms. The Bank had provided $3 million and $3 million of specific reserve allocations to clients whose loan terms have been modified in TDRs as of September 30, 2019 and December 31, 2018. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships at September 30, 2019 or December 31, 2018.

 

A summary of the categories of TDR loan modifications by respective performance as of September 30, 2019 and 2018 that were modified during the three months ended September 30, 2019 and 2018 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, 2019 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal modification

 

 5

 

$

677

 

 4

 

$

315

 

 9

 

$

992

 

Total residential TDRs

 

 5

 

 

677

 

 4

 

 

315

 

 9

 

 

992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal modification

 

 1

 

 

10

 

 1

 

 

 2

 

 2

 

 

12

 

Total consumer TDRs

 

 1

 

 

10

 

 1

 

 

 2

 

 2

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

 6

 

$

687

 

 5

 

$

317

 

11

 

$

1,004

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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, 2018 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal modification

 

 —

 

$

 —

 

 1

 

$

18

 

 1

 

$

18

 

Total residential TDRs

 

 —

 

 

 —

 

 1

 

 

18

 

 1

 

 

18

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

 2

 

 

433

 

 —

 

 

 1

 

 2

 

 

434

 

Total commercial TDRs

 

 2

 

 

433

 

 —

 

 

 1

 

 2

 

 

434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal modification

 

 —

 

 

 —

 

 2

 

 

60

 

 2

 

 

60

 

Total consumer TDRs

 

 —

 

 

 —

 

 2

 

 

60

 

 2

 

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

 2

 

$

433

 

 3

 

$

79

 

 5

 

$

512

 


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, 2019 and 2018, 68% and 85% of the Bank’s TDRs that occurred during the third quarters of 2019 and 2018 were performing according to their modified terms. The Bank provided approximately $980,000 and $422,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during the third quarters of 2019 and 2018.

 

There was no significant change between the pre and post modification loan balances for the three months ending September 30, 2019 and 2018.

 

A summary of the categories of TDR loan modifications by respective performance as of September 30, 2019 and 2018 that were modified during the nine months ended September 30, 2019 and 2018 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, 2019 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate reduction

 

 1

 

$

371

 

 —

 

$

 —

 

 1

 

$

371

 

Principal deferral

 

 1

 

 

 4

 

 —

 

 

 —

 

 1

 

 

 4

 

Legal modification

 

24

 

 

2,055

 

 9

 

 

701

 

33

 

 

2,756

 

Total residential TDRs

 

26

 

 

2,430

 

 9

 

 

701

 

35

 

 

3,131

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 1

 

 

553

 

 —

 

 

 —

 

 1

 

 

553

 

Principal deferral

 

 2

 

 

25

 

 —

 

 

 —

 

 2

 

 

25

 

Legal modification

 

 —

 

 

 —

 

 2

 

 

2,572

 

 2

 

 

2,572

 

Total commercial TDRs

 

 3

 

 

578

 

 2

 

 

2,572

 

 5

 

 

3,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal modification

 

 1

 

 

10

 

 1

 

 

 2

 

 2

 

 

12

 

Total consumer TDRs

 

 1

 

 

10

 

 1

 

 

 2

 

 2

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

30

 

$

3,018

 

12

 

$

3,275

 

42

 

$

6,293

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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, 2018 (dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Residential real estate loans (including home equity loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

 —

 

$

 —

 

 1

 

$

1,200

 

 1

 

$

1,200

 

Rate reduction

 

 1

 

 

386

 

 1

 

 

85

 

 2

 

 

471

 

Principal deferral

 

 1

 

 

15

 

 3

 

 

2,151

 

 4

 

 

2,166

 

Legal modification

 

 6

 

 

90

 

 3

 

 

190

 

 9

 

 

280

 

Total residential TDRs

 

 8

 

 

491

 

 8

 

 

3,626

 

16

 

 

4,117

 

Commercial related and construction/land development loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

 5

 

 

1,071

 

 —

 

 

 —

 

 5

 

 

1,071

 

Total commercial TDRs

 

 5

 

 

1,071

 

 —

 

 

 —

 

 5

 

 

1,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal deferral

 

 1

 

 

54

 

 —

 

 

 —

 

 1

 

 

54

 

Legal modification

 

 —

 

 

 —

 

 2

 

 

60

 

 2

 

 

60

 

Total consumer TDRs

 

 1

 

 

54

 

 2

 

 

60

 

 3

 

 

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total troubled debt restructurings

 

14

 

$

1,616

 

10

 

$

3,686

 

24

 

$

5,302

 


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, 2019 and 2018,  24% and 30% of the Bank’s TDRs that occurred during the first nine months of 2019 and 2018 were performing according to their modified terms. The Bank provided approximately $1.5 million and $577,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during the first nine months of 2019 and 2018.

 

There was no significant change between the pre and post modification loan balances for the nine months ending September 30, 2019 and 2018.

 

The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of September 30, 2019 and 2018 and for which there was a payment default during the three and/or nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2019

 

2018

 

2019

 

2018

 

 

    

 

    

Recorded

    

Number of

    

Recorded

     

Number of

    

Recorded

     

Number of

    

Recorded

 

(dollars in thousands)

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

Loans

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 1

 

$

46

 

 6

 

$

3,386

 

 4

 

$

249

 

 7

 

$

3,552

 

Commercial real estate

 

 —

 

 

 —

 

 —

 

 

 —

 

 1

 

 

553

 

 —

 

 

 —

 

Commercial & industrial

 

 —

 

 

 —

 

 —

 

 

 —

 

 2

 

 

2,572

 

 —

 

 

 —

 

Home equity

 

 2

 

 

143

 

 1

 

 

74

 

 3

 

 

147

 

 1

 

 

74

 

Consumer

 

 —

 

 

 —

 

 2

 

 

60

 

 —

 

 

 —

 

 2

 

 

60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 3

 

$

189

 

 9

 

$

3,520

 

10

 

$

3,521

 

10

 

$

3,686

 

 

 

 

35

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, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

119

 

$

160

 

 

 

 

 

 

 

 

 

Total other real estate owned

 

$

119

 

$

160

 

 

The following table presents the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction:

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

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

 

$

1,796

 

$

3,293

 

 

Easy Advances

The Company’s TRS segment offered its EA product during the first two months of 2019 and 2018. The Company based its estimated provision for loan losses of EAs on the current year’s EA delinquency information and the prior year’s tax refund payment patterns subsequent to the first quarter. Each year, all unpaid EAs are charged off by June 30th.

Information regarding EAs follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

    

September 30, 

 

    

September 30, 

(in thousands)

    

2019

 

2018

 

    

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances originated

 

$

 —

 

$

 —

 

 

$

388,970

 

 

$

430,210

 

 

Net charge (credit) to the Provision for Easy Advances

 

 

(2,098)

 

 

(1,036)

 

 

 

11,322

 

 

 

11,360

 

 

Provision to total Easy Advances originated

 

 

NA

 

 

NA

 

 

 

2.91

%  

 

 

2.64

%  

 

Easy Advances net charge-offs (recoveries)

 

$

(2,098)

 

$

(1,036)

 

 

$

11,322

 

 

$

11,360

 

 

Easy Advances net charge-offs to total Easy Advances originated

 

 

NA

 

 

NA

 

 

 

2.91

%  

 

 

2.64

%  

 

 

 

 

 

 

 

 

 

 

 

36

5. DEPOSITS

 

The composition of the deposit portfolio follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

Demand

 

$

941,661

 

$

937,402

 

Money market accounts

 

 

785,563

 

 

717,954

 

Savings

 

 

173,396

 

 

187,868

 

Individual retirement accounts (1)

 

 

53,101

 

 

53,524

 

Time deposits, $250 and over (1)

 

 

85,789

 

 

84,104

 

Other certificates of deposit (1)

 

 

259,686

 

 

239,324

 

Reciprocal money market and time deposits (1)

 

 

234,043

 

 

217,153

 

Brokered deposits (1)

 

 

166,355

 

 

9,394

 

Total Core Bank interest-bearing deposits

 

 

2,699,594

 

 

2,446,723

 

Total Core Bank noninterest-bearing deposits

 

 

985,380

 

 

971,422

 

Total Core Bank deposits

 

 

3,684,974

 

 

3,418,145

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Money market accounts

 

 

3,605

 

 

5,453

 

Total RPG interest-bearing deposits

 

 

3,605

 

 

5,453

 

 

 

 

 

 

 

 

 

Brokered prepaid card deposits

 

 

8,931

 

 

4,350

 

Other noninterest-bearing deposits

 

 

37,242

 

 

28,197

 

Total RPG noninterest-bearing deposits

 

 

46,173

 

 

32,547

 

Total RPG deposits

 

 

49,778

 

 

38,000

 

 

 

 

 

 

 

 

 

Deposits held for assumption in connection with sale of banking centers (2)

 

 

142,384

 

 

 —

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,877,136

 

$

3,456,145

 


(1)

Includes time deposits.

(2)

See Note 18 “Agreement to Sell Four Banking Centers” in this section of the filing.

 

37

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

 

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

 

At September 30, 2019 and December 31, 2018, 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, 2019

    

 

December 31, 2018

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding balance at end of period

 

$

167,949

 

 

$

182,990

 

 

 

Weighted average interest rate at end of period

 

 

0.48

%  

 

 

0.83

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of securities pledged:

 

 

 

 

 

 

 

 

 

 

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

 

$

85,033

 

 

$

110,854

 

 

 

Mortgage backed securities - residential

 

 

113,671

 

 

 

84,657

 

 

 

Collateralized mortgage obligations

 

 

13,116

 

 

 

10,136

 

 

 

Total securities pledged

 

$

211,820

 

 

$

205,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30, 

 

 

September 30, 

 

 

 

(dollars in thousands)

        

2019

    

 

2018

    

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average outstanding balance during the period

 

$

246,889

 

 

$

213,195

 

 

$

232,949

 

 

$

216,070

 

 

 

Average interest rate during the period

 

 

0.48

%  

 

 

0.59

%  

 

 

0.60

%  

 

 

0.46

%  

 

 

Maximum outstanding at any month end during the period

 

$

219,812

 

 

$

163,768

 

 

$

226,002

 

 

$

215,281

 

 

 

 

 

 

38

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

 

The Company adopted ASU 2016-02 Leases (Topic 842), effective January 1, 2019. The adoption of this ASU did not have a meaningful impact on the Company’s net income, earnings per share, return on average assets, or return on average equity for the three and nine months ended September 30, 2019.

 

ASU 2016-02 requires the Company to record on its balance sheet the assets and liabilities that arise from leases. The Company is therefore required to record 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. Prior to January 1, 2019, operating leases were not recorded on a lessee’s balance sheet in this manner. 

 

As permitted by ASU 2018-11, the Company adopted ASU 2016-02 with a cumulative-effect adjustment as of January 1, 2019. Additionally, the Company elected the following list of practical expedients upon adoption of and as permitted by ASU 2016-02:

 

·

Concerning lease classification, the Company elected not to reassess the lease classification for any expired or existing leases accounted for in accordance with ASC Topic 840.

·

Concerning lease identification, the Company elected not to reassess whether any expired or existing contracts, not previously classified as a lease, are, or contain, leases.

·

Concerning initial direct costs, the Company elected not to reassess initial direct costs for any existing leases.

·

The Company elected to use hindsight in determining the lease term, whether or not to purchase the underlying leased asset, and in assessing impairment in right-of-use assets.

·

The Company elected that all short-term leases will not be placed on the balance sheet. Short-term leases include leases that have a lease term of 12 months or less at their commencement date and do not include a purchase option that the Company is reasonably certain to exercise.

Upon adoption of ASU 2016-02 on January 1, 2019, the Company was under 50 separate and distinct operating lease contracts to lease the land and/or buildings for 38 of its offices, with 15 such operating leases contracted with a related party of the Company.  As of January 1, 2019, the Company recorded total operating lease liabilities of $42 million and total right-of-use assets of $40 million, primarily reflecting the present value of its expected remaining lease payments plus any residual guarantees under its operating lease contracts. In order to discount these remaining lease payments and guarantees, the Company made assumptions concerning the expected remaining lease term and the discount rate.

 

The Company’s assumption regarding the expected remaining lease term included the fixed noncancelable term, plus all periods for which failure to renew the lease imposed a penalty on the Company, plus all periods for which the Company was reasonably certain to exercise a lease renewal option, plus all periods for which the Company was reasonably certain not to exercise a lease termination option.  In determining whether it was reasonably certain to exercise a lease renewal or termination option, the Company considered its overall strategic plan and all economic and environmental circumstances connected to the leased property. Expected remaining lease terms upon adoption of ASU 2016-02 ranged from 0.75 to 18.51 years, with a weighted average remaining term of 8.60 years.

 

The Company employed the interest rate curve published by the FHLB of Cincinnati for the FHLB’s collateralized term borrowings as of January 1, 2019 to discount its operating lease payments and guarantees, matching expected lease term to borrowing term. Discount rates employed upon adoption of ASU 2016-02 ranged from 2.94% to 3.70%, with a weighted average rate of 3.48%. 

 

As of September 30, 2019, payments on 25 of the Company’s operating leases were considered variable because such payments were adjustable based on periodic changes in the Consumer Price Index.

 

Prior to the release of these financial statements, the Company had executed three lease contracts that had not commenced for three of its banking centers. The estimated operating lease liabilities and offsetting right-of-use assets to be recorded for these leases totaled approximately $1.1 million.

 

39

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 

 

 

September 30, 

(dollars in thousands)

        

2019

        

 

2019

 

 

 

 

 

 

 

 

 

 

Operating lease expense:

 

 

 

 

 

 

 

 

 

Related Party:

 

 

 

 

 

 

 

 

 

Variable lease expense

 

$

1,164

 

 

 

$

3,478

 

Fixed lease expense

 

 

10

 

 

 

 

28

 

Third Party:

 

 

 

 

 

 

 

 

 

Variable lease expense

 

 

210

 

 

 

 

644

 

Fixed lease expense

 

 

392

 

 

 

 

1,137

 

Short-term lease expense

 

 

14

 

 

 

 

40

 

Total operating lease expense

 

$

1,790

 

 

 

$

5,327

 

 

 

 

 

 

 

 

 

 

 

Other information concerning operating leases:

 

 

 

 

 

 

 

 

 

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

 

$

1,795

 

 

 

$

5,372

 

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

 

 

14

 

 

 

 

40

 

 

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, 2019:

 

 

 

 

 

 

 

    

September 30, 2019

 

 

 

 

 

Weighted average remaining term in years

 

 

8.15

 

Weighted average discount rate

 

 

3.48

%

 

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, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year (in thousands)

    

Related Party

    

Third Party

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of 2019

 

$

1,157

 

$

633

 

$

1,790

 

2020

 

 

4,585

 

 

2,452

 

 

7,037

 

2021

 

 

4,171

 

 

2,233

 

 

6,404

 

2022

 

 

3,310

 

 

1,826

 

 

5,136

 

2023

 

 

3,310

 

 

1,301

 

 

4,611

 

Thereafter

 

 

15,910

 

 

2,263

 

 

18,173

 

Total undiscounted cash flows

 

$

32,443

 

$

10,708

 

$

43,151

 

Discount applied to cash flows

 

 

(4,784)

 

 

(976)

 

 

(5,760)

 

Total discounted cash flows reported as operating lease liabilities

 

$

27,659

 

$

9,732

 

$

37,391

 

 

 

 

40

8. FEDERAL HOME LOAN BANK ADVANCES

 

FHLB advances were as follows:

 

 

 

 

 

 

 

 

 

(dollars in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Overnight advances

 

$

750,000

 

$

510,000

 

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

 

 

10,000

 

 

10,000

 

Fixed interest rate advances

 

 

410,000

 

 

290,000

 

Total FHLB advances

 

$

1,170,000

 

$

810,000

 

 

 

Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity.  FHLB advances are collateralized by a blanket pledge of eligible real estate loans. At September 30, 2019 and December 31, 2018, Republic had available borrowing capacity of $16 million and $254 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million and $125 million available through various other financial institutions as of September 30, 2019 and December 31, 2018.  

 

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

 

 

 

 

 

 

 

 

Remainder of 2019 (Overnight)

 

$

750,000

 

2.11

%  

Remainder of 2019 (Term)

 

 

230,000

 

2.11

 

2020

 

 

120,000

 

1.81

 

2021

 

 

30,000

 

1.93

 

2022

 

 

20,000

 

2.12

 

2023

 

 

20,000

 

2.56

 

Thereafter

 

 

 —

 

 —

 

Total

 

$

1,170,000

 

2.08

%  

 

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)

    

2019

    

 

2018

    

 

2019

    

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average outstanding balance during the period

 

$

357,685

 

 

$

229,185

 

 

$

340,502

 

 

$

200,421

 

Average interest rate during the period

 

 

2.34

%

 

 

2.02

%

 

 

2.45

%

 

 

1.84

%

Maximum outstanding at any month end during the period

 

$

785,000

 

 

$

395,000

 

 

$

785,000

 

 

$

560,000

 

 

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

First lien, single family residential real estate

 

$

1,108,273

 

$

1,129,588

 

Home equity lines of credit

 

 

278,564

 

 

311,419

 

 

41

9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Unused warehouse lines of credit

 

$

177,912

 

$

591,305

 

Unused home equity lines of credit

 

 

379,836

 

 

377,277

 

Unused loan commitments - other

 

 

805,284

 

 

720,645

 

Standby letters of credit

 

 

12,050

 

 

10,642

 

FHLB letter of credit

 

 

2,485

 

 

10,000

 

Total commitments

 

$

1,377,567

 

$

1,709,869

 

 

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.

42

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 available-for-sale debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

The Bank’s private label mortgage backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (present value model) approach in determining the fair value of this security.

 

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

 

The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value at September 30, 2019. 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 CRA 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: From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold 100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after origination. The Bank carried all unsold loans under the program as “held for sale” on its balance sheet. At the initiation of this program in 2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter marked to market on a monthly basis.

 

During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any new loans, and the subsequent sale of all recently-originated loans under this program, while the two parties evaluate the future offering of this product due to changes in the applicable state law impacting the product. Concurrent with the suspension of this program, the Bank reclassified these loans from held for sale on the balance sheet into the held for investment category and revalued these loans accordingly.

 

The fair value for these loans is based on the discounted cash flows of the underlying loans, which are also classified as Level 3 inputs.

 

43

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.

 

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

 

Premises carried at fair value: Premises and equipment are accounted for at the lower of cost less accumulated depreciation or fair value less estimated costs to sell. The fair value of Bank premises is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Mortgage servicing rights: On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded, and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and can generally be validated against available market data (Level 2). There were no MSR tranches carried at fair value at September 30, 2019 and December 31, 2018.

 

44

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at 

 

 

 

 

 

 

September 30, 2019 Using:

 

 

 

 

 

    

Quoted Prices in

    

Significant

    

    

 

    

    

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

$

257,302

 

$

 

$

257,302

 

Private label mortgage backed security

 

 

 

 

 

 

3,595

 

 

3,595

 

Mortgage backed securities - residential

 

 

 

 

230,694

 

 

 

 

230,694

 

Collateralized mortgage obligations

 

 

 

 

66,580

 

 

 

 

66,580

 

Corporate bonds

 

 

 

 

9,844

 

 

 —

 

 

9,844

 

Trust preferred security

 

 

 

 

 —

 

 

4,000

 

 

4,000

 

Total available-for-sale debt securities

 

$

 —

 

$

564,420

 

$

7,595

 

$

572,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities with readily determinable fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

$

 

$

882

 

$

 

$

882

 

Community Reinvestment Act mutual fund

 

 

2,485

 

 

 —

 

 

 

 

2,485

 

Total equity securities with readily determinable fair value

 

$

2,485

 

$

882

 

$

 —

 

$

3,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

 

$

32,739

 

$

 

$

32,739

 

Consumer loans held for investment

 

 

 —

 

 

 —

 

 

1,187

 

 

1,187

 

Rate lock loan commitments

 

 

 

 

1,193

 

 

 

 

1,193

 

Mandatory forward contracts

 

 

 

 

211

 

 

 

 

211

 

Interest rate swap agreements

 

 

 

 

6,483

 

 

 

 

6,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

 

$

6,620

 

$

 

$

6,620

 

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2018 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

 

$

 

$

216,873

 

$

 

$

216,873

 

Private label mortgage backed security

 

 

 

 

 

 

3,712

 

 

3,712

 

Mortgage backed securities - residential

 

 

 

 

169,209

 

 

 

 

169,209

 

Collateralized mortgage obligations

 

 

 

 

72,811

 

 

 

 

72,811

 

Corporate bonds

 

 

 —

 

 

9,058

 

 

 —

 

 

9,058

 

Trust preferred security

 

 

 —

 

 

 

 

4,075

 

 

4,075

 

Total available-for-sale debt securities

 

$

 —

 

$

467,951

 

$

7,787

 

$

475,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities with readily determinable fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Freddie Mac preferred stock

 

$

 

$

410

 

$

 

$

410

 

Community Reinvestment Act mutual fund

 

 

2,396

 

 

 —

 

 

 

 

2,396

 

Total equity securities with readily determinable fair value

 

$

2,396

 

$

410

 

$

 —

 

$

2,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

 

$

8,971

 

$

 

$

8,971

 

Consumer loans held for investment

 

 

 —

 

 

 —

 

 

1,922

 

 

1,922

 

Rate lock loan commitments

 

 

 

 

356

 

 

 

 

356

 

Interest rate swap agreements

 

 

 

 

1,264

 

 

 

 

1,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

$

 

$

262

 

$

 

$

262

 

Interest rate swap agreements

 

 

 

 

1,149

 

 

 

 

1,149

 

 

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, 2019 and 2018.

 

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)

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

3,615

 

$

3,926

 

$

3,712

 

$

4,449

 

Total gains or losses included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gain

 

 

(24)

 

 

(2)

 

 

(58)

 

 

(19)

 

Recovery of actual losses previously recorded

 

 

38

 

 

39

 

 

113

 

 

114

 

Principal paydowns

 

 

(34)

 

 

(114)

 

 

(172)

 

 

(695)

 

Balance, end of period

 

$

3,595

 

$

3,849

 

$

3,595

 

$

3,849

 

 

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.

 

46

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, 2019 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Range

 

 

 

 

 

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

3,595

 

Discounted cash flow

 

(1) Constant prepayment rate

 

3.0% - 4.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

1.8% - 7.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Loss severity

 

50% - 75%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Valuation

    

    

    

 

 

December 31, 2018 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Range

 

 

 

 

 

 

 

 

 

 

 

 

Private label mortgage backed security

 

$

3,712

 

Discounted cash flow

 

(1) Constant prepayment rate

 

6.5% - 8.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

1.8% - 4.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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)

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

4,000

 

$

4,150

 

$

4,075

 

$

3,600

 

Total gains or losses included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount accretion

 

 

10

 

 

10

 

 

31

 

 

30

 

Net change in unrealized gain

 

 

(10)

 

 

90

 

 

(106)

 

 

620

 

Balance, end of period

 

$

4,000

 

$

4,250

 

$

4,000

 

$

4,250

 

 

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. 

 

47

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, 2019 and December 31, 2018.

 

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Aggregate fair value

 

$

32,739

 

$

8,971

 

Contractual balance

 

 

32,243

 

 

8,676

 

Unrealized gain

 

 

496

 

 

295

 

 

The total amount of gains and losses from changes in fair value included in earnings for the three and nine months ended September  30, 2019 and 2018 for mortgage loans held for sale are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

    

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

212

 

$

133

 

$

484

 

$

308

 

Change in fair value

 

 

155

 

 

(110)

 

 

201

 

 

33

 

Total included in earnings

 

$

367

 

$

23

 

$

685

 

$

341

 

 

Consumer Loans Held for Investment

 

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, 2019 and December 31, 2018. 

 

The significant unobservable inputs in the fair value measurement of the Bank’s consumer loans were the constant prepayment rate, probability of default, and loss severity for these loans under a discounted-cash-flow model. Significant fluctuations in any of these 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, 2019 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Rate

 

 

 

 

 

 

 

 

 

 

Consumer loans held for investment

 

$

1,187

 

Discounted Cash Flows

 

(1) Constant prepayment rate

 

25.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

21.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Loss severity

 

21.0%

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Valuation

    

    

    

 

December 31, 2018 (dollars in thousands)

 

Value

 

Technique

 

Unobservable Inputs

 

Rate

 

 

 

 

 

 

 

 

 

 

Consumer loans held for investment

 

$

1,922

 

Discounted Cash Flows

 

(1) Constant prepayment rate

 

15.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Probability of default

 

45.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Loss severity

 

20.0%

48

 

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

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

Aggregate fair value

 

$

1,187

 

$

1,922

 

Contractual balance

 

 

1,384

 

 

2,170

 

Unrealized (loss) gain

 

 

(197)

 

 

(248)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

94

 

$

130

 

$

295

 

$

457

 

Change in fair value

 

 

14

 

 

21

 

 

51

 

 

(406)

 

Total included in earnings

 

$

108

 

$

151

 

$

346

 

$

51

 

 

49

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

September 30, 2019 Using:

 

 

 

 

 

    

Quoted Prices in

    

Significant

    

    

 

    

    

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

Total

 

 

 

Assets

 

Inputs

 

Inputs

 

Fair

 

(in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

 

$

3,716

 

$

3,716

 

Nonowner occupied

 

 

 

 

 

 

16

 

 

16

 

Commercial real estate

 

 

 

 

 

 

3,750

 

 

3,750

 

Commercial & industrial

 

 

 —

 

 

 —

 

 

339

 

 

339

 

Home equity

 

 

 

 

 

 

470

 

 

470

 

Total impaired loans*

 

$

 —

 

$

 —

 

$

8,291

 

$

8,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises

 

$

 

$

 —

 

$

1,471

 

$

1,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2018 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans held for sale

 

$

 

$

 —

 

$

1,249

 

$

1,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 

$

 

$

4,708

 

$

4,708

 

Nonowner occupied

 

 

 

 

 

 

1,007

 

 

1,007

 

Commercial real estate

 

 

 

 

 

 

1,255

 

 

1,255

 

Commercial & industrial

 

 

 

 

 

 

609

 

 

609

 

Home equity

 

 

 

 

 

 

356

 

 

356

 

Total impaired loans*

 

$

 —

 

$

 —

 

$

7,935

 

$

7,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises

 

$

 

$

 —

 

$

1,694

 

$

1,694

 


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

 

50

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, 2019 (dollars in thousands)

 

Value

 

Technique

 

Inputs

 

Average)

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate owner occupied

 

$

3,716

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 62% (12%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate nonowner occupied

 

$

16

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

5% (5%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

3,750

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

1% - 10% (4%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial & industrial

 

$

339

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

3% - 4% (3%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - home equity

 

$

470

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

2% (2%)

 

 

 

 

 

 

 

 

 

 

Premises

 

$

1,471

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

36% - 76% (48%)

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

    

    

    

Range

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

December 31, 2018 (dollars in thousands)

 

Value

 

Technique

 

Inputs

 

Average)

 

 

 

 

 

 

 

 

 

 

Consumer loans held for sale

 

$

1,249

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

6% (6%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate owner occupied

 

$

4,708

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 67% (9%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - residential real estate nonowner occupied

 

$

1,007

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 27% (15%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

123

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

21% (21%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial real estate

 

$

1,132

 

Income approach

 

Adjustments for differences between net operating income expectations

 

17% (17%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - commercial & industrial

 

$

609

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

3% (3%)

 

 

 

 

 

 

 

 

 

 

Impaired loans - home equity

 

$

356

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

0% - 22% (8%)

 

 

 

 

 

 

 

 

 

 

Premises

 

$

1,694

 

Sales comparison approach

 

Adjustments determined for differences between comparable sales

 

27% - 72% (40%)

51

Impaired Loans

 

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

 

Impaired collateral-dependent loans are as follows:

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

    

 

 

 

 

 

 

 

 

Carrying amount of loans measured at fair value

 

$

7,293

 

$

7,380

 

Estimated selling costs considered in carrying amount

 

 

1,013

 

 

913

 

Valuation allowance

 

 

(15)

 

 

(358)

 

Total fair value

 

$

8,291

 

$

7,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisions on collateral-dependent, impaired loans

 

$

1,419

 

$

117

 

$

1,442

 

$

901

 

 

Premises

 

The Company’s Traditional Banking segment classified three of its former banking centers as held for sale as of September 30, 2019 and December 31, 2018. Impairment charges are recorded when the value of a piece of property is reappraised or reassessed below the property’s then-carrying value. Impairment charges related to properties held for sale were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

    

 

 

 

 

September 30, 

 

September 30, 

 

 

 

(in thousands)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charges on premises

 

$

66

 

$

126

 

$

198

 

$

356

 

 

 

 

52

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

September 30, 2019:

 

 

    

 

 

    

    

 

    

    

 

    

    

 

    

Total

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

Fair

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

397,072

 

$

397,072

 

$

 —

 

$

 —

 

$

397,072

 

Available-for-sale debt securities

 

 

572,015

 

 

 —

 

 

564,420

 

 

7,595

 

 

572,015

 

Held-to-maturity debt securities

 

 

63,315

 

 

 —

 

 

63,872

 

 

 —

 

 

63,872

 

Equity securities with readily determinable fair values

 

 

3,367

 

 

2,485

 

 

882

 

 

 —

 

 

3,367

 

Mortgage loans held for sale, at fair value

 

 

32,739

 

 

 —

 

 

32,739

 

 

 —

 

 

32,739

 

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

 

 

18,504

 

 

 —

 

 

18,504

 

 

 —

 

 

18,504

 

Loans held for sale in connection with sale of banking centers, at the lower of cost or fair value

 

 

130,770

 

 

 —

 

 

130,770

 

 

 —

 

 

130,770

 

Loans, net

 

 

4,617,122

 

 

 —

 

 

 —

 

 

4,695,637

 

 

4,695,637

 

Federal Home Loan Bank stock

 

 

32,242

 

 

 —

 

 

 

 

 —

 

 

NA

 

Accrued interest receivable

 

 

13,699

 

 

 —

 

 

13,699

 

 

 —

 

 

13,699

 

Rate lock loan commitments

 

 

1,193

 

 

 —

 

 

1,193

 

 

 —

 

 

1,193

 

Mandatory forward contracts

 

 

211

 

 

 —

 

 

211

 

 

 —

 

 

211

 

Interest rate swap agreements

 

 

6,483

 

 

 —

 

 

6,483

 

 

 —

 

 

6,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

1,031,553

 

 

 —

 

$

1,031,553

 

 

 —

 

$

1,031,553

 

Transaction deposits

 

 

2,109,821

 

 

 —

 

 

2,109,821

 

 

 —

 

 

2,109,821

 

Time deposits

 

 

593,378

 

 

 —

 

 

597,044

 

 

 —

 

 

597,044

 

Deposits held for assumption in connection with sale of banking centers

 

 

142,384

 

 

 —

 

 

142,563

 

 

 —

 

 

142,563

 

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

 

 

167,949

 

 

 —

 

 

167,949

 

 

 —

 

 

167,949

 

Federal Home Loan Bank advances

 

 

1,170,000

 

 

 —

 

 

1,169,392

 

 

 —

 

 

1,169,392

 

Subordinated note

 

 

41,240

 

 

 —

 

 

31,421

 

 

 —

 

 

31,421

 

Accrued interest payable

 

 

2,362

 

 

 —

 

 

2,362

 

 

 —

 

 

2,362

 

Interest rate swap agreements

 

 

6,620

 

 

 —

 

 

6,620

 

 

 —

 

 

6,620

 

 

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2018:

 

 

    

    

 

    

    

 

    

    

 

    

    

 

    

Total

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

Fair

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

351,474

 

$

351,474

 

$

 —

 

$

 —

 

$

351,474

 

Available-for-sale debt securities

 

 

475,738

 

 

 —

 

 

467,951

 

 

7,787

 

 

475,738

 

Held-to-maturity debt securities

 

 

65,227

 

 

 —

 

 

64,858

 

 

 —

 

 

64,858

 

Equity securities with readily determinable fair values

 

 

2,806

 

 

2,396

 

 

410

 

 

 —

 

 

2,806

 

Mortgage loans held for sale, at fair value

 

 

8,971

 

 

 —

 

 

8,971

 

 

 —

 

 

8,971

 

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

 

 

12,838

 

 

 —

 

 

12,838

 

 

 —

 

 

12,838

 

Loans, net

 

 

4,103,552

 

 

 —

 

 

 —

 

 

4,062,457

 

 

4,062,457

 

Federal Home Loan Bank stock

 

 

32,067

 

 

 —

 

 

 —

 

 

 —

 

 

NA

 

Accrued interest receivable

 

 

13,942

 

 

 —

 

 

13,942

 

 

 —

 

 

13,942

 

Rate lock loan commitments

 

 

356

 

 

 —

 

 

356

 

 

 —

 

 

356

 

Interest rate swap agreements

 

 

1,264

 

 

 —

 

 

1,264

 

 

 —

 

 

1,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

1,003,969

 

 

 —

 

$

1,003,969

 

 

 —

 

$

1,003,969

 

Transaction deposits

 

 

2,035,701

 

 

 —

 

 

2,035,701

 

 

 —

 

 

2,035,701

 

Time deposits

 

 

416,475

 

 

 —

 

 

412,477

 

 

 —

 

 

412,477

 

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

 

 

182,990

 

 

 —

 

 

182,990

 

 

 —

 

 

182,990

 

Federal Home Loan Bank advances

 

 

810,000

 

 

 —

 

 

804,251

 

 

 —

 

 

804,251

 

Subordinated note

 

 

41,240

 

 

 —

 

 

33,724

 

 

 —

 

 

33,724

 

Accrued interest payable

 

 

1,084

 

 

 —

 

 

1,084

 

 

 —

 

 

1,084

 

Mandatory forward contracts

 

 

262

 

 

 —

 

 

262

 

 

 —

 

 

262

 

Interest rate swap agreements

 

 

1,149

 

 

 —

 

 

1,149

 

 

 —

 

 

1,149

 

 

54

 

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)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

13,883

 

$

12,653

 

$

8,971

 

$

5,761

 

Origination of mortgage loans held for sale

 

 

124,375

 

 

49,152

 

 

247,071

 

 

133,273

 

Proceeds from the sale of mortgage loans held for sale

 

 

(108,493)

 

 

(55,063)

 

 

(229,755)

 

 

(134,157)

 

Net gain on sale of mortgage loans held for sale

 

 

2,974

 

 

1,120

 

 

6,452

 

 

2,985

 

Balance, end of period

 

$

32,739

 

$

7,862

 

$

32,739

 

$

7,862

 

 

The following table presents the components of Mortgage Banking income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

    

2018

 

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain realized on sale of mortgage loans held for sale

 

$

2,170

 

$

1,093

 

$

4,941

 

$

2,791

 

Net change in fair value recognized on loans held for sale

 

 

155

 

 

(110)

 

 

201

 

 

33

 

Net change in fair value recognized on rate lock loan commitments

 

 

(29)

 

 

(84)

 

 

837

 

 

38

 

Net change in fair value recognized on forward contracts

 

 

678

 

 

224

 

 

473

 

 

123

 

Net gain recognized

 

 

2,974

 

 

1,123

 

 

6,452

 

 

2,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing income

 

 

632

 

 

598

 

 

1,842

 

 

1,803

 

Amortization of mortgage servicing rights

 

 

(542)

 

 

(361)

 

 

(1,275)

 

 

(1,092)

 

Net servicing income recognized

 

 

90

 

 

237

 

 

567

 

 

711

 

Total Mortgage Banking income

 

$

3,064

 

$

1,360

 

$

7,019

 

$

3,696

 

 

Activity for capitalized mortgage servicing rights was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

5,158

 

$

4,915

 

$

4,919

 

$

5,044

 

Additions

 

 

867

 

 

372

 

 

1,839

 

 

974

 

Amortized to expense

 

 

(542)

 

 

(361)

 

 

(1,275)

 

 

(1,092)

 

Balance, end of period

 

$

5,483

 

$

4,926

 

$

5,483

 

$

4,926

 

 

There was no balance or activity in the valuation allowance for capitalized mortgage servicing rights for the three and nine months ended September 30, 2019 and 2018.

 

 

55

Other information relating to mortgage servicing rights follows:

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of mortgage servicing rights portfolio

 

$

7,539

 

 

$

9,357

 

 

 

Monthly weighted average prepayment rate of unpaid principal balance*

 

 

253

%

 

 

160

%

 

 

Discount rate

 

 

10.00

%

 

 

10.00

%

 

 

Weighted average foreclosure rate

 

 

0.10

%

 

 

0.14

%

 

 

Weighted average life in years

 

 

4.90

 

 

 

6.32

 

 

 


* 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, 2019

    

December 31, 2018

 

 

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

 

$

32,243

 

$

32,739

 

$

8,676

 

$

8,971

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Rate lock loan commitments

 

$

61,657

 

$

1,193

 

$

14,788

 

$

356

Mandatory forward contracts

 

 

81,868

 

 

211

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Mandatory forward contracts

 

$

 —

 

$

 —

 

$

20,063

 

$

262

 

56

12. INTEREST RATE SWAPS

 

Interest rate swap derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a cash flow hedging relationship. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss is recorded as a component of OCI. For derivatives not designated as hedges, the gain or loss is recognized in current period earnings.

 

Interest Rate Swaps Used as Cash Flow Hedges

 

The Bank entered into two interest rate swap agreements (“swaps”) during 2013 as part of its interest rate risk management strategy. The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR.  The counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is not significant.

 

The swaps were determined to be fully effective during all periods presented; therefore, no amount of ineffectiveness was included in net income. The aggregate fair value of the swaps is recorded in other liabilities with changes in fair value recorded in OCI. The amount included in AOCI would be reclassified to current earnings should the hedge no longer be considered effective. The Bank expects the hedges to remain fully effective during the remaining term of the swaps.

 

The following table reflects information about swaps designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

Unrealized

 

 

 

Notional

 

Pay

 

 

Receive 

 

 

 

 

Assets /

 

 

Gain (Loss)

 

 

Assets /

 

 

Gain (Loss)

(dollars in thousands)

  

 

Amount

  

Rate

 

  

Rate

  

Term

  

 

(Liabilities)

  

 

in AOCI

  

 

(Liabilities)

  

 

in AOCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

$

10,000

 

2.17

%

 

1M LIBOR

 

12/2013 - 12/2020

 

$

(65)

 

$

(49)

 

$

58

 

$

45

Interest rate swap on FHLB advance

 

 

10,000

 

2.33

%

 

3M LIBOR

 

12/2013 - 12/2020

 

 

(72)

 

 

(53)

 

 

57

 

 

45

Total

 

$

20,000

 

 

 

 

 

 

 

 

$

(137)

 

$

(102)

 

$

115

 

$

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

$

(2)

 

$

(1)

 

$

(18)

 

$

22

 

Interest rate swap on FHLB advance

 

 

 —

 

 

 2

 

 

(16)

 

 

14

 

Total interest (benefit) expense on swap transactions

 

$

(2)

 

$

 1

 

$

(34)

 

$

36

 

 

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)

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(3)

 

$

54

 

$

(218)

 

$

330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 2

 

 

(1)

 

 

34

 

 

(36)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

The estimated net amount of the existing losses reported in AOCI at September 30, 2019 expected to be reclassified into earnings within the next 12 months is considered immaterial.

 

57

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, 2019

 

December 31, 2018

 

 

 

 

 

 

Notional

 

 

 

 

Notional

 

 

 

 

 

(in thousands)

    

Bank Position

 

Amount

    

Fair Value

    

Amount

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps with Bank clients - Assets

 

Pay variable/receive fixed

 

$

91,546

 

$

6,483

 

$

26,398

 

$

1,264

 

 

Interest rate swaps with Bank clients - Liabilities

 

Pay variable/receive fixed

 

 

4,119

 

 

(3)

 

 

54,718

 

 

(908)

 

 

Interest rate swaps with Bank clients - Total

 

Pay variable/receive fixed

 

$

95,665

 

$

6,480

 

$

81,116

 

$

356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting interest rate swaps with institutional swap dealer

 

Pay fixed/receive variable

 

 

95,665

 

 

(6,480)

 

 

81,116

 

 

(356)

 

 

Total

 

 

 

$

191,330

 

$

 —

 

$

162,232

 

$

 —

 

 

 

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 $6.6 million and $0.0 million at September 30, 2019 and December 31, 2018.

 

 

58

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)

 

    

2019

    

2018

    

2019

    

2018

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

18,408

 

$

17,411

 

$

65,931

 

$

60,546

 

Dividends declared on Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares

 

 

 

(4,961)

 

 

(4,517)

 

 

(14,826)

 

 

(13,552)

 

Class B Shares

 

 

 

(530)

 

 

(487)

 

 

(1,591)

 

 

(1,468)

 

Undistributed net income for basic earnings per share

 

 

 

12,917

 

 

12,407

 

 

49,514

 

 

45,526

 

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

 

 

 

(27)

 

 

(38)

 

 

(93)

 

 

(103)

 

Undistributed net income for diluted earnings per share

 

 

$

12,890

 

$

12,369

 

$

49,421

 

$

45,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Shares

 

 

 

18,828

 

 

18,748

 

 

18,803

 

 

18,722

 

Class B Shares

 

 

 

2,208

 

 

2,214

 

 

2,211

 

 

2,228

 

Effect of dilutive securities on Class A Shares outstanding

 

 

 

101

 

 

158

 

 

118

 

 

143

 

Weighted average shares outstanding including dilutive securities

 

 

 

21,137

 

 

21,120

 

 

21,132

 

 

21,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share dividends distributed

 

 

$

0.26

 

$

0.24

 

$

0.79

 

$

0.73

 

Undistributed earnings per share*

 

 

 

0.62

 

 

0.60

 

 

2.38

 

 

2.19

 

Total basic earnings per share - Class A Common Stock

 

 

$

0.88

 

$

0.84

 

$

3.17

 

$

2.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share dividends distributed

 

 

$

0.24

 

$

0.22

 

$

0.72

 

$

0.66

 

Undistributed earnings per share*

 

 

 

0.56

 

 

0.54

 

 

2.16

 

 

1.99

 

Total basic earnings per share - Class B Common Stock

 

 

$

0.80

 

$

0.76

 

$

2.88

 

$

2.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share dividends distributed

 

 

$

0.26

 

$

0.24

 

$

0.79

 

$

0.73

 

Undistributed earnings per share*

 

 

 

0.62

 

 

0.59

 

 

2.36

 

 

2.17

 

Total diluted earnings per share - Class A Common Stock

 

 

$

0.88

 

$

0.83

 

$

3.15

 

$

2.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share dividends distributed

 

 

$

0.24

 

$

0.22

 

$

0.72

 

$

0.66

 

Undistributed earnings per share*

 

 

 

0.56

 

 

0.54

 

 

2.15

 

 

1.98

 

Total diluted earnings per share - Class B Common Stock

 

 

$

0.80

 

$

0.76

 

$

2.87

 

$

2.64

 


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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

Antidilutive stock options

 

158,000

 

161,000

 

160,000

 

161,000

 

Average antidilutive stock options

 

157,000

 

29,000

 

156,000

 

10,000

 

 

 

59

 

 

 

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)

 

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized (loss) gain on AFS debt securities

 

$

86

 

$

(467)

 

$

5,759

 

$

(3,130)

 

Adjustment for adoption of ASU 2016-01

 

 

 —

 

 

 —

 

 

 —

 

 

(428)

 

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

 

 

(24)

 

 

(2)

 

 

(58)

 

 

(19)

 

Net unrealized (losses) gains

 

 

62

 

 

(469)

 

 

5,701

 

 

(3,577)

 

Tax effect

 

 

(172)

 

 

100

 

 

(1,358)

 

 

752

 

Net of tax

 

 

(110)

 

 

(369)

 

 

4,343

 

 

(2,825)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives used for cash flow hedges

 

 

(3)

 

 

54

 

 

(218)

 

 

330

 

Reclassification amount for net derivative losses realized in income

 

 

(2)

 

 

 1

 

 

(34)

 

 

36

 

Net unrealized gains

 

 

(5)

 

 

55

 

 

(252)

 

 

366

 

Tax effect

 

 

 9

 

 

(12)

 

 

62

 

 

(76)

 

Net of tax

 

 

 4

 

 

43

 

 

(190)

 

 

290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(106)

 

$

(326)

 

$

4,153

 

$

(2,535)

 

 

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

  

2019

    

2018

  

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap on money market deposits

 

Interest benefit (expense) on deposits

 

$

 2

 

$

 1

 

$

18

 

$

(22)

 

Interest rate swap on FHLB advance

 

Interest benefit (expense) on FHLB advances

 

 

 —

 

 

(2)

 

 

16

 

 

(14)

 

Total derivative losses on cash flow hedges

 

Total interest benefit (expense)

 

 

 2

 

 

(1)

 

 

34

 

 

(36)

 

Tax effect

 

Income tax (benefit) expense

 

 

(1)

 

 

 —

 

 

(9)

 

 

 8

 

Net of tax

 

Net income

 

$

 1

 

$

(1)

 

$

25

 

$

(28)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

2019

    

 

 

 

(in thousands)

 

December 31, 2018

 

Change

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on AFS debt securities

 

$

(2,165)

 

$

4,390

 

$

2,225

 

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

 

 

1,078

 

 

(45)

 

 

1,033

 

Unrealized gain (loss) on cash flow hedges

 

 

90

 

 

(192)

 

 

(102)

 

Total unrealized (loss) gain

 

$

(997)

 

$

4,153

 

$

3,156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

2018

    

 

 

 

(in thousands)

 

December 31, 2017

 

Change

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on AFS debt securities

 

$

(604)

 

$

(2,810)

 

$

(3,414)

 

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

 

 

1,093

 

 

(15)

 

 

1,078

 

Unrealized gain (loss) on cash flow hedges

 

 

(73)

 

 

290

 

 

217

 

Total unrealized gain (loss)

 

$

416

 

$

(2,535)

 

$

(2,119)

 

 

 

 

 

60

15. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”). While this update modified guidance for recognizing revenue, it did not have a material impact on the timing or presentation of the Company’s revenue. The majority of the Company’s revenue comes from interest income and other sources, including loans, leases, securities, and derivatives, which are not subject to ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to its client. The Company did elect a practical expedient permitted under this guidance which allows it to expense as-incurred incremental costs of obtaining a contract when the amortization period of those costs would be less than one year. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

Core Banking

 

 

Republic Processing Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Tax

 

Republic

 

 

 

 

 

 

 

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

 

Core

 

 

Refund

 

Credit

 

 

Total

 

 

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

 

Banking

 

 

Solutions

 

Solutions

 

 

RPG

 

 

 

Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income(1)

 

$

42,879

 

$

4,329

 

$

212

 

   

$

47,420

 

 

$

295

 

$

7,771

 

 

$

8,066

 

 

 

$

55,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

3,738

 

 

11

 

 

 —

 

 

 

3,749

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

3,749

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

317

 

 

 —

 

 

 

317

 

 

 

 

317

 

Mortgage banking income(1)

 

 

 —

 

 

 —

 

 

3,064

 

 

 

3,064

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

3,064

 

Interchange fee income

 

 

3,008

 

 

 —

 

 

 —

 

 

 

3,008

 

 

 

23

 

 

 —

 

 

 

23

 

 

 

 

3,031

 

Program fees(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

122

 

 

1,195

 

 

 

1,317

 

 

 

 

1,317

 

Increase in cash surrender value of BOLI(1)

 

 

394

 

 

 —

 

 

 —

 

 

 

394

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

394

 

Net gains (losses) on OREO

 

 

267

 

 

 —

 

 

 —

 

 

 

267

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

267

 

Other

 

 

695

 

 

(90)

 

 

66

 

 

 

671

 

 

 

 1

 

 

 —

 

 

 

 1

 

 

 

 

672

 

Total noninterest income

 

 

8,102

 

 

(79)

 

 

3,130

 

 

 

11,153

 

 

 

463

 

 

1,195

 

 

 

1,658

 

 

 

 

12,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

50,981

 

$

4,250

 

$

3,342

 

 

$

58,573

 

 

$

758

 

$

8,966

 

 

$

9,724

 

 

 

$

68,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration(2)

 

 

75

%  

 

 6

%  

 

 5

%  

 

 

86

%  

 

 

 1

%  

 

13

%  

 

 

14

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

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)

 

$

40,655

 

$

4,414

 

$

133

 

   

$

45,202

 

 

$

113

 

$

7,718

 

 

$

7,831

 

 

 

$

53,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

3,568

 

 

11

 

 

 —

 

 

 

3,579

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

3,579

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

149

 

 

 —

 

 

 

149

 

 

 

 

149

 

Mortgage banking income(1)

 

 

 —

 

 

 —

 

 

1,360

 

 

 

1,360

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

1,360

 

Interchange fee income

 

 

2,721

 

 

 —

 

 

 —

 

 

 

2,721

 

 

 

22

 

 

14

 

 

 

36

 

 

 

 

2,757

 

Program fees(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

93

 

 

1,593

 

 

 

1,686

 

 

 

 

1,686

 

Increase in cash surrender value of BOLI(1)

 

 

385

 

 

 —

 

 

 —

 

 

 

385

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

385

 

Net gains (losses) on OREO

 

 

248

 

 

 —

 

 

 —

 

 

 

248

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

248

 

Other

 

 

942

 

 

 —

 

 

124

 

 

 

1,066

 

 

 

 —

 

 

235

 

 

 

235

 

 

 

 

1,301

 

Total noninterest income

 

 

7,864

 

 

11

 

 

1,484

 

 

 

9,359

 

 

 

264

 

 

1,842

 

 

 

2,106

 

 

 

 

11,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

48,519

 

$

4,425

 

$

1,617

 

 

$

54,561

 

 

$

377

 

$

9,560

 

 

$

9,937

 

 

 

$

64,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration(2)

 

 

74

%  

 

 7

%  

 

 3

%  

 

 

84

%  

 

 

 1

%  

 

15

%  

 

 

16

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

This revenue is not subject to ASU 2014-09, Revenue from Contracts with Customers.

(2)

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

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

Core Banking

 

 

Republic Processing Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Tax

 

Republic

 

 

 

 

 

 

 

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

 

Core

 

 

Refund

 

Credit

 

 

Total

 

 

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

 

Banking

 

 

Solutions

 

Solutions

 

 

RPG

 

 

 

Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income(1)

 

$

126,103

 

$

11,181

 

$

484

 

   

$

137,768

 

 

$

21,443

 

$

22,520

 

 

$

43,963

 

 

 

$

181,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

10,616

 

 

34

 

 

 —

 

 

 

10,650

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

10,650

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

21,046

 

 

 —

 

 

 

21,046

 

 

 

 

21,046

 

Mortgage banking income(1)

 

 

 —

 

 

 —

 

 

7,019

 

 

 

7,019

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

7,019

 

Interchange fee income

 

 

8,802

 

 

 —

 

 

 —

 

 

 

8,802

 

 

 

243

 

 

 —

 

 

 

243

 

 

 

 

9,045

 

Program fees(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

318

 

 

3,110

 

 

 

3,428

 

 

 

 

3,428

 

Increase in cash surrender value of BOLI(1)

 

 

1,154

 

 

 —

 

 

 —

 

 

 

1,154

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

1,154

 

Net gains (losses) on OREO

 

 

487

 

 

 —

 

 

 —

 

 

 

487

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

487

 

Other

 

 

1,792

 

 

(90)

 

 

162

 

 

 

1,864

 

 

 

 1

 

 

659

 

 

 

660

 

 

 

 

2,524

 

Total noninterest income

 

 

22,851

 

 

(56)

 

 

7,181

 

 

 

29,976

 

 

 

21,608

 

 

3,769

 

 

 

25,377

 

 

 

 

55,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

148,954

 

$

11,125

 

$

7,665

 

 

$

167,744

 

 

$

43,051

 

$

26,289

 

 

$

69,340

 

 

 

$

237,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration(2)

 

 

63

%  

 

 5

%  

 

 3

%  

 

 

71

%  

 

 

18

%  

 

11

%  

 

 

29

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

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)

 

$

118,191

 

$

12,169

 

$

308

 

   

$

130,668

 

 

$

19,127

 

$

21,987

 

 

$

41,114

 

 

 

$

171,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

10,678

 

 

30

 

 

 —

 

 

 

10,708

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

10,708

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

19,974

 

 

 —

 

 

 

19,974

 

 

 

 

19,974

 

Mortgage banking income(1)

 

 

 —

 

 

 —

 

 

3,696

 

 

 

3,696

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

3,696

 

Interchange fee income

 

 

8,052

 

 

 —

 

 

 —

 

 

 

8,052

 

 

 

210

 

 

53

 

 

 

263

 

 

 

 

8,315

 

Program fees(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

276

 

 

4,429

 

 

 

4,705

 

 

 

 

4,705

 

Increase in cash surrender value of BOLI(1)

 

 

1,135

 

 

 —

 

 

 —

 

 

 

1,135

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

1,135

 

Net gains (losses) on OREO

 

 

700

 

 

 —

 

 

 —

 

 

 

700

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

700

 

Other

 

 

2,026

 

 

 —

 

 

211

 

 

 

2,237

 

 

 

1,002

 

 

834

 

 

 

1,836

 

 

 

 

4,073

 

Total noninterest income

 

 

22,591

 

 

30

 

 

3,907

 

 

 

26,528

 

 

 

21,462

 

 

5,316

 

 

 

26,778

 

 

 

 

53,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

140,782

 

$

12,199

 

$

4,215

 

 

$

157,196

 

 

$

40,589

 

$

27,303

 

 

$

67,892

 

 

 

$

225,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration(2)

 

 

63

%  

 

 5

%  

 

 2

%  

 

 

70

%  

 

 

18

%  

 

12

%  

 

 

30

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

This revenue is not subject to ASU 2014-09, Revenue from Contracts with Customers.

(2)

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

 

 

62

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

63

Capital commitment fee  The Company received and recorded a $1.0 million nonrefundable capital commitment fee during the first quarter of 2018. The fee was paid by a third party upon the Company’s completion of its contractual obligations to build the infrastructure and disburse funds for a new collaborative credit product offered to the third party’s customers through the Bank. The completion of the infrastructure and the first disbursement of funds were made for this new credit product during the first quarter of 2018. Incremental expenses incurred by the Company to fulfill its obligation under this contract were expensed as-incurred.

 

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, 2019, 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. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank, are considered part of the Traditional Banking segment.

 

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

 

 

 

 

 

 

Reportable Segment:

 

Nature of Operations:

 

Primary Drivers of Net Revenue:

 

 

 

 

 

Core Banking:

 

 

 

 

 

 

 

 

 

Traditional Banking

 

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

 

Loans, investments, and deposits.

 

 

 

 

 

Warehouse Lending

 

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

 

Mortgage warehouse lines of credit.

 

 

 

 

 

Mortgage Banking

 

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

 

Loan sales and servicing.

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

Tax Refund Solutions

 

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

 

Loans, refund transfers, and prepaid cards.

 

 

 

 

 

Republic Credit Solutions

 

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

 

Unsecured, consumer loans.

 

The accounting policies used for Republic’s reportable segments are the same as those described in the summary of significant accounting policies in the Company’s 2018 Annual Report on Form 10-K.  Segment performance is evaluated using operating income. Goodwill is allocated to the Traditional Banking segment. Income taxes are generally allocated based on income before income tax expense unless specific segment allocations can be reasonably made. Transactions among reportable segments are made at carrying value.

64

Segment information follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

Core Banking

 

 

Republic Processing Group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Tax

 

Republic

 

 

 

 

 

 

 

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

 

Core

 

 

Refund

 

Credit

 

 

Total

 

 

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

 

Banking

 

 

Solutions

 

Solutions

 

 

RPG

 

 

 

Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

42,879

 

$

4,329

 

$

212

 

   

$

47,420

 

 

$

295

 

$

7,771

 

 

$

8,066

 

 

 

$

55,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

1,555

 

 

620

 

 

 —

 

 

 

2,175

 

 

 

(2,008)

 

 

2,986

 

 

 

978

 

 

 

 

3,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

317

 

 

 —

 

 

 

317

 

 

 

 

317

 

Mortgage banking income

 

 

 —

 

 

 —

 

 

3,064

 

 

 

3,064

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

3,064

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

122

 

 

1,195

 

 

 

1,317

 

 

 

 

1,317

 

Other noninterest income

 

 

8,102

 

 

(79)

 

 

66

 

 

 

8,089

 

 

 

24

 

 

 —

 

 

 

24

 

 

 

 

8,113

 

Total noninterest income

 

 

8,102

 

 

(79)

 

 

3,130

 

 

 

11,153

 

 

 

463

 

 

1,195

 

 

 

1,658

 

 

 

 

12,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

35,882

 

 

886

 

 

1,637

 

 

 

38,405

 

 

 

3,047

 

 

959

 

 

 

4,006

 

 

 

 

42,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax expense

 

 

13,544

 

 

2,744

 

 

1,705

 

 

 

17,993

 

 

 

(281)

 

 

5,021

 

 

 

4,740

 

 

 

 

22,733

 

Income tax expense (benefit)

 

 

2,244

 

 

617

 

 

358

 

 

 

3,219

 

 

 

(67)

 

 

1,173

 

 

 

1,106

 

 

 

 

4,325

 

Net income (loss)

 

$

11,300

 

$

2,127

 

$

1,347

 

 

$

14,774

 

 

$

(214)

 

$

3,848

 

 

$

3,634

 

 

 

$

18,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end assets

 

$

4,960,737

 

$

973,716

 

$

40,209

 

 

$

5,974,662

 

 

$

24,296

 

$

104,689

 

 

$

128,985

 

 

 

$

6,103,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.76

%  

 

2.30

%  

 

NM

 

 

 

3.56

%  

 

 

NM

 

 

NM

 

 

 

NM

 

 

 

 

4.07

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration*

 

 

75

%  

 

 6

%  

 

 5

%  

 

 

86

%  

 

 

 1

%  

 

13

%  

 

 

14

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

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

 

$

40,655

 

$

4,414

 

$

133

 

 

$

45,202

 

 

$

113

 

$

7,718

 

 

$

7,831

 

 

 

$

53,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

696

 

 

(183)

 

 

 —

 

 

 

513

 

 

 

(1,028)

 

 

4,592

 

 

 

3,564

 

 

 

 

4,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

149

 

 

 —

 

 

 

149

 

 

 

 

149

 

Mortgage banking income

 

 

 —

 

 

 —

 

 

1,360

 

 

 

1,360

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

1,360

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

93

 

 

1,593

 

 

 

1,686

 

 

 

 

1,686

 

Other noninterest income

 

 

7,864

 

 

11

 

 

124

 

 

 

7,999

 

 

 

22

 

 

249

 

 

 

271

 

 

 

 

8,270

 

Total noninterest income

 

 

7,864

 

 

11

 

 

1,484

 

 

 

9,359

 

 

 

264

 

 

1,842

 

 

 

2,106

 

 

 

 

11,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

34,847

 

 

834

 

 

1,071

 

 

 

36,752

 

 

 

2,656

 

 

1,804

 

 

 

4,460

 

 

 

 

41,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax expense

 

 

12,976

 

 

3,774

 

 

546

 

 

 

17,296

 

 

 

(1,251)

 

 

3,164

 

 

 

1,913

 

 

 

 

19,209

 

Income tax expense (benefit)

 

 

966

 

 

864

 

 

114

 

 

 

1,944

 

 

 

(799)

 

 

653

 

 

 

(146)

 

 

 

 

1,798

 

Net income (loss)

 

$

12,010

 

$

2,910

 

$

432

 

 

$

15,352

 

 

$

(452)

 

$

2,511

 

 

$

2,059

 

 

 

$

17,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end assets

 

$

4,537,971

 

$

561,625

 

$

13,251

 

 

$

5,112,847

 

 

$

15,991

 

$

93,516

 

 

$

109,507

 

 

 

$

5,222,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.82

%  

 

3.26

%  

 

NM

 

 

 

3.76

%  

 

 

NM

 

 

NM

 

 

 

NM

 

 

 

 

4.32

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration*

 

 

74

%  

 

 7

%  

 

 3

%  

 

 

84

%  

 

 

 1

%  

 

15

%  

 

 

16

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

Core Banking

 

 

Republic Processing Group

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

    

Total

    

    

Tax

 

Republic

    

 

 

 

    

 

 

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

 

Core

 

 

Refund

 

Credit

 

 

Total

 

 

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

 

Banking

 

 

Solutions

 

Solutions

 

 

RPG

 

 

 

Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

126,103

 

$

11,181

 

$

484

 

 

$

137,768

 

 

$

21,443

 

$

22,520

 

 

$

43,963

 

 

 

$

181,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

3,171

 

 

1,262

 

 

 —

 

 

 

4,433

 

 

 

11,818

 

 

8,593

 

 

 

20,411

 

 

 

 

24,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

21,046

 

 

 —

 

 

 

21,046

 

 

 

 

21,046

 

Mortgage banking income

 

 

 —

 

 

 —

 

 

7,019

 

 

 

7,019

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

7,019

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

318

 

 

3,110

 

 

 

3,428

 

 

 

 

3,428

 

Other noninterest income

 

 

22,851

 

 

(56)

 

 

162

 

 

 

22,957

 

 

 

244

 

 

659

 

 

 

903

 

 

 

 

23,860

 

Total noninterest income

 

 

22,851

 

 

(56)

 

 

7,181

 

 

 

29,976

 

 

 

21,608

 

 

3,769

 

 

 

25,377

 

 

 

 

55,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

109,196

 

 

2,436

 

 

4,311

 

 

 

115,943

 

 

 

13,010

 

 

2,395

 

 

 

15,405

 

 

 

 

131,348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

36,587

 

 

7,427

 

 

3,354

 

 

 

47,368

 

 

 

18,223

 

 

15,301

 

 

 

33,524

 

 

 

 

80,892

 

Income tax expense

 

 

4,753

 

 

1,671

 

 

704

 

 

 

7,128

 

 

 

4,251

 

 

3,582

 

 

 

7,833

 

 

 

 

14,961

 

Net income

 

$

31,834

 

$

5,756

 

$

2,650

 

 

$

40,240

 

 

$

13,972

 

$

11,719

 

 

$

25,691

 

 

 

$

65,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end assets

 

$

4,960,737

 

$

973,716

 

$

40,209

 

 

$

5,974,662

 

 

$

24,296

 

$

104,689

 

 

$

128,985

 

 

 

$

6,103,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.75

%  

 

2.49

%  

 

NM

 

 

 

3.63

%  

 

 

NM

 

 

NM

 

 

 

NM

 

 

 

 

4.60

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration*

 

 

63

%  

 

 5

%  

 

 3

%  

 

 

71

%  

 

 

18

%  

 

11

%  

 

 

29

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

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

 

$

118,191

 

$

12,169

 

$

308

 

 

$

130,668

 

 

$

19,127

 

$

21,987

 

 

$

41,114

 

 

 

$

171,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

2,158

 

 

88

 

 

 —

 

 

 

2,246

 

 

 

11,473

 

 

12,545

 

 

 

24,018

 

 

 

 

26,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net refund transfer fees

 

 

 

 

 

 

 —

 

 

 

 —

 

 

 

19,974

 

 

 —

 

 

 

19,974

 

 

 

 

19,974

 

Mortgage banking income

 

 

 

 

 

 

3,696

 

 

 

3,696

 

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

 

3,696

 

Program fees

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 

276

 

 

4,429

 

 

 

4,705

 

 

 

 

4,705

 

Other noninterest income

 

 

22,591

 

 

30

 

 

211

 

 

 

22,832

 

 

 

1,212

 

 

887

 

 

 

2,099

 

 

 

 

24,931

 

Total noninterest income

 

 

22,591

 

 

30

 

 

3,907

 

 

 

26,528

 

 

 

21,462

 

 

5,316

 

 

 

26,778

 

 

 

 

53,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

103,654

 

 

2,523

 

 

3,451

 

 

 

109,628

 

 

 

11,454

 

 

3,807

 

 

 

15,261

 

 

 

 

124,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

34,970

 

 

9,588

 

 

764

 

 

 

45,322

 

 

 

17,662

 

 

10,951

 

 

 

28,613

 

 

 

 

73,935

 

Income tax expense

 

 

4,906

 

 

2,193

 

 

160

 

 

 

7,259

 

 

 

3,664

 

 

2,466

 

 

 

6,130

 

 

 

 

13,389

 

Net income

 

$

30,064

 

$

7,395

 

$

604

 

 

$

38,063

 

 

$

13,998

 

$

8,485

 

 

$

22,483

 

 

 

$

60,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end assets

 

$

4,537,971

 

$

561,625

 

$

13,251

 

 

$

5,112,847

 

 

$

15,991

 

$

93,516

 

 

$

109,507

 

 

 

$

5,222,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.71

%  

 

3.18

%  

 

NM

 

 

 

3.65

%  

 

 

NM

 

 

NM

 

 

 

NM

 

 

 

 

4.67

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net-revenue concentration*

 

 

63

%  

 

 5

%  

 

 2

%  

 

 

70

%  

 

 

18

%  

 

12

%  

 

 

30

%  

 

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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

 

 

66

17. INCOME TAXES

 

The following table illustrates the difference between the federal corporate tax rate and the Company’s effective tax rate for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

Nine Months Ended

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

2019

    

2018

 

2019

    

2018

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal corporate tax rate

 

 

21.00

%  

 

21.00

%  

 

21.00

%  

 

21.00

%  

 

Effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SAB 118 related discrete items*

 

 

 —

 

 

(12.36)

 

 

 —

 

 

(3.21)

 

 

State taxes, net of federal benefit

 

 

1.51

 

 

1.59

 

 

0.06

 

 

1.55

 

 

General business tax credits

 

 

(1.92)

 

 

(4.55)

 

 

(1.03)

 

 

(1.54)

 

 

Nontaxable income

 

 

(0.94)

 

 

(0.86)

 

 

(0.90)

 

 

(0.92)

 

 

Other, net

 

 

(0.62)

 

 

4.54

 

 

(0.63)

 

 

1.23

 

 

Effective tax rate

 

 

19.03

%  

 

9.36

%  

 

18.50

%  

 

18.11

%  

 


*Among other things, SEC Staff Accounting Bulletin 118 (“SAB 118”) allowed companies a one-year measurement period to complete their accounting for the impact of the 2017 Tax Cuts and Jobs Act (“TCJA”). The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018.

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

 

·

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

 

·

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

 

·

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

 

·

The Company recognized $437,000 and $834,000 in tax benefits for low-income-housing investments and R&D credits for the three and nine months ended September 30, 2019. The low-income-housing investments were attributable to the Company’s Traditional Banking segment, while the R&D credits were attributed to the Traditional Banking, TRS, and RCS segments.

 

The following three tax-related items provided $2.8 million in federal income tax benefits for the three and nine months ended September 30, 2018, of which $2.6 million was considered nonrecurring in nature:

67

 

·

The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. During the third quarter of 2018 the Company completed a cost-segregation study and assigned revised tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. Tax benefits related to the cost-segregation study were primarily attributed to the Company’s Traditional Banking segment.

 

·

The Company also adopted an automatic tax-accounting-method change related to deferred loan fees during the third quarter of 2018, as it was preparing its 2017 federal tax return.  This tax-accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan.  The change in tax-accounting-method resulted in a further impact from the TCJA, as it affected the Company’s final 2017 federal tax return due October 15, 2018. Tax benefits related to the tax-accounting-method change were 100% attributed to the Company’s Traditional Banking segment.

 

·

The Company completed an R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits dating back to 2014. Tax benefits related to the R&D tax-credit study were attributed to the Company’s Traditional Banking, TRS, and RCS segments.

 

18. AGREEMENT TO SELL FOUR BANKING CENTERS 

 

In July 2019, the Bank entered into a definitive agreement to sell its four banking centers located in the Kentucky cities of Owensboro, Elizabethtown and Frankfort to Limestone Bank (“Limestone”), a subsidiary of Limestone Bancorp, Inc. The agreement provides that Limestone will acquire loans, with balances of approximately $131 million as of September 30, 2019, and assume deposits with balances of approximately $142 million as of the same date, associated with the four banking centers. The $131 million of loan balances to be sold include approximately $20 million of additional loans, primarily mortgage-related, that Republic and Limestone have further agreed to include in the transaction since the date of the original announcement and have been reduced by approximately $965,000 of credit card balances that Republic and Limestone have agreed to remove from the transaction. 

 

In addition to the sale of loans and assumption of deposits, Limestone will also acquire substantially all of the fixed assets of these locations, which had a book value of $1.3 million as of September 30, 2019.  Based on the September 30, 2019 deposits, the all-in blended premium for the transaction is expected to be approximately $8.1 million, or approximately 6% of the total deposits transferred. The final calculated premium will be primarily based on the trailing 10-day average amount of the deposits as of the closing date, as well as the branch location for the deposits. The transaction is subject to customary closing conditions and is anticipated to be completed in the fourth quarter of 2019.

 

 

 

 

68

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

 

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

 

Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management may not update them to reflect changes that occur subsequent to the date the statements are made.

 

Broadly speaking, forward-looking statements include:

 

·

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

·

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

·

forecasts of future economic performance; and

·

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

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:

 

·

changes in political and economic conditions;

·

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

·

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

·

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

·

equity and fixed income market fluctuations;

·

client bankruptcies and loan defaults;

·

inflation;

·

recession;

·

natural disasters impacting Company operations;

·

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;

69

·

changes in accounting standards;

·

monetary fluctuations;

·

changes to the Company’s overall internal control environment;

·

success in gaining regulatory approvals when required;

·

the actual final amount and mix of loans and deposits sold to Limestone;

·

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

·

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

·

other risks and uncertainties reported from time to time in the Company’s filings with the SEC, including Part 1 Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and Part II Item 1A “Risk Factors” of the current filing.

 

Issued but Not Yet Effective Accounting Standards Updates

 

For disclosure regarding the impact to the Company’s financial statements of issued-but-not-yet-effective ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”

 

BUSINESS SEGMENT COMPOSITION

 

As of September 30, 2019,  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. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.

 

(I)  Traditional Banking segment

 

The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of September 30, 2019, Republic had 45 full-service banking centers and two LPOs with locations as follows:

 

Kentucky — 32

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

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 8**

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3**


* The Company agreed to sell banking center(s) in July 2019. See additional information under Note 18 of Part I Item 1 “Financial Statements.”

** Includes an LPO

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

70

 

As of September 30, 2019 and through the date of this filing, generally all Traditional Banking products and services, except for a selection of deposit products offered through the Bank’s separately branded national branchless banking platform, MemoryBank, were offered through the Company’s traditional RB&T brand.

 

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

 

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

 

Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial Lending, 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 an adjacent area to the market footprint.

 

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

 

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.

 

Dealer Services —  The Bank offers dealer-floor-plan loans and consumer-indirect automobile loans through its Dealer Services Department. Dealer-floor-plan loans are commercial lines of credit to automobile dealers secured by the dealer’s current inventory of vehicles, typically in or around the Bank’s market footprint. The Indirect Automobile Program involves establishing relationships with automobile dealers and obtaining consumer automobile loans in a low-cost delivery method.

 

Aircraft Lending — Also included in the Bank’s Dealer Services Department is the Aircraft Lending Division. First offered by the Bank in October 2017, aircraft loans typically range in amounts from $55,000 to $1,000,000, with terms up to 20 years, to purchase or refinance a piston aircraft (non-jet aircraft), along with engine overhauls and avionic upgrades. The aircraft loan program is open to all states, except for Alaska and Hawaii.

 

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

 

MemoryBank — In 2016, the Bank opened the “digital doors” of MemoryBank, a national branchless banking platform. MemoryBank is a separately branded division of the Bank, which from a marketing perspective, focuses on technologically savvy clients that prefer to carry larger balances in highly liquid interest-bearing bank accounts. MemoryBank products are offered through its website, www.mymemorybank.com.

 

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

 

71

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

 

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

 

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

 

(IV)  Tax Refund Solutions segment

Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the 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.

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

72

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. In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EA’s product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA and therefore on the Company’s financial condition and results of operations.  For the 2018 and 2019 fiscal years, the EA product had the following features:

 

EA features consistent during 2018 and 2019:

·

Offered only during the first two months of each year;

·

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

·

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

·

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

·

If an insufficient refund to repay the EA occurs:

o

there is no recourse to the taxpayer, 

o

no negative credit reporting on the taxpayer, and

o

no collection efforts against the taxpayer.

EA features modified from 2018 to 2019:

·

During 2019, 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.  This compares to a maximum loan amount of $3,500 during 2018; and

·

During 2018, EA fees were charged only to the Tax Providers.  In 2019, the fee charged to the Tax Providers was lowered; and a direct fee to the taxpayer was charged.  The APR to the taxpayer for his or her portion of the total fee equated to less than 36% for all offering tiers.

The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. 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 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.

   

See additional detail regarding the Easy Advance (“EA”) product under Footnote 4 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements.”

 

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

 

(V) Republic Credit Solutions segment

 

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

 

73

·

RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United States with certain services provided by Elevate Credit, Inc., its third-party servicer provider. RCS sells participation interests equal to 90% of the balances generated within three business days to a third-party special purpose entity 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.

 

·

RCS healthcare receivables product – The Bank originates healthcare-receivables products across the United States 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 are carried at the lower of cost or fair value.

 

From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted through RCS a credit-card product to generally subprime borrowers across the United States through one third-party marketer/servicer. For outstanding cards, RCS sold 90% of the balances generated within two business days of each transaction occurrence to a special purpose entity related to its third-party marketer/servicer and retained the remaining 10% interest. During the fourth quarter of 2018, the Bank and its third-party marketer/servicer finalized an agreement to sell 100% of the existing portfolio to an unrelated third party. The sale of the RCS credit-card portfolio receivables was settled in January 2019 and all accounts and related assets were transferred in March 2019.

 

 

OVERVIEW (Three Months Ended September 30, 2019 Compared to Three Months Ended September 30,  2018)

 

Total Company net income for the third quarter of 2019 was $18.4 million, a $997,000, or 6% increase from the same period in 2018.  Diluted EPS increased to $0.88 for the quarter ended September 30, 2019 compared to  $0.83 for the same period in 2018. 

 

In July 2019, the Bank entered into a definitive agreement to sell its four banking centers located in the Kentucky cities of Owensboro, Elizabethtown and Frankfort to Limestone Bank (“Limestone”), a subsidiary of Limestone Bancorp, Inc. The agreement provides that Limestone will acquire loans, with balances of approximately $131 million as of September 30, 2019, and assume deposits with balances of approximately $142 million as of the same date, associated with the four banking centers. The $131 million of loan balances to be sold include approximately $20 million of additional loans, primarily mortgage-related, that Republic and Limestone have further agreed to include in transaction since the date of the original announcement and have been reduced by approximately $965,000 of credit card balances that Republic and Limestone have agreed to remove from the transaction. 

 

In addition to the sale of loans and assumption of deposits, Limestone will also acquire substantially all of the fixed assets of these locations, which had a book value of $1.3 million as of September 30, 2019.  Based on the September 30, 2019 deposits, the all-in blended premium for the transaction is expected to be approximately $8.1 million, or approximately 6% of the total deposits transferred.  The final calculated premium will be primarily based on the trailing 10-day average amount of the deposits as of the closing date, as well as the branch location for the deposits. The transaction is subject to customary closing conditions and is anticipated to be completed in the fourth quarter of 2019.

 

See Footnote 18 “Agreement to Sell Four Banking Centers”  of Part I Item 1 “Financial Statements” for additional information concerning the Bank’s agreement to sell four of its banking centers.

 

74

The following table presents condensed statements of income for the quarters ended September 30, 2019 and 2018 for 1) Company operations excluding those associated with the agreement to sell four of the Bank’s banking centers, a non-GAAP measure, 2) Company operations associated with the agreement to sell those banking centers, and 3) Total Company operations:

 

Table 1 — Condensed Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

Three Months Ended September 30, 2018

 

$ Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding HFS

 

HFS

 

Total Company

 

Excluding HFS

 

HFS

 

Total Company

 

Excluding HFS

 

HFS

 

Total Company

 

(in thousands)

 

Operations(1)

  

Operations(2)

  

Operations(3)

  

Operations(1)

  

Operations(2)

  

Operations(3)

  

Operations(1)

  

Operations(2)

  

Operations(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

$

65,514

 

$

2,545

 

$

68,059

 

$

58,490

 

$

2,600

 

$

61,090

 

$

7,024

 

$

(55)

 

$

 

6,969

 

INTEREST EXPENSE

 

 

11,573

 

 

1,000

 

 

12,573

 

 

7,029

 

 

1,028

 

 

8,057

 

 

4,544

 

 

(28)

 

 

 

4,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

53,941

 

 

1,545

 

 

55,486

 

 

51,461

 

 

1,572

 

 

53,033

 

 

2,480

 

 

(27)

 

 

 

2,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN AND LEASE LOSSES

 

 

3,014

 

 

139

 

 

3,153

 

 

4,038

 

 

39

 

 

4,077

 

 

(1,024)

 

 

100

 

 

 

(924)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

 

 

50,927

 

 

1,406

 

 

52,333

 

 

47,423

 

 

1,533

 

 

48,956

 

 

3,504

 

 

(127)

 

 

 

3,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

12,395

 

 

416

 

 

12,811

 

 

10,961

 

 

504

 

 

11,465

 

 

1,434

 

 

(88)

 

 

 

1,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

41,662

 

 

749

 

 

42,411

 

 

40,347

 

 

865

 

 

41,212

 

 

1,315

 

 

(116)

 

 

 

1,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

 

21,660

 

 

1,073

 

 

22,733

 

 

18,037

 

 

1,172

 

 

19,209

 

 

3,623

 

 

(99)

 

 

 

3,524

 

INCOME TAX EXPENSE

 

 

4,203

 

 

122

 

 

4,325

 

 

1,715

 

 

83

 

 

1,798

 

 

2,488

 

 

39

 

 

 

2,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

17,457

 

$

951

 

$

18,408

 

$

16,322

 

$

1,089

 

$

17,411

 

$

1,135

 

$

(138)

 

$

 

997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Income statement line items reflecting the operations of the Company excluding HFS Operations are considered non-GAAP measures.

(2)

HFS Operations include direct income and expense items for the four banking centers expected to be sold under the agreement signed between the Bank and Limestone in July 2019.

(3)

Income statement line items reflecting Total Company Operations are considered the GAAP equivalent to items presented in (1) above. Items in (2) above include non-GAAP to GAAP reconciling amounts.

 

Other general highlights by reportable segment consisted of the following:

 

Traditional Banking segment

 

·

Pre-tax net income increased $568,000, or 4%, for the third quarter of 2019 compared to the same period in 2018, however, due to significant nonrecurring tax benefits recorded during the third quarter of 2018, net income decreased $710,000, or 6%

 

·

Net interest income increased $2.2 million, or 5%, for the third quarter of 2019 compared to the same period in 2018.

 

·

The Provision was $1.6 million for the third quarter of 2019 compared to $696,000 for the same period in 2018.

 

·

Total noninterest income increased $238,000, or 3%, for the third quarter of 2019 compared to the same period in 2018.

 

·

Total noninterest expense increased $1.0 million, or 3%,  for the third quarter of 2019 compared to same period in 2018.

 

Warehouse Lending segment

 

·

Net income decreased $783,000, or 27%, for the third quarter of 2019 compared to the same period in 2018.

 

·

Net interest income decreased $85,000, or 2%, for the third quarter of 2019 compared to the same period in 2018.

 

·

The Provision was a  net charge of $620,000 for the third quarter of 2019 compared to a net credit of $183,000 for the same period in 2018.

 

·

Total committed Warehouse lines increased to $1.2 billion at September 30, 2019 from $1.1 billion at December 31, 2018.

 

·

Average line usage was 68% during the third quarter of 2019 compared to 53% during the same period in 2018.

 

75

Mortgage Banking segment

 

·

Within the Mortgage Banking segment and as a component of noninterest income, mortgage banking income increased $1.7 million, or 125%, during the third quarter of 2019 compared to the same period in 2018.

 

·

Overall, Republic’s originations of secondary market loans totaled $124 million during the third quarter of 2019 compared to $49 million during the same period in 2018.

 

Tax Refund Solutions segment

 

·

Net loss improved $238,000,  or 53%, for the third quarter of 2019 compared to the same period in 2018. 

 

·

Net interest income increased $182,000 for the third quarter of 2019 compared to the same period in 2018.  

 

·

TRS recorded a net credit to the Provision of $2.0 million during the third quarter of 2019 compared to a net credit of $1.0 million for the same period in 2018.  

 

·

Noninterest income increased $199,000, or 75%,  for the third quarter of 2019 compared to the same period in 2018.

 

·

Net RT revenue increased $168,000 for the third quarter of 2019 compared to the same period in 2018.

 

·

Noninterest expense was $3.0 million for the third quarter of 2019 compared to $2.7 million for the same period in 2018.

 

Republic Credit Solutions segment

 

·

Net income increased $1.3 million, or 53%, for the third quarter of 2019 compared to the same period in 2018. 

 

·

Net interest income increased $53,000, or 1%,  for the third quarter of 2019 compared to the same period in 2018.  

 

·

Overall, RCS recorded a net charge to the Provision of $3.0 million  during the third quarter of 2019 compared to a net charge of $4.6 million  for the same period in 2018.  

 

·

Noninterest income decreased $647,000, or 35%, for the third quarter of 2019 compared to the same period in 2018.

 

·

Noninterest expense was $959,000  for the third quarter of 2019 compared to $1.8 million  for the same period in 2018.

 

RESULTS OF OPERATIONS (Three Months Ended September 30, 2019 Compared to Three Months Ended September 30,  2018)

 

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.

 

The Core Bank indexes many of its financial instruments to either the FFTR, Prime, or LIBOR.  From December 2015 through June 2019, these short-term market rates generally trended higher. In July 2019, short-term rates began to decrease with the Federal Reserve lowering the FFTR by 25 basis points and then another 25 basis points in September 2019. Management believes that a decreasing interest-rate environment is generally less favorable to 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 shape and steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.

 

76

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

 

Total Company net interest income increased $2.5 million, or 5%, during the third quarter of 2019 compared to the same period in 2018. Total Company net interest margin decreased to 4.07% during the third quarter of 2019 compared to 4.32% for the same period in 2018.

 

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

 

Traditional Banking segment

 

The Traditional Banking’s net interest income increased $2.2 million, or 5%, for the third quarter of 2019 compared to the same period in 2018.  Traditional Banking’s net interest margin was 3.76%  for the third quarter of 2019,  reflecting compression of four basis points from the same period in 2018. 

 

The changes in the Traditional Bank’s net interest income and net interest margin during the third quarter of 2019 were primarily attributable to the following factors:

 

·

Average loans increased $245 million, or 7%, during the third quarter of 2019 compared to the same period in 2018. The primary contributors for the increase in the quarter-over-quarter average balances were C&I loans, which grew $83 million, and CRE loans, which grew $94 million.    

   

·

The quarter-over-quarter margin compression within the Traditional Banking segment primarily reflects the negative impact of the flat, and in some instances, inverted U.S. Treasury yield curve during 2019 in which short-term and long-term U.S. Treasury yields remained similar to each other.  As is generally the case with all banks, the Traditional Bank’s asset yields and liability funding costs are substantially determined by the shape of the U.S. Treasury yield curve.  As a result, the flat or inverted yield curve continued to place market-based pressure on the Traditional Bank during the quarter thus raising the overall cost of its funding liabilities, which are generally tied to short-term market rates.  Concurrently, the Traditional Bank also continued to experience market-based pressures during the quarter to reduce its new loan yields, which are generally tied to longer-term rates.  Management expects margin compression challenges to remain in the future as long as the overall U.S. Treasury yield curve remains flat or inverted.

 

Warehouse Lending segment

 

Despite a significant increase in average outstanding Warehouse Lending balances during the third quarter of 2019 compared to the third quarter of 2018, on-going margin compression in the Warehouse segment’s net interest margin during the same period drove an $85,000 decrease in its net interest income. The following factors led to the overall changes in the Warehouse segment’s net interest income and net interest margin: 

 

·

Pricing pressure to the Bank on Warehouse lines of credit resulting from the negative impact of an inverted yield curve to the Bank’s Warehouse clients primarily drove a 96-basis-point compression in the Warehouse segment’s net interest margin.

 

·

A sharp decline in long-term fixed mortgage rates increased Warehouse clients’ usage of their Bank lines of credit, driving average outstanding Warehouse balances from $542 million during the third quarter of 2018 to $752 million during the third quarter of 2019.

 

·

Through the Company’s internal FTP process, the Traditional Banking segment charges or credits other segments based on prevailing market rates for funds utilized by loans or provided by deposits. Through this FTP process, the Warehouse segment experienced an approximate $300,000 decrease in FTP income credit during the quarter as a result of a $52 million decline in average noninterest-bearing deposit balances within the segment.  Substantially all of the decline in average noninterest-bearing balances was related to one large escrow account that exited the Bank in the fourth quarter of 2018.

 

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 68% during the third quarter of 2019. On an annual basis,

77

weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 57% during 2016.

 

Table 2 — Total Company Average Balance Sheets and Interest Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

Three Months Ended September 30, 2018

 

 

    

Average

    

 

 

    

Average

    

 

Average

    

 

 

    

Average

 

 

(dollars in thousands)

    

Balance

 

Interest

 

Rate

 

 

Balance

 

Interest

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other interest-earning deposits

 

$

302,156

 

$

1,666

 

2.21

%  

  

$

265,111

 

$

1,311

 

1.98

%  

 

Investment securities, including FHLB stock (1)

 

 

547,281

 

 

3,497

 

2.56

 

 

 

530,468

 

 

3,483

 

2.63

 

 

Other RPG loans (2) (5)

 

 

126,619

 

 

8,417

 

26.59

 

 

 

97,748

 

 

8,032

 

32.87

 

 

Outstanding Warehouse lines of credit (3) (5)

 

 

752,089

 

 

8,834

 

4.70

 

 

 

541,592

 

 

7,068

 

5.22

 

 

All other Traditional Bank loans (4) (5)

 

 

3,727,431

 

 

45,645

 

4.90

 

 

 

3,473,586

 

 

41,196

 

4.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

5,455,576

 

 

68,059

 

4.99

 

 

 

4,908,505

 

 

61,090

 

4.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

 

(47,379)

 

 

 

 

 

 

 

 

(45,319)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning cash and cash equivalents

 

 

63,655

 

 

 

 

 

 

 

 

58,389

 

 

 

 

 

 

 

Premises and equipment, net

 

 

45,960

 

 

 

 

 

 

 

 

46,301

 

 

 

 

 

 

 

Bank owned life insurance

 

 

65,878

 

 

 

 

 

 

 

 

64,248

 

 

 

 

 

 

 

Other assets (2)

 

 

127,946

 

 

 

 

 

 

 

 

69,162

 

 

 

 

 

 

 

Total assets

 

$

5,711,636

 

 

 

 

 

 

 

$

5,101,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

1,160,529

 

$

1,549

 

0.53

%  

 

$

1,139,113

 

$

1,238

 

0.43

%  

 

Money market accounts

 

 

790,852

 

 

2,071

 

1.05

 

 

 

663,241

 

 

1,079

 

0.65

 

 

Time deposits

 

 

426,453

 

 

2,217

 

2.08

 

 

 

359,417

 

 

1,553

 

1.73

 

 

Reciprocal money market and time deposits

 

 

214,321

 

 

768

 

1.43

 

 

 

290,561

 

 

581

 

0.80

 

 

Brokered deposits

 

 

241,477

 

 

1,437

 

2.38

 

 

 

23,756

 

 

111

 

1.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

 

2,833,632

 

 

8,042

 

1.14

 

 

 

2,476,088

 

 

4,562

 

0.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

246,889

 

 

298

 

0.48

 

 

 

213,195

 

 

317

 

0.59

 

 

Federal Home Loan Bank advances

 

 

690,457

 

 

3,839

 

2.22

 

 

 

574,130

 

 

2,782

 

1.94

 

 

Subordinated note

 

 

41,240

 

 

394

 

3.82

 

 

 

41,240

 

 

396

 

3.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

3,812,218

 

 

12,573

 

1.32

 

 

 

3,304,653

 

 

8,057

 

0.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities and Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,065,904

 

 

 

 

 

 

 

 

1,076,967

 

 

 

 

 

 

 

Other liabilities

 

 

91,338

 

 

 

 

 

 

 

 

44,196

 

 

 

 

 

 

 

Stockholders’ equity

 

 

742,176

 

 

 

 

 

 

 

 

675,470

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

5,711,636

 

 

 

 

 

 

 

$

5,101,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

55,486

 

 

 

 

 

 

 

$

53,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

3.67

%  

 

 

 

 

 

 

 

4.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

4.07

%  

 

 

 

 

 

 

 

4.32

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

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

(2)

Interest income includes loan fees of $6.5 million and $6.7 million for the three months ended September 30, 2019 and 2018.  

(3)

Interest income includes loan fees of $853,000 and $807,000 for the three months ended September 30, 2019 and 2018.  

(4)

Interest income includes loan fees of $1.6 million and $1.6 million for the three months ended September 30, 2019 and 2018.  

(5)

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.

 

 

78

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

 

Table 3 — Total Company Volume/Rate Variance Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

 

 

Compared to

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

Total Net

 

Increase / (Decrease) Due to

 

 

(in thousands)

    

Change

    

Volume

    

Rate

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other interest-earning deposits

 

$

355

 

$

195

 

$

160

 

 

Investment securities, including FHLB stock

 

 

14

 

 

108

 

 

(94)

 

 

Other RPG loans

 

 

385

 

 

2,097

 

 

(1,712)

 

 

Outstanding Warehouse lines of credit

 

 

1,766

 

 

2,529

 

 

(763)

 

 

All other Traditional Bank loans

 

 

4,449

 

 

3,079

 

 

1,370

 

 

Net change in interest income

 

 

6,969

 

 

8,008

 

 

(1,039)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

 

311

 

 

24

 

 

287

 

 

Money market accounts

 

 

992

 

 

238

 

 

754

 

 

Time deposits

 

 

664

 

 

318

 

 

346

 

 

Reciprocal money market and time deposits

 

 

187

 

 

(183)

 

 

370

 

 

Brokered deposits

 

 

1,326

 

 

1,287

 

 

39

 

 

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

 

 

(19)

 

 

46

 

 

(65)

 

 

Federal Home Loan Bank advances

 

 

1,057

 

 

612

 

 

445

 

 

Subordinated note

 

 

(2)

 

 

 —

 

 

(2)

 

 

Net change in interest expense

 

 

4,516

 

 

2,342

 

 

2,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net interest income

 

$

2,453

 

$

5,666

 

$

(3,213)

 

 

 

79

Provision for Loan and Lease Losses

 

Total Company Provision was $3.2 million for the third quarter of 2019, compared to $4.1 million for the same period in 2018.  The significant components comprising the Company’s Provision by reportable segment were as follows:

 

Traditional Banking segment

 

The Traditional Banking Provision during the third quarter of 2019 was $1.6 million, compared to $696,000 for the third quarter of 2018. An analysis of the Provision for the third quarter of 2019 compared to the same period in 2018 follows:

 

·

Related to the Bank’s loans rated Substandard and Special Mention, the Bank recorded a net charge to the Provision of $1.6 million for the third quarter of 2019 compared to a net charge to the Provision of $141,000 for the third quarter 2018.    The charge during the third quarter of 2019 includes a $1.4 million Provision for one commercial relationship that defaulted during the quarter. 

 

·

Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $4,000 and $643,000 to the Provision for the third quarters of 2019 and 2018. Loan growth primarily drove these charges to the Provision for pass and non-rated loans in both periods.

 

As a percentage of total loans, the Traditional Banking Allowance was 0.86% at September 30, 2019 compared to 0.85% at December 31, 2018 and 0.86% at September 30,  2018.  The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at September 30, 2019.

 

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

 

Warehouse Lending segment

 

Warehouse recorded a net charge to the Provision of $620,000 for the third quarter of 2019 compared to a net credit of $183,000 for the same period in 2018.  The Provision for both periods reflected changes in general reserves, as outstanding Warehouse period-end balances increased $248 million during the third quarter of 2019 compared to a decrease of $73 million during the third quarter of 2018.

 

As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at September 30, 2019,  December 31, 2018 and September 30,  2018.  The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at September 30, 2019.

 

Tax Refund Solutions segment

 

TRS recorded net credits to the Provision of $2.0 million and $1.0 million during the third quarters of 2019 and 2018. These credits to the Provision primarily reflect recoveries on EA loans charged off during the first half of the year. While TRS experienced a higher rate of EAs charged-off from January 1, 2019 to June 30, 2019 than the comparable six months in 2018, it also experienced a higher rate of EA recoveries during the third quarter of 2019 than during the third quarter of 2018. 

 

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

 

80

Republic Credit Solutions segment

 

As illustrated in Table 4 below, RCS recorded a Provision of $3.0 million during the third quarter of 2019 compared to a Provision of $4.6 million for the same period in 2018. The $1.6 million decrease in the Provision resulted from lower Provisions of $1.2 million and $460,000, respectively, for RCS’s line-of-credit product and its discontinued credit card product. The overall improvement in the Provision for the line-of-credit product was driven by a decline in its annualized historical loss rate combined with a decrease in average outstanding balances. The decrease in losses within the RCS credit-card portfolio was due to the discontinuance of the program, effective January of this year.

 

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 Allowance was 13.32% at September 30, 2019,  14.70% at December 31, 2018 and 14.58% at September 30,  2018.  The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at September 30, 2019.

 

Table 4 — RCS Provision by Product

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended Sep. 30,

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product:

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

2,981

 

$

4,131

 

$

(1,150)

 

(28)

%

 

Credit card

 

 

 —

 

 

460

 

 

(460)

 

(100)

 

 

Hospital receivables

 

 

 5

 

 

 1

 

 

 4

 

400

 

 

Total

 

$

2,986

 

$

4,592

 

$

(1,606)

 

(35)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81

Table 5 — Summary of Loan and Lease Loss Experience

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

September 30, 

 

(dollars in thousands)

 

2019

    

2018

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

45,983

 

$

45,047

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate

 

 

(17)

 

 

(47)

 

Commercial real estate

 

 

(1,407)

 

 

 —

 

Commercial & industrial

 

 

 —

 

 

(75)

 

Home equity

 

 

 —

 

 

(14)

 

Consumer

 

 

(547)

 

 

(535)

 

Total Traditional Banking

 

 

(1,971)

 

 

(671)

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Total Core Banking

 

 

(1,971)

 

 

(671)

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

Easy Advances

 

 

 —

 

 

 —

 

Other TRS loans

 

 

(90)

 

 

 —

 

Republic Credit Solutions

 

 

(2,799)

 

 

(6,204)

 

Total Republic Processing Group

 

 

(2,889)

 

 

(6,204)

 

Total charge-offs

 

 

(4,860)

 

 

(6,875)

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate

 

 

126

 

 

18

 

Commercial real estate

 

 

 —

 

 

 1

 

Construction & land development

 

 

 —

 

 

 3

 

Commercial & industrial

 

 

 1

 

 

 4

 

Home equity

 

 

23

 

 

59

 

Consumer

 

 

150

 

 

146

 

Total Traditional Banking

 

 

300

 

 

231

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Total Core Banking

 

 

300

 

 

231

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

Easy Advances

 

 

2,098

 

 

1,036

 

Other TRS loans

 

 

 2

 

 

 —

 

Republic Credit Solutions

 

 

256

 

 

308

 

Total Republic Processing Group

 

 

2,356

 

 

1,344

 

 

 

 

 

 

 

 

 

Total recoveries

 

 

2,656

 

 

1,575

 

 

 

 

 

 

 

 

 

Net loan charge-offs

 

 

(2,204)

 

 

(5,300)

 

 

 

 

 

 

 

 

 

Provision - Core Banking

 

 

2,175

 

 

513

 

Provision - RPG

 

 

978

 

 

3,564

 

Total Provision

 

 

3,153

 

 

4,077

 

Allowance at end of period

 

$

46,932

 

$

43,824

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

1.01

%  

 

1.06

%  

Allowance to nonperforming loans

 

 

226

 

 

254

 

Net loan charge-offs to average loans

 

 

0.19

 

 

0.52

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

0.73

%  

 

0.78

%  

Allowance to nonperforming loans

 

 

163

 

 

185

 

Net loan charge-offs to average loans

 

 

0.15

 

 

0.04

 

82

Noninterest Income

 

Total Company noninterest income increased $1.3 million, or 12%, during the third quarter of 2019 compared to the same period in 2018.  The most significant components comprising the total Company’s noninterest income by reportable segment were as follows:

 

Traditional Banking segment

 

Traditional Banking’s noninterest income increased $238,000, or 3%, for the third quarter of 2019 compared to the same period in 2018.  The most significant categories affecting the change in noninterest income for the quarter were as follows:

 

·

Service charges on deposit accounts increased to $3.7 million for the third quarter of 2019 compared to $3.6 million for the same period in 2018.  The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the quarters ended September 30, 2019 and 2018 was  $2.3 million and $2.2 million. The total daily overdraft charges, net of refunds, included in interest income for the quarters ended September 30, 2019 and 2018 were $612,000 and $591,000. 

 

·

Interchange income increased $287,000, or 11%, driven by a 6% increase in active debit cards along with increased overall usage on its card base, in general.  

 

Mortgage Banking segment

 

Within the Mortgage Banking segment, mortgage banking income increased $1.7 million, or 125%, during the third quarter of 2019 compared to the same period in 2018, which resulted from a $75 million increase in secondary market loans originated from period to period combined with a $40 million increase in the Bank’s pipeline of secondary market loans in process from September 30, 2018 to September 30, 2019. A sharp decline in long-term mortgage rates during the previous nine months, combined with the Bank’s continued investments in mortgage resources, contributed to the increased quarter-over-quarter mortgage activity.

 

Republic Credit Solutions segment

 

RCS’s noninterest income decreased $647,000, or 35%, during the third quarter of 2019 compared to the same period in 2018, resulting primarily from the discontinuation of its credit-card product.

 

RCS’s largest noninterest income item, programs fees, are presented by product in the following table:    

 

Table 6 — RCS Program Fees by Product

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended Sep. 30,

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product:

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

1,172

 

$

1,168

 

$

 4

 

 0

%

 

Credit card

 

 

 —

 

 

382

 

 

(382)

 

(100)

 

 

Hospital receivables

 

 

79

 

 

27

 

 

52

 

193

 

 

Installment loans*

 

 

(56)

 

 

16

 

 

(72)

 

(450)

 

 

Total

 

$

1,195

 

$

1,593

 

$

(398)

 

(25)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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

 

83

Noninterest Expense

 

Total Company noninterest expense increased $1.2 million, or 3%, during the third quarter of 2019 compared to the same period in 2018.  The most significant components comprising the increase in noninterest expense by reportable segment were as follows:

 

Traditional Banking segment

 

Traditional Banking noninterest expense increased $1.0 million, or 3%, for the third quarter of 2019 compared to the same period in 2018. The most significant categories driving the change in noninterest expense were as follows:

 

·

Salaries and employee benefits expense increased $1.2 million, or 6%. Annual merit increases, as well as, the addition of 60 Traditional Bank FTE employees from September 30, 2018 to September 30, 2019 primarily drove the increase.

 

·

Noninterest expense during the third quarter of 2019 was positively impacted by a $343,000 reduction in FDIC insurance expense. Because the FDIC’s Deposit Insurance Fund exceeded a reserve ratio of 1.38% by June 30, 2019, the Bank was able to apply its Small Bank Assessment Credits against its most recent FDIC insurance premium payment.  The Company still has $841,000 of Small Bank Assessment Credits available for use in future quarters; however, its ability to utilize these credits are contingent upon the level of the DIF’s reserve ratio and are therefore not certain.

 

Tax Refund Solutions segment

 

TRS’s noninterest expense increased $391,000, or 15%, during the third quarter of 2019 compared to the same period in 2018 resulting primarily from a $461,000 increase in salaries and employee benefits expense.  

 

Republic Credit Solutions segment

 

RCS’s noninterest expense decreased $845,000, or 47%, during the third quarter of 2019 compared to the same period in 2018.   Reductions of $700,000 in legal reserves primarily drove the overall decrease from period to period.

 

Income Tax Expense

 

The Total Company effective income tax rate was  19% for the third quarter of 2019 compared to 10% for the same period in 2018. 

 

The following item primarily drove the Total Company’s effective income tax rate during the third quarter of 2019 below the federal corporate tax rate of 21%:

 

·

The Company recognized $437,000 in tax benefits for low-income-housing investments and R&D credits for the three months ended September 30, 2019. The low-income-housing investments were attributable to the Company’s Traditional Banking segment, while the R&D credits were attributed to the Traditional Banking, TRS, and RCS segments.

 

The following items provided $2.8 million in federal income tax benefits for the third quarter of 2018 and primarily drove the Total Company’s effective tax rate lower than the federal corporate tax rate of 21%:

 

·

The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. During the third quarter of 2018 the Company completed a cost-segregation study and assigned revised tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. Tax benefits related to the cost-segregation study were primarily attributed to the Company’s Traditional Banking segment.

 

·

The Company also adopted an automatic tax-accounting-method change related to deferred loan fees during the third quarter of 2018, as it was preparing its 2017 federal tax return.  This tax-accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The change in tax-accounting-method resulted in a further impact from the TCJA, as it affected the Company’s final 2017 federal tax return due October 15, 2018. Tax benefits related to the tax-accounting-method change were 100% attributed to the Company’s Traditional Banking segment.

 

84

·

The Company completed an R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits dating back to 2014. Tax benefits related to the R&D tax-credit study were attributed to the Company’s Traditional Banking, TRS, and RCS segments.  

 

OVERVIEW  (Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018)

 

Total Company net income for the first nine months of 2019 was $65.9 million, a $5.4 million, or 9%, increase from the same period in 2018. Diluted EPS increased to $3.15 for the nine months ended September 30, 2019 compared to $2.90 for the same period in 2018. 

 

See Footnote 18 “Agreement to Sell Four Banking Centers” of Part I Item 1 “Financial Statements” for information concerning the Bank’s agreement to sell four of its banking centers.

 

The following table presents condensed statements of income for the nine months ended September 30, 2019 and 2018 for 1) Company operations excluding those associated with the agreement to sell four of the Bank’s banking centers, a non-GAAP measure, 2) Company operations associated with the agreement to sell those banking centers, and 3) Total Company operations:

 

Table 7 — Condensed Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

Nine Months Ended September 30, 2018

 

$ Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding HFS

 

HFS

 

Total Company

 

Excluding HFS

 

HFS

 

Total Company

 

Excluding HFS

 

HFS

 

Total Company

 

(in thousands)

 

Operations(1)

 

Operations(2)

 

Operations(3)

 

Operations(1)

 

Operations(2)

 

Operations(3)

 

Operations(1)

 

Operations(2)

 

Operations(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

$

208,571

 

$

7,785

 

$

216,356

 

$

186,090

 

$

7,189

 

$

193,279

 

$

22,481

 

$

596

 

$

 

23,077

 

INTEREST EXPENSE

 

 

31,636

 

 

2,989

 

 

34,625

 

 

18,729

 

 

2,768

 

 

21,497

 

 

12,907

 

 

221

 

 

 

13,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

 

176,935

 

 

4,796

 

 

181,731

 

 

167,361

 

 

4,421

 

 

171,782

 

 

9,574

 

 

375

 

 

 

9,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN AND LEASE LOSSES

 

 

24,510

 

 

334

 

 

24,844

 

 

26,145

 

 

119

 

 

26,264

 

 

(1,635)

 

 

215

 

 

 

(1,420)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES

 

 

152,425

 

 

4,462

 

 

156,887

 

 

141,216

 

 

4,302

 

 

145,518

 

 

11,209

 

 

160

 

 

 

11,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

53,911

 

 

1,442

 

 

55,353

 

 

51,836

 

 

1,470

 

 

53,306

 

 

2,075

 

 

(28)

 

 

 

2,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

128,793

 

 

2,555

 

 

131,348

 

 

122,459

 

 

2,430

 

 

124,889

 

 

6,334

 

 

125

 

 

 

6,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

 

77,543

 

 

3,349

 

 

80,892

 

 

70,593

 

 

3,342

 

 

73,935

 

 

6,950

 

 

 7

 

 

 

6,957

 

INCOME TAX EXPENSE

 

 

14,513

 

 

448

 

 

14,961

 

 

13,056

 

 

333

 

 

13,389

 

 

1,457

 

 

115

 

 

 

1,572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

63,030

 

$

2,901

 

$

65,931

 

$

57,537

 

$

3,009

 

$

60,546

 

$

5,493

 

$

(108)

 

$

 

5,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Income statement line items reflecting the operations of the Company excluding HFS Operations are considered non-GAAP measures.

(2)

HFS Operations include direct income and expense items for the four banking centers expected to be sold under the agreement signed between the Bank and Limestone in July 2019.

(3)

Income statement line items reflecting Total Company Operations are considered the GAAP equivalent to items presented in (1) above. Items in (2) above include non-GAAP to GAAP reconciling amounts.

 

The following are general highlights by reportable segment:

 

Traditional Banking segment

 

·

Net income increased $1.8 million, or 6%, for the first nine months of 2019 compared to the same period in 2018.  

 

·

Net interest income increased $7.9 million, or 7%, for the first nine months of 2019 compared to the same period in 2018.

 

·

The Provision was $3.2 million for the first nine months of 2019 compared to $2.2 million for the same period in 2018.

 

·

Total noninterest income increased $260,000 for the first nine months of 2019 compared to the same period in 2018.

 

·

Total noninterest expense increased $5.5 million, or 5%, for the first nine months of 2019 compared to same period in 2018.

 

·

Total nonperforming loans to total loans for the Traditional Banking segment was 0.57% at September 30, 2019 compared to 0.45% at December 31, 2018.

85

 

·

Delinquent loans to total loans for the Traditional Banking segment was 0.38% at September 30, 2019 compared to 0.25% at December 31, 2018.

 

 

Warehouse Lending segment

 

·

Net income decreased $1.6 million, or 22%, for the first nine months of 2019 compared to the same period in 2018.

 

·

Net interest income decreased $988,000, or 8%, for the first nine months of 2019 compared to the same period in 2018.

 

·

The Warehouse Provision was a net charge of $1.3 million for the first nine months of 2019 compared to a net charge of $88,000 for the same period in 2018.

 

·

Total committed Warehouse lines increased to $1.2 billion at September 30, 2019 from $1.1 billion at December 31, 2018.

 

·

Average line usage was 55% during the first nine months of 2019 compared to 49% during the same period in 2018.

 

Mortgage Banking segment

 

·

Within the Mortgage Banking segment, mortgage banking income increased $3.3 million, or 90%, during the first nine months of 2019 compared to the same period in 2018.

 

·

Overall, Republic’s originations of secondary market loans totaled $247 million during the first nine months of 2019 compared to $133 million during the same period in 2018, with the Company’s gain recognized as a percent of total originations increasing to 2.61% during the first nine months of 2019 from 2.24% during the same period in 2018.

 

Tax Refund Solutions segment

 

·

Net income decreased $26,000 for the first nine months of 2019 compared to the same period in 2018. 

 

·

Net interest income increased $2.3 million, or 12%, for the first nine months of 2019 compared to the same period in 2018.

 

·

Total EA originations were $389 million during the first nine months of 2019 compared to $430 million for the same period in 2018.

 

·

Overall, TRS recorded a net charge to the Provision of $11.8 million during the first nine months of 2019 compared to a net charge of $11.5 million for the same period in 2018.

 

·

Noninterest income increased $146,000  for the first nine months of 2019 compared to the same period in 2018.

 

·

Net RT revenue increased $1.1 million, or 5%, for the first nine months of 2019 compared to the same period in 2018.

 

·

Noninterest expense was $13.0 million for the first nine months of 2019 compared to $11.5 million for the same period in 2018.

 

Republic Credit Solutions segment

 

·

Net income increased $3.2 million, or 38%, for the first nine months of 2019 compared to the same period in 2018. 

 

·

Net interest income increased $533,000, or 2%, for the first nine months of 2019 compared to the same period in 2018.

 

·

Overall, RCS recorded a net charge to the Provision of $8.6 million during the first nine months of 2019 compared to a net charge of $12.5 million for the same period in 2018.

 

·

Noninterest income decreased $1.5 million, or 29%, for the first nine months of 2019 compared to the same period in 2018.

86

 

·

Noninterest expense was $2.4 million for the first nine months of 2019 compared to $3.8 million for the same period in 2018.

 

·

Total nonperforming loans to total loans for the RCS segment was 0.07% at September 30, 2019 compared to 0.14% at December 31, 2018.

 

·

Delinquent loans to total loans for the RCS segment was 6.70% at September 30, 2019 compared to 7.97% at December 31, 2018.

 

RESULTS OF OPERATIONS (Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018)

 

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. 

 

The Core Bank indexes many of its financial instruments to either the FFTR, Prime, or LIBOR.  From December 2015 through June 2019, these short-term market rates generally trended higher. In July 2019, short-term rates began to decrease with the Federal Reserve lowering the FFTR by 25 basis points and then another 25 basis points in September 2019. Management believes that a decreasing interest-rate environment is generally less favorable to 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 shape and steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.

 

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

 

Total Company net interest income increased $9.9 million, or 6%, during the first nine months of 2019 compared to the same period in 2018. Total Company net interest margin decreased to 4.60% during the first nine months of 2019 compared to 4.67% for the same period in 2018. 

 

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 $7.9 million, or 7%, for the first nine months of 2019 compared to the same period in 2018. Traditional Banking’s net interest margin was 3.75% for the first nine months of 2019, an increase of three basis points over the same period in 2018.

 

The increases in the Traditional Bank’s net interest income and net interest margin during the first nine months of 2019 were primarily attributable to the following factors:

 

·

Average loans increased $245 million, or 7%, during the first nine months of 2019 compared to the same period in 2018. The primary contributors for the increase in the year-over-year average balances were C&I loans, which grew $83 million, and CRE loans, which grew $58 million. 

   

·

Despite a 31-basis-point increase in the Traditional Banking segment’s cost of interest-bearing liabilities, its net interest margin expanded when comparing the first nine months of 2019 to the same period in 2018. This expansion was partially driven by the above-mentioned strong loan growth and partially by the increased value from noninterest-bearing funding. The difference between the Traditional Banking segment’s net interest margin and net interest spread was 19 basis points during the first nine months of 2019 compared to 14 basis points during the same period in 2018, with the differential representing the increased value to the net interest margin of noninterest-bearing deposits and stockholders’ equity. The increase in this value resulted from a 30-basis-point rise in the yield on the Traditional Banking segment’s interest-earning assets from period

87

to period.  While this contributing factor to the increase in net interest income remains a major reason why net interest income continues to increase compared to the prior year on a year-to-date basis, it is a diminishing factor as the difference between the net interest margin and net interest spread continues to decline with each passing quarter due to the flat, and sometimes inverted, U.S. Treasury yield curve.

 

Warehouse Lending segment

 

Despite a  significant increase in average outstanding Warehouse balances during the first nine months of 2019 compared to the same period in 2018, on-going compression in the Warehouse segment’s net interest margin during the same period drove a $988,000 decrease in its net interest income. The following factors led to the overall changes in the Warehouse segment’s net interest margin and net interest income: 

 

·

Pricing pressure to the Bank on Warehouse lines of credit resulting from the negative impact of an inverted yield curve to the Bank’s Warehouse clients primarily drove the 69-basis-point compression in the Warehouse segment’s net interest margin.

 

·

A sharp decline in long-term fixed mortgage rates increased Warehouse clients’ usage of their Bank lines of credit, driving average outstanding Warehouse balances from $511 million during the third quarter of 2018 to $599 million during the third quarter of 2019.

 

·

Through the Company’s internal FTP process, the Traditional Banking segment charges or credits other segments based on prevailing market rates for funds utilized by loans or provided by deposits. Through this FTP process, the Warehouse segment experienced an approximate $940,000 decrease in FTP income credit received as a result of a $46 million decline in average noninterest-bearing deposit balances within the segment.  Substantially all of the decline in average noninterest-bearing balances was related to one large escrow account that exited the Bank in the fourth quarter of 2018.

 

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 68% during the third 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 57% during 2016.

 

Tax Refund Solutions segment

 

TRS’s net interest income increased $2.3 million for the first nine months of 2019 compared to the same period in 2018, resulting from a $1.3 million increase in interest income from its EA product and a $429,000 increase in interest income from commercial loans to its Tax Providers.

 

TRS’s EA product earned $19.1 million in interest income during the first nine months of 2019, a $1.3 million, or 7%, increase from the same period in 2018. For the first nine months  of the 2019 tax season, TRS modified its EA product offering with the following changes:

 

·

TRS allowed the taxpayer to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250, a substantial increase over the maximum of $3,500 the previous year;

·

TRS lowered the fee charged to the Tax Providers for the EA; and

·

TRS implemented a direct fee to the taxpayer for the EA, with the annual percentage rate to the taxpayer for his or her portion of the total fee being less than 36% for all offering tiers.

 

Despite the increase in the available EA maximum amount, the average loan amount for the first quarter 2019 tax season decreased by 9% compared to the first quarter 2018 tax season, as the taxpayer base generally opted for lower loan amounts this tax season.  While the average amount borrowed per loan decreased during 2019, the average fee per loan increased 7% for the same period, as the combined Tax Provider and taxpayer fee for 2019 resulted in a higher total average fee per loan than the lone tax provider fee in 2018. 

 

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

 

88

Republic Credit Solutions segment

 

RCS’s net interest income increased $533,000, or 2%, from the first nine months of 2018 to the first nine months of 2019. The increase was driven primarily by an increase in fee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income increased to $19.3 million during the first nine months of 2019 compared to $19.0 million during the same period in 2018 and accounted for 79% and 82% of all RCS interest income on loans during the periods.

 

Future long-term growth in interest income from RCS’s higher-yielding line-of-credit product will be restricted by a current on-balance-sheet Board-approved risk limit of $40 million for the Company. As of September 30, 2019, the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was $30 million. 

 

89

Table 8 — Total Company Average Balance Sheets and Interest Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

Nine Months Ended September 30, 2018

 

 

 

Average

    

 

 

    

Average

    

 

Average

    

 

 

    

Average

    

 

(dollars in thousands)

 

Balance

 

Interest

 

Rate

 

 

Balance

 

Interest

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other interest-earning deposits

 

$

296,474

 

$

5,143

 

2.31

%  

  

$

274,773

 

$

3,632

 

1.76

%  

 

Investment securities, including FHLB stock (1)

 

 

541,739

 

 

11,278

 

2.78

 

 

 

529,731

 

 

9,780

 

2.46

 

 

TRS Easy Advance loans (2)

 

 

45,406

 

 

19,098

 

56.08

 

 

 

41,631

 

 

17,830

 

57.10

 

 

Other RPG loans (3) (6)

 

 

122,106

 

 

25,301

 

27.63

 

 

 

88,664

 

 

23,531

 

35.39

 

 

Outstanding Warehouse lines of credit(4)(6)

 

 

599,302

 

 

22,148

 

4.93

 

 

 

510,732

 

 

19,368

 

5.06

 

 

All other Traditional Bank loans (5) (6)

 

 

3,663,704

 

 

133,388

 

4.85

 

 

 

3,454,874

 

 

119,138

 

4.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

5,268,731

 

 

216,356

 

5.48

 

 

 

4,900,405

 

 

193,279

 

5.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

 

(52,159)

 

 

 

 

 

 

 

 

(49,052)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning cash and cash equivalents

 

 

109,585

 

 

 

 

 

 

 

 

125,295

 

 

 

 

 

 

 

Premises and equipment, net

 

 

44,694

 

 

 

 

 

 

 

 

46,478

 

 

 

 

 

 

 

Bank owned life insurance

 

 

65,484

 

 

 

 

 

 

 

 

63,938

 

 

 

 

 

 

 

Other assets (2)

 

 

120,781

 

 

 

 

 

 

 

 

63,710

 

 

 

 

 

 

 

Total assets

 

$

5,557,116

 

 

 

 

 

 

 

$

5,150,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

$

1,140,171

 

$

4,652

 

0.54

%  

 

$

1,119,192

 

$

2,980

 

0.36

%  

 

Money market accounts

 

 

764,055

 

 

5,873

 

1.02

 

 

 

615,336

 

 

2,575

 

0.56

 

 

Time deposits

 

 

408,419

 

 

6,108

 

1.99

 

 

 

341,348

 

 

4,005

 

1.56

 

 

Reciprocal money market and time deposits

 

 

201,492

 

 

2,042

 

1.35

 

 

 

316,067

 

 

1,708

 

0.72

 

 

Brokered deposits

 

 

170,688

 

 

3,018

 

2.36

 

 

 

42,464

 

 

588

 

1.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

 

2,684,825

 

 

21,693

 

1.08

 

 

 

2,434,407

 

 

11,856

 

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

232,949

 

 

1,049

 

0.60

 

 

 

216,070

 

 

752

 

0.46

 

 

Federal Home Loan Bank advances

 

 

638,237

 

 

10,631

 

2.22

 

 

 

571,136

 

 

7,779

 

1.82

 

 

Subordinated note

 

 

41,240

 

 

1,252

 

4.05

 

 

 

41,240

 

 

1,110

 

3.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

3,597,251

 

 

34,625

 

1.28

 

 

 

3,262,853

 

 

21,497

 

0.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities and Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,140,355

 

 

 

 

 

 

 

 

1,180,187

 

 

 

 

 

 

 

Other liabilities

 

 

93,491

 

 

 

 

 

 

 

 

47,555

 

 

 

 

 

 

 

Stockholders’ equity

 

 

726,019

 

 

 

 

 

 

 

 

660,179

 

 

 

 

 

 

 

Total liabilities and stock-holders’ equity

 

$

5,557,116

 

 

 

 

 

 

 

$

5,150,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

181,731

 

 

 

 

 

 

 

$

171,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

4.20

%  

 

 

 

 

 

 

 

4.38

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

4.60

%  

 

 

 

 

 

 

 

4.67

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

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

(2)

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

(3)

Interest income includes loan fees of $20.7 million and  $19.9 million for the nine months ended September 30, 2019 and 2018.

(4)

Interest income includes loan fees of $2.2 million and $2.3 million for the nine months ended September 30, 2019 and 2018.

(5)

Interest income includes loan fees of $4.0 million and  $4.3 million for the nine months ended September 30, 2019 and 2018.

(6)

Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all loan premiums, discounts, fees and costs.

 

90

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

Compared to

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Total Net

 

Increase / (Decrease) Due to

 

(in thousands)

 

Change

    

Volume

    

Rate

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other interest-earning deposits

 

$

1,511

 

$

304

 

$

1,207

 

Investment securities, including FHLB stock

 

 

1,498

 

 

228

 

 

1,270

 

TRS Easy Advance loans*

 

 

1,268

 

 

(1,817)

 

 

3,085

 

Other RPG loans

 

 

1,770

 

 

7,645

 

 

(5,875)

 

Outstanding Warehouse lines of credit

 

 

2,780

 

 

3,284

 

 

(504)

 

All other Traditional Bank loans

 

 

14,250

 

 

7,411

 

 

6,839

 

Net change in interest income

 

 

23,077

 

 

17,055

 

 

6,022

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts

 

 

1,672

 

 

56

 

 

1,616

 

Money market accounts

 

 

3,298

 

 

739

 

 

2,559

 

Time deposits

 

 

2,103

 

 

879

 

 

1,224

 

Reciprocal money market and time deposits

 

 

334

 

 

(779)

 

 

1,113

 

Brokered deposits

 

 

2,430

 

 

2,226

 

 

204

 

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

 

 

297

 

 

62

 

 

235

 

Federal Home Loan Bank advances

 

 

2,852

 

 

985

 

 

1,867

 

Subordinated note

 

 

142

 

 

 —

 

 

142

 

Net change in interest expense

 

 

13,128

 

 

4,168

 

 

8,960

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net interest income

 

$

9,949

 

$

12,887

 

$

(2,938)

 


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

91

Provision for Loan and Lease Losses

 

Total Company Provision was $24.8 million for the first nine months of 2019 compared to $26.3 million for the same period in 2018. 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 2019 was $3.2 million, compared to $2.2 million for the first nine months of 2018. An analysis of the Provision for the first nine months of 2019 compared to the same period in 2018 follows:

 

·

The Bank recorded net charges to the Provision of $2.2 million and $250,000 for the first nine months of 2019 and 2018 related to loans rated Substandard or Special Mention. The charge during the first nine months of 2019 includes a $1.4 million Provision for a previously nonrated commercial relationship that defaulted during the second quarter of 2019 and a $1.4 million Provision for a previously nonrated commercial relationship that defaulted during the third quarter of 2019.  

 

·

Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $1.2 million and $2.1 million to the Provision for the first nine months of 2019 and 2018. Loan growth primarily drove the net charge to the Provision in both periods.

 

As a percentage of total loans, the Traditional Banking Allowance was 0.86% at September 30, 2019 compared to 0.85% at December 31, 2018 and 0.86% at September 30, 2018. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at September 30, 2019.

 

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

 

Warehouse Lending segment

 

Warehouse recorded a net charge to the Provision of $1.3 million for the first nine months of 2019 compared to a net charge of $88,000 for the same period in 2018. Provision expense for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $505 million during the first nine months of 2019 compared to an increase of $35 million during the first nine months of 2018.

 

As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at September 30, 2019, December 31, 2018 and September 30, 2018. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at September 30, 2019.

 

Tax Refund Solutions segment

 

TRS recorded a net charge to the Provision of $11.8 million during the first nine months of 2019 compared to a net charge of $11.5 million for the same period in 2018. TRS’s Provision for EA loan losses was $11.3 million, or 2.91% of its $389 million in EAs originated during the first nine months of 2019, compared to a Provision of $11.4 million, or 2.64% of its $430 million of EAs originated during the first nine months of 2018. 

 

The unpaid EA percentage was 5.84% at March 31, 2019, compared to 4.49% at March 31, 2018, representing a difference of 135 basis points.  The unpaid EAs to total EAs originated dropped to 2.91% at September 30, 2019. This compares to 2.64% at September 30, 2018, a difference of 27 basis points. 

92

Provision expense at TRS during the first nine months of 2019 also reflects net charges of $491,000 to the Provision for TRS’s non-EA products, including its receivable assistance program loans and its small-dollar line of credit program. A net charge to the Provision of $111,000 was made during the first nine months of 2018 for similar non-EA loan products.

 

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

 

Republic Credit Solutions segment

 

As illustrated in Table 10 below, RCS recorded a Provision of $8.6 million during the first nine months of 2019 compared to a Provision of $12.5 million for the same period in 2018. Approximately $2.7 million of the $4.0 million decrease in the Provision from period to period was attributable to RCS’s credit-card product that was discontinued in January 2019.    

 

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 Allowance was 13.32% at September 30, 2019, 14.70% at December 31, 2018 and 14.58% at September 30, 2018. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at September 30, 2019.

 

The following table presents RCS Provision by product:

 

Table 10 — RCS Provision by Product

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended Sep. 30,

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product:

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

8,554

 

$

9,775

 

$

(1,221)

 

(12)

%

 

Credit card

 

 

 —

 

 

2,728

 

 

(2,728)

 

(100)

 

 

Hospital receivables

 

 

39

 

 

42

 

 

(3)

 

(7)

 

 

Total

 

$

8,593

 

$

12,545

 

$

(3,952)

 

(32)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

93

 

Table 11 — Summary of Loan and Lease Loss Experience

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

(dollars in thousands)

 

2019

    

2018

 

 

 

 

 

 

 

 

 

Allowance at beginning of period

 

$

44,675

 

$

42,769

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate

 

 

(474)

 

 

(405)

 

Commercial real estate

 

 

(1,407)

 

 

 —

 

Commercial & industrial

 

 

 —

 

 

(200)

 

Home equity

 

 

(13)

 

 

(48)

 

Consumer

 

 

(1,480)

 

 

(1,542)

 

Total Traditional Banking

 

 

(3,374)

 

 

(2,195)

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Total Core Banking

 

 

(3,374)

 

 

(2,195)

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

Easy Advances

 

 

(13,425)

 

 

(12,478)

 

Commercial & industrial

 

 

(371)

 

 

(55)

 

Republic Credit Solutions

 

 

(9,306)

 

 

(13,669)

 

Total Republic Processing Group

 

 

(23,102)

 

 

(26,202)

 

Total charge-offs

 

 

(26,476)

 

 

(28,397)

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

Residential real estate

 

 

393

 

 

243

 

Commercial real estate

 

 

 4

 

 

129

 

Construction & land development

 

 

 —

 

 

30

 

Commercial & industrial

 

 

 6

 

 

39

 

Home equity

 

 

61

 

 

288

 

Consumer

 

 

445

 

 

480

 

Total Traditional Banking

 

 

909

 

 

1,209

 

Warehouse lines of credit

 

 

 —

 

 

 —

 

Total Core Banking

 

 

909

 

 

1,209

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

Easy Advances

 

 

2,103

 

 

1,118

 

Commercial & industrial

 

 

 2

 

 

 5

 

Republic Credit Solutions

 

 

875

 

 

856

 

Total Republic Processing Group

 

 

2,980

 

 

1,979

 

Total recoveries

 

 

3,889

 

 

3,188

 

 

 

 

 

 

 

 

 

Net loan charge-offs

 

 

(22,587)

 

 

(25,209)

 

 

 

 

 

 

 

 

 

Provision - Core Banking

 

 

4,433

 

 

2,246

 

Provision - RPG

 

 

20,411

 

 

24,018

 

Total Provision

 

 

24,844

 

 

26,264

 

Allowance at end of period

 

$

46,932

 

$

43,824

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

1.01

%  

 

1.06

%  

Allowance to nonperforming loans

 

 

226

 

 

254

 

Net loan charge-offs to average loans

 

 

0.68

 

 

0.82

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

0.73

%  

 

0.78

%  

Allowance to nonperforming loans

 

 

163

 

 

185

 

Net loan charge-offs to average loans

 

 

0.08

 

 

0.03

 

94

Noninterest Income

 

Total Company noninterest income increased $2.0 million, or 4%, during the first nine months of 2019 compared to the same period in 2018. 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 $260,000  for the first nine months of 2019 compared to the same period in 2018. The following were the most significant categories affecting the change in noninterest income:

 

·

Service charges on deposit accounts decreased $62,000 to $10.6 million for the first nine months of 2019 compared to the same period in 2018. 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, 2019 and 2018 were $6.5 million and $6.4 million. The total daily overdraft charges, net of refunds, included in interest income for the nine months ended September 30, 2019 and 2018 were $1.7 million and  $1.5 million. 

 

·

Interchange income rose $667,000, or 9%, driven by a 6% increase in active debit cards along with increased overall usage on its card base, in general.

 

Mortgage Banking segment

 

Within the Mortgage Banking segment, mortgage banking income increased $3.3 million, or 90%, during the first nine months of 2019 compared to the same period in 2018, which resulted from a $114 million increase in secondary market loans originated from period to period combined with a $40 million increase in the Bank’s pipeline of secondary market loans in process from September 30, 2018 to September 30, 2019. A sharp decline in long-term mortgage rates during the previous nine months, combined with the Bank’s continued investments in mortgage resources, contributed to the increased year-over-year mortgage activity.

 

Tax Refund Solutions segment

 

TRS’s noninterest income increased $146,000,  during the first nine months of 2019 compared to the same period in 2018 resulting from a $1.1 million, or 5%, increase in net RT revenue that was almost entirely offset by the lack of a one-time $1.0 million nonrefundable capital commitment fee recorded during the first nine months of 2018.   A nominal increase in RT pricing and a shift in the RT mix among the various Tax Providers primarily drove the rise in net RT revenues.

 

Republic Credit Solutions segment

 

RCS’s noninterest income decreased $1.5 million, or 29%, during the first nine months of 2019 compared to the same period in 2018. As illustrated in Table 10 below, RCS program fees decreased $1.3 million resulting primarily from a reduction in fees associated with the discontinuance of RCS’s credit-card product. 

 

95

The following table presents RCS program fees by product:

 

Table 12 — RCS Program Fees by Product

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended Sep. 30,

 

 

 

 

 

 

 

(in thousands)

 

2019

 

 

2018

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product:

 

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit

 

$

3,219

 

$

3,297

 

$

(78)

 

(2)

%

 

Credit card

 

 

 —

 

 

1,418

 

 

(1,418)

 

(100)

 

 

Hospital receivables

 

 

172

 

 

100

 

 

72

 

72

 

 

Installment loans*

 

 

(281)

 

 

(386)

 

 

105

 

(27)

 

 

Total

 

$

3,110

 

$

4,429

 

$

(1,319)

 

(30)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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

 

Noninterest Expense

 

Total Company noninterest expense increased $6.5 million, or 5%, during the first nine months of 2019 compared to the same period in 2018. The following were the most significant components comprising the increase in noninterest expense by reportable segment:

 

Traditional Banking segment

 

Traditional Banking noninterest expense increased $5.5 million, or 5%, for the first nine months of 2019 compared to the same period in 2018. The most significant categories driving the change in noninterest expense were as follows:

 

·

Salaries and employee benefits expense increased $4.8 million, or 8%. Annual merit increases, as well as, the addition of 60 Traditional Bank FTE employees from September 30, 2018 to September 30, 2019 primarily drove the increase.

 

·

Occupancy expense increased $818,000, or 5%, primarily driven by increases in rent expense and support costs for the Traditional Bank’s technology and infrastructure.

 

Tax Refund Solutions segment

 

TRS’s noninterest expense increased $1.6 million, or 14%, during the first nine months of 2019 compared to the same period in 2018 partially due to $500,000 in legal reserves recorded during 2019 and partially due to a $588,000 increase in salaries and benefits expense.

 

Republic Credit Solutions segment

 

RCS’s noninterest expense decreased $1.4 million, or 37%, during the first nine months of 2019 compared to the same period in 2018 due to a $796,000 decrease in data processing expense resulting from the discontinuance of RCS’s credit card product.

 

Income Tax Expense

 

The following items provided $2.4 million in federal income tax benefits for the nine months ended September 30, 2019 and drove the Total Company’s effective tax rate for that period lower than the federal corporate tax rate of 21%:

 

·

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

 

·

In April 2019, Kentucky enacted HB458, which allows for combined filing for Republic Bancorp and the Bank. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net

96

operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021 and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance on the deferred tax asset for these losses is approximately $815,000. This benefit was recorded in the second quarter of 2019 and fully attributed to the Company’s Traditional Banking segment.

 

·

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

 

·

The Company recognized $437,000 and $834,000 in tax benefits for low-income-housing investments and R&D credits for the three and nine months ended September 30, 2019. The low-income-housing investments were attributable to the Company’s Traditional Banking segment, while the R&D credits were attributed to the Traditional Banking, TRS, and RCS segments.

 

The following items provided $2.8 million in federal income tax benefits for the nine months ended September 30, 2018 and drove the  Total Company’s effective tax rate for that period lower than the federal corporate tax rate of 21%:

 

·

The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. During the third quarter of 2018 the Company completed a cost-segregation study and assigned revised tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. Tax benefits related to the cost-segregation study were primarily attributed to the Company’s Traditional Banking segment.

 

·

The Company also adopted an automatic tax-accounting-method change related to deferred loan fees during the third quarter of 2018, as it was preparing its 2017 federal tax return.  This tax-accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan.  The change in tax-accounting-method resulted in a further impact from the TCJA, as it affected the Company’s final 2017 federal tax return due October 15, 2018. Tax benefits related to the tax-accounting-method change were 100% attributed to the Company’s Traditional Banking segment.

 

·

The Company completed an R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits dating back to 2014. Tax benefits related to the R&D tax-credit study were attributed to the Company’s Traditional Banking, TRS, and RCS segments.

 

97

COMPARISON OF FINANCIAL CONDITION AT September 30, 2019 AND December 31, 2018

 

Table 13 — Loan Portfolio Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

September 30, 2019

    

December 31, 2018

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

$

889,554

 

$

907,005

 

$

(17,451)

 

(2)

%

Owner occupied - correspondent*

 

71,654

 

 

94,827

 

 

(23,173)

 

(24)

 

Nonowner occupied

 

255,808

 

 

242,846

 

 

12,962

 

 5

 

Commercial real estate

 

1,266,290

 

 

1,248,940

 

 

17,350

 

 1

 

Construction & land development

 

192,535

 

 

175,178

 

 

17,357

 

10

 

Commercial & industrial

 

464,614

 

 

430,355

 

 

34,259

 

 8

 

Lease financing receivables

 

14,820

 

 

15,031

 

 

(211)

 

(1)

 

Home equity

 

296,339

 

 

332,548

 

 

(36,209)

 

(11)

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

17,722

 

 

19,095

 

 

(1,373)

 

(7)

 

Overdrafts

 

1,075

 

 

1,102

 

 

(27)

 

(2)

 

Automobile loans

 

59,403

 

 

63,475

 

 

(4,072)

 

(6)

 

Other consumer

 

60,655

 

 

46,642

 

 

14,013

 

30

 

Total Traditional Banking

 

3,590,469

 

 

3,577,044

 

 

13,425

 

 0

 

Warehouse lines of credit*

 

973,588

 

 

468,695

 

 

504,893

 

108

 

Total Core Banking

 

4,564,057

 

 

4,045,739

 

 

518,318

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group*:

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

 

 —

 

 —

 

Other TRS loans

 

846

 

 

13,744

 

 

(12,898)

 

(94)

 

Republic Credit Solutions

 

99,151

 

 

88,744

 

 

10,407

 

12

 

Total Republic Processing Group

 

99,997

 

 

102,488

 

 

(2,491)

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans**

 

4,664,054

 

 

4,148,227

 

 

515,827

 

12

 

Allowance for loan and lease losses

 

(46,932)

 

 

(44,675)

 

 

(2,257)

 

 5

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

$

4,617,122

 

$

4,103,552

 

$

513,570

 

13

 


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

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

 

Gross loans increased by $516 million, or 12%, during the first nine months of 2019 to $4.7 billion at September 30, 2019. The most significant components comprising the change in loans by reportable segment follow:

 

Traditional Banking segment

 

As reflected in Table 11 above, the period-end balances of Traditional Banking loans increased $13 million from December 31, 2018 to September 30, 2019, with $144 million of loan growth offset by $131 million of loans held for investment reclassified to held for sale during 2019 following the Bank’s agreement to sell four of its banking centers. The Bank’s CRE, C&I, and Construction portfolios primarily drove growth. 

 

See Footnote 18 “Agreement to Sell Four Banking Centers”  of Part I Item 1 “Financial Statements” for additional information concerning the Bank’s agreement to sell four of its banking centers.

98

 

Warehouse Lending segment

 

Outstanding Warehouse period end balances increased $505 million from December 31, 2018 to September 30, 2019. A sharp decline in long-term fixed mortgage rates during 2019 drove the increase in Warehouse balances.  

 

Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 68% during the third 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 57% during 2016.

 

Allowance for Loan and Lease Losses

 

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

 

The Company’s Allowance increased $2 million from $45 million at December 31, 2018 to  $47 million at September 30, 2019.  As a percent of total loans, the total Company’s Allowance decreased to 1.01% at September 30, 2019 compared to 1.08% at December 31, 2018.  An analysis of the Allowance by reportable segment follows:

 

Traditional Banking segment

 

The Traditional Banking Allowance increased $1 million to $31 million at September 30, 2019 driven primarily by an Allowance of $1.4 million for a commercial relationship that defaulted during the second quarter of 2019. The Traditional Bank Allowance to total Traditional Bank loans increased one basis point to 0.86% when comparing September 30, 2019 to December 31, 2018. In general, historical losses within the Traditional Banking segment have remained relatively stable and low for a sustained period of time.  The Traditional Bank did incur a $1.4 million charge-off during the third quarter of 2019 on one of its commercial loans; however, this charge-off represented the last loan in a pool of out-of-market loans purchased by the Bank in 2011. This pool of loans had been analyzed for loss by the Bank within its Allowance calculation as a separate class from other commercial loans; therefore, any losses from this pool have not been extrapolated to the Bank’s other commercial portfolios for the Allowance calculation.

 

Warehouse Lending segment

 

The Warehouse Allowance increased to approximately $2.4 million, and the Warehouse Allowance to total Warehouse loans remained at 0.25% when comparing September 30, 2019 to December 31, 2018.  As of September 30, 2019,  the Warehouse Allowance was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the third quarter of 2019.

 

Republic Credit Solutions segment

 

The RCS Allowance remained at $13 million from December 31, 2018 to September 30, 2019.  RCS maintained an Allowance for two distinct credit products offered at September 30, 2019, including its line-of-credit product and its healthcare-receivables product.  At September 30, 2019, the Allowance to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables product to as high as 46% for its line-of-credit product.  The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.

 

99

Asset Quality

 

Classified and Special Mention Loans

 

The Bank applies credit quality indicators, or “ratings,” to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard,” and PCI-Sub are considered “Classified.” Loans rated “Special Mention” or PCI-1 are considered Special Mention. The Bank’s Classified and Special Mention loans increased $10 million during the first nine months of 2019 resulting primarily from the downgrade of five commercial relationships to Substandard during 2019.

 

See Footnote 4 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.

 

Table 14 — Classified and Special Mention Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss

 

$

 

$

 

$

 —

 

 —

%

Doubtful

 

 

 

 

 

 

 —

 

 —

 

Substandard

 

 

31,487

 

 

19,860

 

 

11,627

 

58.54

 

Purchased Credit Impaired - Substandard

 

 

1,335

 

 

1,559

 

 

(224)

 

(14.37)

 

Total Classified Loans

 

 

32,822

 

 

21,419

 

 

11,403

 

53.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

20,004

 

 

21,205

 

 

(1,201)

 

(5.66)

 

Purchased Credit Impaired - Group 1

 

 

1,018

 

 

1,121

 

 

(103)

 

(9.19)

 

Total Special Mention Loans

 

 

21,022

 

 

22,326

 

 

(1,304)

 

(5.84)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Classified and Special Mention Loans

 

$

53,844

 

$

43,745

 

$

10,099

 

23.09

%

 

100

Nonperforming Loans

 

Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. Impaired loans that are not placed on nonaccrual status are not included as nonperforming loans. The nonperforming loan category includes TDRs totaling approximately $9 million and $8 million at September 30, 2019 and December 31, 2018.  Generally, all nonperforming loans are considered impaired.

 

Nonperforming loans to total loans increased to 0.44% at September 30, 2019 from 0.39% at December 31, 2018, as the total balance of nonperforming loans increased by $5 million, or 29%, while total loans increased $516 million, or 12%,  during the first nine months of 2019.  Two commercial relationships placed on nonaccrual status during the first nine months of 2019 primarily drove the increase in nonperforming loans.

 

Table 15 — Nonperforming Loans and Nonperforming Assets Summary

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

    

 

 

 

 

 

 

 

 

 

 

Loans on nonaccrual status*

 

$

20,574

 

$

15,993

 

 

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

 

 

175

 

 

145

 

 

Total nonperforming loans

 

 

20,749

 

 

16,138

 

 

Other real estate owned

 

 

119

 

 

160

 

 

Total nonperforming assets

 

$

20,868

 

$

16,298

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.44

%  

 

0.39

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.45

 

 

0.39

 

 

Nonperforming assets to total assets

 

 

0.34

 

 

0.31

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.45

%  

 

0.40

%  

 

Nonperforming assets to total loans (including OREO)

 

 

0.45

 

 

0.40

 

 

Nonperforming assets to total assets

 

 

0.35

 

 

0.32

 

 


*Loans on nonaccrual status include impaired loans. See Footnote 4 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding impaired loans.

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

 

 

101

Table 16 — Nonperforming Loan Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

December 31, 2018

 

 

 

 

 

 

 

Percent of

 

 

 

 

Percent of

 

 

 

   

 

 

 

Total

 

 

 

 

Total

 

(in thousands)

 

Balance

 

Loan Class

Balance

 

Loan Class

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

   

$

9,728

 

1.09

%  

  

$

10,800

 

1.19

%  

 

Owner occupied - correspondent

 

   

 

1,328

 

1.85

 

 

 

382

 

0.40

 

 

Nonowner occupied

 

   

 

26

 

0.01

 

 

 

669

 

0.28

 

 

Commercial real estate

 

   

 

4,690

 

0.37

 

 

 

2,318

 

0.19

 

 

Construction & land development

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Commercial & industrial

 

   

 

3,014

 

0.65

 

 

 

630

 

0.15

 

 

Lease financing receivables

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Home equity

 

   

 

1,659

 

0.56

 

  

 

1,095

 

0.33

 

 

Consumer:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Overdrafts

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Automobile loans

 

 

 

116

 

0.20

 

 

 

75

 

0.12

 

 

Other consumer

 

 

 

13

 

0.02

 

 

 

37

 

0.08

 

 

Total Traditional Banking

 

 

 

20,574

 

0.57

 

 

 

16,006

 

0.45

 

 

Warehouse lines of credit

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Total Core Banking

 

 

 

20,574

 

0.45

 

 

 

16,006

 

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

   

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Other TRS loans

 

 

 

109

 

12.88

 

 

 

 4

 

0.03

 

 

Republic Credit Solutions

 

   

 

66

 

0.07

 

 

 

128

 

0.14

 

 

Total Republic Processing Group

 

   

 

175

 

0.18

 

 

 

132

 

0.13

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

 

   

$

20,749

 

0.44

%  

 

$

16,138

 

0.39

%  

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

102

Table 17 — Stratification of Nonperforming Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Nonperforming Loans and Recorded Investment

 

 

    

 

    

 

 

    

 

 

    

Balance

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2019

 

 

 

Balance

 

 

 

 

> $100 &

 

 

 

 

Balance 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

 

No.

 

<= $500

 

 

No.

 

> $500

 

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

113

 

$

4,713

 

 

17

 

$

2,849

 

 

 2

 

$

2,166

 

 

132

 

$

9,728

 

Owner occupied - correspondent

 

 —

 

 

 —

 

 

 3

 

 

1,328

 

 

 —

 

 

 —

 

 

 3

 

 

1,328

 

Nonowner occupied

 

 2

 

 

26

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 2

 

 

26

 

Commercial real estate

 

 3

 

 

132

 

 

 2

 

 

630

 

 

 3

 

 

3,928

 

 

 8

 

 

4,690

 

Construction & land development

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial & industrial

 

 1

 

 

10

 

 

 2

 

 

432

 

 

 1

 

 

2,572

 

 

 4

 

 

3,014

 

Lease financing receivables

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

19

 

 

586

 

 

 5

 

 

1,073

 

 

 —

 

 

 —

 

 

24

 

 

1,659

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

 8

 

 

116

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 8

 

 

116

 

Other consumer

 

 6

 

 

13

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 6

 

 

13

 

Total Traditional Banking

 

152

 

 

5,596

 

 

29

 

 

6,312

 

 

 6

 

 

8,666

 

 

187

 

 

20,574

 

Warehouse lines of credit

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total Core Banking

 

152

 

 

5,596

 

 

29

 

 

6,312

 

 

 6

 

 

8,666

 

 

187

 

 

20,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

254

 

 

109

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

254

 

 

109

 

Republic Credit Solutions

 

206

 

 

66

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

206

 

 

66

 

Total Republic Processing Group

 

460

 

 

175

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

460

 

 

175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

612

 

$

5,771

 

 

29

 

$

6,312

 

 

 6

 

$

8,666

 

 

647

 

$

20,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Nonperforming Loans and Recorded Investment

 

 

    

 

    

 

 

    

 

 

    

Balance

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

 

 

 

Balance

 

 

 

 

> $100 &

 

 

 

 

Balance 

 

 

 

 

Total

 

(dollars in thousands)

 

No.

 

<= $100

 

 

No.

 

<= $500

 

 

No.

 

> $500

 

 

No.

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

108

 

$

4,859

 

 

11

 

$

2,401

 

 

 3

 

$

3,540

 

 

122

 

$

10,800

 

Owner occupied - correspondent

 

 —

 

 

 —

 

 

 1

 

 

382

 

 

 —

 

 

 —

 

 

 1

 

 

382

 

Nonowner occupied

 

 4

 

 

169

 

 

 —

 

 

 —

 

 

 1

 

 

500

 

 

 5

 

 

669

 

Commercial real estate

 

 5

 

 

201

 

 

 1

 

 

397

 

 

 2

 

 

1,720

 

 

 8

 

 

2,318

 

Construction & land development

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial & industrial

 

 2

 

 

59

 

 

 2

 

 

571

 

 

 —

 

 

 —

 

 

 4

 

 

630

 

Lease financing receivables

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Home equity

 

19

 

 

417

 

 

 4

 

 

678

 

 

 —

 

 

 —

 

 

23

 

 

1,095

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Overdrafts

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Automobile loans

 

 5

 

 

75

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 5

 

 

75

 

Other consumer

 

14

 

 

37

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14

 

 

37

 

Total Traditional Banking

 

157

 

 

5,817

 

 

19

 

 

4,429

 

 

 6

 

 

5,760

 

 

182

 

 

16,006

 

Warehouse lines of credit

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total Core Banking

 

157

 

 

5,817

 

 

19

 

 

4,429

 

 

 6

 

 

5,760

 

 

182

 

 

16,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other TRS loans

 

 6

 

 

 4

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 6

 

 

 4

 

Republic Credit Solutions

 

960

 

 

128

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

960

 

 

128

 

Total Republic Processing Group

 

966

 

 

132

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

966

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,123

 

$

5,949

 

 

19

 

$

4,429

 

 

 6

 

$

5,760

 

 

1,148

 

$

16,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103

Table 18 — Rollforward of Nonperforming Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans at the beginning of the period

 

$

19,403

 

$

18,360

 

$

16,138

 

$

15,074

 

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

 

 

4,441

 

 

2,425

 

 

9,955

 

 

6,787

 

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

 

 

(864)

 

 

(2,438)

 

 

(4,257)

 

 

(3,041)

 

Principal balance paydowns of loans nonperforming at both period ends

 

 

(2,240)

 

 

(587)

 

 

(1,117)

 

 

(849)

 

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

 

 

 9

 

 

(474)

 

 

30

 

 

(685)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans at the end of the period

 

$

20,749

 

$

17,286

 

$

20,749

 

$

17,286

 


*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)

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off

 

$

(70)

 

$

(14)

 

$

(427)

 

$

(43)

 

Loans transferred to OREO

 

 

(18)

 

 

(224)

 

 

(1,230)

 

 

(409)

 

Loans refinanced at other institutions

 

 

(594)

 

 

(2,019)

 

 

(2,515)

 

 

(2,168)

 

Loans returned to accrual status

 

 

(182)

 

 

(181)

 

 

(85)

 

 

(421)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(864)

 

$

(2,438)

 

$

(4,257)

 

$

(3,041)

 

 

Based on the Bank’s review at September 30, 2019, management believes that its reserves are adequate to absorb probable losses on all nonperforming loans.

 

Delinquent Loans

 

Total Company delinquent loans to total loans increased to 0.44% at September 30, 2019, from 0.38% at December 31, 2018,  primarily due to two commercial relationships that defaulted during the first nine months of 2019. 

 

Core Bank delinquent loans to total Core Bank loans increased to 0.30%  at September 30, 2019 from 0.22% at December 31, 2018, primarily due to the previously mentioned commercial relationships that defaulted during the first nine months of 2019. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of September 30, 2019 and December 31, 2018 were on nonaccrual status.

 

104

Table 20 — Delinquent Loan Composition* 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

December 31, 2018

 

 

 

 

 

 

 

Percent of

 

 

 

 

Percent of

 

 

 

 

 

 

 

Total

 

 

 

 

Total

 

(in thousands)

    

Balance

 

Loan Class

Balance

 

Loan Class

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Traditional Banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

   

$

4,131

 

0.46

%  

   

$

5,525

 

0.61

%  

 

Owner occupied - correspondent

 

   

 

958

 

1.34

 

   

 

 —

 

 —

 

 

Nonowner occupied

 

   

 

 —

 

 —

 

   

 

1,008

 

0.42

 

 

Commercial real estate

 

   

 

3,911

 

0.31

 

   

 

1,099

 

0.09

 

 

Construction & land development

 

   

 

150

 

0.08

 

   

 

 —

 

 —

 

 

Commercial & industrial

 

   

 

2,715

 

0.58

 

   

 

25

 

0.01

 

 

Lease financing receivables

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Home equity

 

 

 

1,184

 

0.40

 

 

 

784

 

0.24

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

 

84

 

0.47

 

 

 

129

 

0.68

 

 

Overdrafts

 

 

 

253

 

23.53

 

 

 

230

 

20.87

 

 

Automobile loans

 

 

 

97

 

0.16

 

 

 

28

 

0.04

 

 

Other consumer

 

 

 

13

 

0.02

 

 

 

47

 

0.10

 

 

Total Traditional Banking

 

 

 

13,496

 

0.38

 

 

 

8,875

 

0.25

 

 

Warehouse lines of credit

 

 

 

 —

 

 —

 

 

 

 —

 

 —

 

 

Total Core Banking

 

 

 

13,496

 

0.30

 

 

 

8,875

 

0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Tax Refund Solutions:

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Easy Advances

 

   

 

 —

 

 —

 

   

 

 —

 

 —

 

 

Other TRS loans

 

   

 

236

 

27.90

 

   

 

10

 

0.07

 

 

Republic Credit Solutions

 

   

 

6,640

 

6.70

 

   

 

7,077

 

7.97

 

 

Total Republic Processing Group

 

   

 

6,876

 

6.88

 

   

 

7,087

 

6.91

 

 

 

 

   

 

 

 

 

 

   

 

 

 

 

 

 

Total delinquent loans

 

   

$

20,372

 

0.44

%  

   

$

15,962

 

0.38

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


*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.

105

Table 21 — Rollforward of Delinquent Loans 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(in thousands)

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delinquent loans at the beginning of the period

 

$

19,326

 

$

13,132

 

$

15,962

 

$

14,101

 

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

 

 

5,608

 

 

7,077

 

 

10,120

 

 

7,952

 

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

 

 

(2,674)

 

 

(3,942)

 

 

(5,292)

 

 

(4,465)

 

Principal balance paydowns of loans delinquent at both period ends

 

 

(1,930)

 

 

(64)

 

 

(251)

 

 

(151)

 

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

 

 

42

 

 

1,623

 

 

(167)

 

 

389

 

Delinquent loans at the end of period

 

$

20,372

 

$

17,826

 

$

20,372

 

$

17,826

 


*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)

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Loans charged off

 

$

(89)

 

$

(22)

 

$

(429)

 

$

(50)

 

Easy Advances* paid-off or charged-off

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Loans transferred to OREO

 

 

(18)

 

 

(224)

 

 

(1,258)

 

 

(342)

 

Loans refinanced at other institutions

 

 

(865)

 

 

(2,301)

 

 

(1,803)

 

 

(1,961)

 

Loans paid current

 

 

(1,702)

 

 

(1,395)

 

 

(1,802)

 

 

(2,112)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(2,674)

 

$

(3,942)

 

$

(5,292)

 

$

(4,465)

 

 

Impaired Loans and Troubled Debt Restructurings

 

The Bank’s policy is to charge-off all or that portion of its recorded investment in a collateral-dependent impaired credit upon a determination that it is probable the full amount of contractual principal and interest will not be collected. Impaired loans totaled $49 million at September 30, 2019 compared to $41 million at December 31, 2018, an increase of $8 million during the first nine months of 2019 driven by five commercial loans that defaulted during 2019.

 

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. As of September 30, 2019, the Bank had $30 million in TDRs, of which $9 million were also on nonaccrual status. As of December 31, 2018, the Bank had $33 million in TDRs, of which $8 million  were also on nonaccrual status.

 

Table 23 — Impaired Loan Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

    

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings

 

$

30,161

 

$

32,863

 

$

(2,702)

 

(8.22)

%

 

Impaired loans (which are not TDRs)

 

 

18,396

 

 

8,572

 

 

9,824

 

114.61

 

 

Total recorded investment in impaired loans

 

$

48,557

 

$

41,435

 

$

7,122

 

17.19

%

 

 

See Footnote 4 “Loans and Allowance for Loan and Lease Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding impaired loans and TDRs.

 

106

Deposits

 

Table 24 — Deposit Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

September 30, 2019

    

December 31, 2018

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

941,661

 

$

937,402

 

$

4,259

 

 0

%

 

Money market accounts

 

 

785,563

 

 

717,954

 

 

67,609

 

 9

 

 

Savings

 

 

173,396

 

 

187,868

 

 

(14,472)

 

(8)

 

 

Individual retirement accounts (1)

 

 

53,101

 

 

53,524

 

 

(423)

 

(1)

 

 

Time deposits, $250 and over (1)

 

 

85,789

 

 

84,104

 

 

1,685

 

 2

 

 

Other certificates of deposit (1)

 

 

259,686

 

 

239,324

 

 

20,362

 

 9

 

 

Reciprocal money market and time deposits (1)

 

 

234,043

 

 

217,153

 

 

16,890

 

 8

 

 

Brokered deposits (1)

 

 

166,355

 

 

9,394

 

 

156,961

 

1,671

 

 

Total Core Bank interest-bearing deposits

 

 

2,699,594

 

 

2,446,723

 

 

252,871

 

10

 

 

Total Core Bank noninterest-bearing deposits

 

 

985,380

 

 

971,422

 

 

13,958

 

 1

 

 

Total Core Bank deposits

 

 

3,684,974

 

 

3,418,145

 

 

266,829

 

 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Processing Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

3,605

 

 

5,453

 

 

(1,848)

 

(34)

 

 

Total RPG interest-bearing deposits

 

 

3,605

 

 

5,453

 

 

(1,848)

 

(34)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brokered prepaid card deposits

 

 

8,931

 

 

4,350

 

 

4,581

 

105

 

 

Other noninterest-bearing deposits

 

 

37,242

 

 

28,197

 

 

9,045

 

32

 

 

Total RPG noninterest-bearing deposits

 

 

46,173

 

 

32,547

 

 

13,626

 

42

 

 

Total RPG deposits

 

 

49,778

 

 

38,000

 

 

11,778

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits held for assumption in connection with sale of banking centers (2)

 

 

142,384

 

 

 —

 

 

142,384

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,877,136

 

$

3,456,145

 

$

420,991

 

12

%

 


(1)

Includes time deposits.

(2)

See Note 18 “Sale of Four Banking Centers” of Part I Item 1 “Financial Statements” for additional detail.

 

Total Company deposits increased $421 million, or 12%, from December 31, 2018 to $3.9 billion at September 30, 2019.  Total deposits at September 30, 2019 includes $142 million of deposits held for assumption in connection with the Bank’s agreement to sell four of its banking centers. These  deposits held for assumption at September 30, 2019 include $101 million of interest-bearing and $41 million of noninterest-bearing deposits.

 

See Footnote 18 “Agreement to Sell Four Banking Centers”  of Part I Item 1 “Financial Statements” for additional information concerning the Bank’s agreement to sell four of its banking centers.

 

Total Company interest-bearing deposits increased $251 million, or 10%,  during the first nine months of 2019 due primarily to the acquisition of $150 million of wholesale-brokered deposits. Promotional rates for time deposits and money market accounts offered through the Company’s Memory Bank digital brand primarily drove the remaining growth in interest-bearing deposits.

 

Total Company noninterest-bearing deposits increased  $28 million, or 3%, with growth primarily driven by business-checking accounts.

 

Federal Home Loan Bank Advances

 

Primarily to fund a seasonal increase in usage rates on its warehouse lines of credit, the Company experienced a $240 million increase in its FHLB overnight advances from December 31, 2018 to September 30, 2019. The Bank held $750 million in overnight advances at a rate of 2.11% as of September 30, 2019, compared to $510 million in overnight advances at a rate of 2.45% at December 31, 2018.   The usage of overnight FHLB advances is expected to continue to fluctuate based on the overall usage rates for the Bank’s warehouse lines of credit, which are also tied to short-term repricing indices. 

 

The overall use and types of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. If a meaningful amount of the Bank’s loan originations in the future have repricing terms longer than five years, management could elect to borrow additional longer-term funds

107

from the FHLB to mitigate its risk of future increases in market interest rates. Whether the Bank ultimately does so, and how much in advances it extends out, will be dependent upon circumstances at that time. If the Bank does obtain longer-term FHLB advances in the future for interest rate risk mitigation, it could have a negative impact on the then-current earnings. The amount of the negative impact will be dependent upon the dollar amount, coupon and final maturity of the advances obtained, as well as, the overall shape of the U.S. Treasury yield curve at that time. 

 

Interest Rate Swaps

 

Interest Rate Swaps Used as Cash Flow Hedges

 

The Bank entered into two interest rate swap agreements during 2013 as part of its interest rate risk management strategy. The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR.  The counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is not significant.

 

Non-hedge Interest Rate Swaps

 

The Bank also enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk.  These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.

 

See Footnote 12 “Interest Rate Swaps” of Part I Item 1 “Financial Statements” for additional discussion regarding the Bank’s interest rate swaps.

 

Liquidity

 

The Bank had a loan to deposit ratio (excluding brokered deposits) of 184% at September 30, 2019 and 172% at December 31, 2018. At September 30, 2019 and December 31, 2018, the Company had cash and cash equivalents on-hand of $397 million and $351 million.  The Bank also had available borrowing capacity of $16 million and  $254 million from the FHLB at September 30, 2019 and December 31, 2018.  In addition, the Bank’s liquidity resources included unencumbered debt securities of $191 million and  $300 million as of September 30, 2019 and December 31, 2018 and unsecured lines of credit of $125 million available through various other financial institutions as of the same period-ends.

 

The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage backed securities and proceeds realized from loans held for sale. The Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. At September 30, 2019 and December 31, 2018, these pledged investment securities had a fair value of $444 million and $241 million. Republic’s banking centers and its websites,  www.republicbank.com and www.mymemorybank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.

 

At September 30, 2019, the Bank had approximately $1.1 billion in deposits from 159 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $531 million, or 14%, of the Company’s total deposit balances at September 30, 2019.  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.

 

108

Due to its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached and, periodically during each quarter, has fallen short of its Board-approved minimum internal policy limits for liquidity management. Most recently, the Bank has experienced a significant increase in its outstanding Warehouse line-of-credit balances.  Because management deems this increase in Warehouse balances to not be long-term in nature, it has elected to utilize overnight borrowings from the FHLB in order to fund these outstanding balances.  As a result, the Bank had utilized the bulk of its FHLB borrowing capacity as of the most recent quarter-end.  While the Bank was in compliance with all Board-approved liquidity policies as of September 30, 2019, it was not always within policy parameters for each day of the quarter.  The Bank will likely continue to maintain its liquidity levels near the Bank’s Board-approved minimums for the foreseeable future and will also likely utilize much of its FHLB borrowing capacity or short-term brokered deposits to fund the current spike in Warehouse balances. 

 

Capital

 

Total stockholders’ equity increased from $690 million at December 31, 2018 to $744 million at September 30, 2019. The increase in stockholders’ equity was primarily attributable to net income earned during 2019 reduced by cash dividends declared.

 

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

 

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

 

Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At September 30, 2019, RB&T could, without prior approval, declare dividends of approximately $131 million.

 

Regulatory Capital Requirements — The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators.  Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.

 

Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 10.0% Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, the Company and Bank must hold a capital conservation buffer of 2.5% composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements.

 

109

Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based Capital, Tier I Risk Based Capital and Tier I Leverage Capital. Republic and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the Capital Conservation Buffer. Republic’s average stockholders’ equity to average assets ratio was 13.06% at September 30, 2019 compared to 13.02% at December 31, 2018. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

 

In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. The sole asset of RBCT represents the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. The RBCT TPS are treated as part of Republic’s Tier I Capital.

 

The subordinated note and related interest expense are included in Republic’s consolidated financial statements. The subordinated note paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to 3-month LIBOR plus 1.42% on a quarterly basis thereafter. The subordinated note matures on December 31, 2035 and is redeemable at the Company’s option on a quarterly basis. The Company chose not to redeem the subordinated note on October 1, 2019 and is currently carrying the note at a cost of LIBOR plus 1.42%.

 

Table 25 — Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

As of December 31, 2018

 

 

(dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

809,729

 

15.59

%  

$

757,727

 

16.80

%  

 

Republic Bank & Trust Company

 

 

706,360

 

13.61

 

 

654,258

 

14.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

722,797

 

13.91

%  

$

673,052

 

14.92

%  

 

Republic Bank & Trust Company

 

 

659,428

 

12.71

 

 

609,583

 

13.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (core) capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

762,797

 

14.68

%  

$

713,052

 

15.81

%  

 

Republic Bank & Trust Company

 

 

659,428

 

12.71

 

 

609,583

 

13.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

$

762,797

 

13.40

%  

$

713,052

 

14.11

%  

 

Republic Bank & Trust Company

 

 

659,428

 

11.60

 

 

609,583

 

12.06

 

 

 

 

110

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, 2019, a dynamic simulation model was run for interest rate changes from “Down 200” basis points to “Up 300” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning October 1, 2019 and ending September 30, 2020 based on instantaneous movements in interest rates from Down 200 to Up 300 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loans fees and excludes Traditional Bank loan fees.

 

Table 26 — Bank Interest Rate Sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Rates

 

(200)

    

(100)

    

+100

    

+200

    

+300

    

 

Basis Points

 

Basis Points

 

Basis Points

 

Basis Points

 

Basis Points

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change from base net interest income at September 30, 2019

 

(9.9)

%  

 

(5.2)

%  

 

3.8

%  

 

6.7

%  

 

9.3

%  

% Change from base net interest income at December 31, 2018

 

NA

 

 

(2.9)

%  

 

0.9

%  

 

0.3

%  

 

(0.9)

%  

 

The Bank’s dynamic simulation model run for September 2019 projected a decrease in the Bank’s net interest income for the Down 200 and 100 scenarios. The Up 100 through Up 300 scenarios for September 2019 reflected an increase in net interest income, with this increase more favorable than the comparable scenarios at December 2018. September 2019 scenarios were less favorable than December 2018 for the down rate scenarios.  The deterioration in the down rate scenarios was generally due to the impact of rate decreases that have already occurred during 2019, as the Company now has less ability to lower its interest-bearing deposit rates in response to future rate decreases. The primary drivers behind changes in the up-rate scenarios are, generally, increases in variable rate assets, along with increases in low-beta deposits and decreases in high-beta deposits. In addition, the most recent 12-month forecast for market interest rates projected intermediate and long-term rates to be much lower than the December 2018 forecast.

 

The Core Bank indexes many of its financial instruments to either the FFTR, Prime, or LIBOR. These short-term market rates have generally trended higher since December 2015.  During this period, longer-term market rates have generally not increased as much, causing the yield curve to flatten.  During the first half of 2019, longer-term market rates began to generally trend lower, while the short-term market rates remained relatively stable, causing short-term market rates to be higher than some longer-term market rates on the yield curve. This event, in which short-term market rates are higher than longer-term market rates, is labelled an inverted yield curve. 

111

A continued flattening or inverting of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease further or further invert, will likely have a negative impact on the Company’s net interest income and net interest margin.  Additionally, while parallel increases in short-term and long-term interest rates are generally believed by management to be more favorable to the Core Bank’s net interest income and net interest margin in the near term, management believes stable interest rates or a parallel decrease in short-term and long-term interest will likely have a negative impact on the Bank’s net interest income and net interest margin.  Under any interest rate scenario, however, if the Core Bank is unable to reasonably maintain its deposit balances and the cost of those deposits at acceptable levels, it will likely have a negative impact to the Core Bank’s net interest income and net interest margin.  

 

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, 2019 Compared to Three Months Ended September 30,  2018)” and RESULTS OF OPERATIONS (Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018).”

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

 

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

 

Item 4.Controls and Procedures.

 

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

 

PART II — OTHER INFORMATION

 

Item 1.Legal Proceedings. 

 

In the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. There is no proceeding pending or threatened litigation, to the knowledge of management, in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or the Bank.

 

Item 1A.Risk Factors.  

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

Except for the additional risk factor information described below, there have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. You should carefully consider the risk factor discussed below and in our 2018 Form 10-K, which could materially affect our business, financial condition or future results.

 

The planned discontinuance of LIBOR presents risks to the Company because the Company uses LIBOR as a reference rate for a portion of its financial instruments. LIBOR is used as a reference rate for a meaningful amount of the Company’s financial instruments, which means it is the base on which relevant interest rates are determined. Transactions include those in which the Company lends and borrows money, purchases securities, and enters into derivatives to manage risk. The United Kingdom Financial Conduct Authority, the institution that regulates LIBOR, announced in July 2017 that it intends to stop persuading or compelling institutions to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021.

 

There are ongoing efforts to establish an alternative reference rate. The Secured Overnight Financing Rate (“SOFR”) is considered the most likely alternative reference rate suitable for replacing LIBOR, but issues remain with respect to its implementation. As a result, the scope of its ultimate acceptance and the impact on rates, pricing and the ability to manage risk, including through derivatives, remain uncertain. No other alternative rate is currently under wide consideration. If SOFR or another rate does not achieve wide

112

acceptance as the alternative to LIBOR, there likely will be disruption to all of the markets relying on the availability of a broadly accepted reference rate. Even if SOFR or another reference rate ultimately replaces LIBOR, risks will remain for the Company with respect to outstanding loans, derivatives or other instruments referencing LIBOR. Those risks arise in connection with transitioning those instruments to a new reference rate and the corresponding value transfer that may occur in connection with that transition. That is because a new reference rate likely will not exactly imitate LIBOR. As a result, for example, over the life of a transaction that transitions from LIBOR to a new reference rate, the Company’s monetary obligations to its counterparties and its yield from transactions with clients may change, potentially adversely to the Company. For some instruments, the method of transitioning to a new reference rate may be challenging, especially if parties to an instrument cannot agree as to how to perform that transition.  If a contract is not transitioned to a new reference rate and LIBOR ceases to exist, the impact on the Company’s obligations is likely to vary by asset class and contract.  In addition, prior to LIBOR discontinuance, instruments that continue to refer to LIBOR may be impacted if there is a change in the availability or calculation of LIBOR. Risks related to transitioning instruments to a new reference rate or to how LIBOR is derived, and its availability include impacts on the yield on loans or securities held by the Company, amounts paid on Company debt, or amounts received and paid on derivative instruments it has contracted. The value of loans, securities, or derivative instruments tied to LIBOR and the trading market for LIBOR-based securities could also be impacted upon its discontinuance or if it is limited.

 

While the Company expects LIBOR to continue to be available in substantially its current form until the end of 2021 or shortly before that, it is possible that LIBOR quotes will become unavailable prior to that point. This could result, for example, if a sufficient number of institutions decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. These risks may also be increased due to the shorter time for preparing for the transition.

 

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 2019 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

 

4,080

 

$

48.95

 

4,080

 

 

 

August 1 - August 31

 

 —

 

 

 —

 

 —

 

 

 

September 1 - September 30

 

 —

 

 

 —

 

 —

 

 

 

Total

 

4,080

 

$

48.95

 

4,080

 

191,440

 

 

The Company repurchased  4,080 shares during the third quarter of 2019. In addition, in connection with employee stock plans, there were 5,680 shares withheld upon exercise of stock options to satisfy the exercise price and withholding taxes for option exercises during the third quarter of 2019. During 2011, the Company’s Board of Directors amended its existing share repurchase program by approving the repurchase of 300,000 additional shares from time to time, as market conditions are deemed attractive to the Company. The repurchase program will remain effective until the total number of shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of September 30, 2019, the Company had 191,440 shares that could be repurchased under its current share repurchase programs.

 

During the third quarter of 2019, there were no shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock by stockholders of Republic in accordance with the share-for-share conversion provision option of the Class B Common Stock. The exemption from registration of newly issued Class A Common Stock relies upon Section (3)(a)(9) of the Securities Act of 1933.

 

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

113

 

Item 5. Other Information

 

Subsequent to the issuance of the Company’s third quarter earnings release on October 18, 2019 and prior to the filing of this Quarterly Report on Form 10-Q, the Company reconsidered the financial presentation in its October 18, 2019 earnings release for the upcoming disposal of its four banking centers discussed in Footnote 18 “Agreement to Sell Four Banking Centers” of Part I Item 1 “Financial Statements” and concluded that this disposal did not meet the criteria to be presented as discontinued operations under ASC 205, Presentation of Financial Statements. While the Company’s October 18, 2019 earnings release did present these banking centers as discontinued operations, this Quarterly Report on Form 10-Q presents the assets and liabilities of the four banking centers as held for sale. This change in presentation did not affect the Company’s overall net income and Diluted EPS for the quarters and nine months ended September 30, 2019 as previously disclosed. 

 

Item 6.Exhibits.

 

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

 

 

 

 

Exhibit Number

 

Description of Exhibit

 

 

 

10.1

 

Amendment 2019-1 to the Republic Bancorp, Inc. and Subsidiaries Non-Employee Director and Key Employee Deferred Compensation Plan dated September 18, 2019

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32*

 

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

 

 

 

101

 

Interactive data files: (i) Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018, (iii) Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018, (iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 and (v) Notes to Consolidated Financial Statements


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

114

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 8, 2019

     

     

/s/ Steven E. Trager          

 

 

 

By:   Steven E. Trager

 

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

Principal Financial Officer:

 

 

 

 

 

 

 

 

Date: November 8, 2019

 

 

/s/ Kevin Sipes                 

 

 

 

By:   Kevin Sipes

 

 

 

 

  Executive Vice President, Chief Financial

 

 

 

Officer and Chief Accounting Officer

 

115