Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020
or
◻ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-24649
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
61-0862051
(State of other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
601 West Market Street, Louisville, Kentucky
40202
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (502) 584-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common
RBCAA
The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧ Yes ◻ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ◻ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ⌧
Non-accelerated filer ◻
Smaller reporting company ◻
Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ◻ Yes ☒ No
The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of July 31, 2020, was 18,708,244 and 2,199,804.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements.
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
73
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
121
Item 4.
Controls and Procedures.
PART II — OTHER INFORMATION
Legal Proceedings.
Item 1A.
Risk Factors.
122
Unregistered Sales of Equity Securities and Use of Proceeds.
124
Item 6.
Exhibits.
125
SIGNATURES
126
2
GLOSSARY OF TERMS
The terms identified in alphabetical order below are used throughout this Form 10-Q. You may find it helpful to refer to this page as you read this report.
Term
Definition
ACH
Automated Clearing House
ACL
Allowance for Credit Losses
ACLC
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
ACLL
Allowance for Credit Losses on Loans
ACLS
Allowance for Credit Losses on Securities
AFS
Available for Sale
AOCI
Accumulated Other Comprehensive Income
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Basic EPS
Basic earnings per Class A Common Share
BOLI
Bank Owned Life Insurance
BPO
Brokered Price Opinion
C&D
Construction and Development
C&I
Commercial and Industrial
CECL
Current Expected Credit Loss
CMO
Collateralized Mortgage Obligation
Core Bank
The Traditional Banking, Warehouse Lending, and Mortgage Banking reportable segments
COVID-19
Coronavirus Disease of 2019
CRE
Commercial Real Estate
Diluted EPS
Diluted earnings per Class A Common Share
EA
Easy Advance
ESPP
Employee Stock Purchase Plan
EVP
Executive Vice President
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFTR
Federal Funds Target Rate
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FICO
Fair Isaac Corporation
FNMA
Federal National Mortgage Association
FOMC
Federal Open Market Committee
FRB
Federal Reserve Bank
FTE
Full Time Equivalent
FTP
Funds Transfer Pricing
GAAP
Generally Accepted Accounting Principles in the United States
HEAL
Home Equity Amortizing Loan
HELOC
Home Equity Line of Credit
HTM
Held to Maturity
IRS
Internal Revenue Service
ITM
Interactive Teller Machine
LGD
Loss Given Default
LIBOR
London Interbank Offered Rate
LPO
Loan Production Office
LTV
Loan to Value
MBS
Mortgage Backed Securities
MSRs
Mortgage Servicing Rights
NA
Not Applicable
NM
Not Meaningful
OBS
Off-Balance Sheet
OCI
Other Comprehensive Income
OREO
Other Real Estate Owned
OTTI
Other than Temporary Impairment
PCD
Purchased with Credit Deterioration
PCI
Purchased Credit Impaired
PD
Probability of Default
PPP
SBA's Paycheck Protection Program
PPPLF
The FRB's Paycheck Protection Program Liquidity Facility
Prime
The Wall Street Journal Prime Interest Rate
Provision
Provision for Expected Credit Loss Expense
PSU
Performance Stock Unit
R&D
Research and Development
RB&T / the Bank
Republic Bank & Trust Company
RBCT
Republic Bancorp Capital Trust
RCS
Republic Credit Solutions segment
Republic / the Company
Republic Bancorp, Inc.
RPG
Republic Processing Group
RPS
Republic Payment Solutions
RT
Refund Transfer
SBA
U.S. Small Business Administration
SEC
Securities and Exchange Commission
SSUAR
Securities Sold Under Agreements to Repurchase
SVP
Senior Vice President
TCJA
2017 Tax Cuts and Jobs Act
TDR
Troubled Debt Restructuring
The Captive
Republic Insurance Services, Inc.
TPS
Trust Preferred Securities
TRS
Tax Refund Solutions segment
TRUP
TPS Investment
Warehouse
Warehouse Lending segment
3
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
June 30,
December 31,
2020
2019
ASSETS
Cash and cash equivalents
$
560,195
385,303
Available-for-sale debt securities, at fair value (amortized cost of $473,971 in 2020 and $467,122 in 2019, allowance for credit losses of $126 in 2020 and $0 in 2019)
486,847
471,355
Held-to-maturity debt securities (fair value of $56,266 in 2020 and $63,156 in 2019, allowance for credit losses of $147 in 2020 and $0 in 2019)
55,745
62,531
Equity securities with readily determinable fair value
3,015
3,188
Mortgage loans held for sale, at fair value
40,028
19,224
Consumer loans held for sale, at fair value
164
598
Consumer loans held for sale, at the lower of cost or fair value
12,800
11,646
Loans (loans carried at fair value of $667 in 2020 and $998 in 2019)
5,065,092
4,433,151
Allowance for credit losses
(55,097)
(43,351)
Loans, net
5,009,995
4,389,800
Federal Home Loan Bank stock, at cost
25,629
30,831
Premises and equipment, net
42,753
46,196
Right-of-use assets
34,450
35,206
Goodwill
16,300
Other real estate owned
2,194
113
Bank owned life insurance
67,217
66,433
Other assets and accrued interest receivable
103,243
81,595
TOTAL ASSETS
6,460,575
5,620,319
LIABILITIES
Deposits:
Noninterest-bearing
1,821,400
1,033,379
Interest-bearing
3,196,685
2,752,629
Total deposits
5,018,085
3,786,008
Securities sold under agreements to repurchase and other short-term borrowings
177,397
167,617
Operating lease liabilities
35,571
36,530
Federal Reserve Paycheck Protection Program Liquidity Facility
169,209
—
Federal Home Loan Bank advances
137,500
750,000
Subordinated note
41,240
Other liabilities and accrued interest payable
85,954
74,680
Total liabilities
5,664,956
4,856,075
Commitments and contingent liabilities (Footnote 9)
STOCKHOLDERS’ EQUITY
Preferred stock, no par value
Class A Common Stock and Class B Common Stock, no par value
4,898
4,907
Additional paid in capital
142,813
142,068
Retained earnings
638,282
614,171
Accumulated other comprehensive income
9,626
3,098
Total stockholders’ equity
795,619
764,244
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying footnotes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
Six Months Ended
INTEREST INCOME:
Loans, including fees
54,185
60,211
131,698
137,039
Taxable investment securities
2,712
3,284
5,495
6,875
Federal Home Loan Bank stock and other
194
2,169
1,057
4,383
Total interest income
57,091
65,664
138,250
148,297
INTEREST EXPENSE:
Deposits
3,647
6,903
9,949
13,651
17
330
136
751
Federal Reserve Payment Protection Plan Liquidity Facility
105
822
4,062
2,470
6,792
295
423
647
858
Total interest expense
4,886
11,718
13,307
22,052
NET INTEREST INCOME
52,205
53,946
124,943
126,245
Provision for expected credit loss expense
6,534
4,460
29,294
21,691
NET INTEREST INCOME AFTER PROVISION
45,671
49,486
95,649
104,554
NONINTEREST INCOME:
Service charges on deposit accounts
2,451
3,598
5,587
6,901
Net refund transfer fees
2,913
3,629
18,736
20,729
Mortgage banking income
8,398
2,416
13,193
3,955
Interchange fee income
2,808
3,257
5,360
6,014
Program fees
1,138
1,037
3,762
2,111
Increase in cash surrender value of bank owned life insurance
395
377
784
759
Net gains on other real estate owned
1
90
220
Other
721
1,894
1,853
Total noninterest income
18,751
15,125
49,320
42,542
NONINTEREST EXPENSE:
Salaries and employee benefits
26,324
25,286
52,946
50,362
Occupancy and equipment, net
6,715
6,472
13,561
13,056
Communication and transportation
1,353
1,071
2,642
2,232
Marketing and development
1,018
1,278
1,851
2,380
FDIC insurance expense
299
743
Bank franchise tax expense
914
935
3,420
3,431
Data processing
2,753
2,217
5,292
4,313
Interchange related expense
1,173
1,302
2,249
2,617
Supplies
539
582
991
1,066
Other real estate owned and other repossession expense
21
148
39
Legal and professional fees
1,025
844
2,262
1,730
2,691
2,998
6,242
6,813
Total noninterest expense
44,825
43,428
91,794
88,937
INCOME BEFORE INCOME TAX EXPENSE
19,597
21,183
53,175
58,159
INCOME TAX EXPENSE
3,793
3,176
10,674
10,636
NET INCOME
15,804
18,007
42,501
47,523
BASIC EARNINGS PER SHARE:
Class A Common Stock
0.77
0.86
2.04
2.29
Class B Common Stock
0.69
0.79
1.86
2.08
DILUTED EARNINGS PER SHARE:
0.76
2.28
0.78
1.85
2.07
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Net income
OTHER COMPREHENSIVE INCOME
Change in fair value of derivatives used for cash flow hedges
(10)
(146)
(171)
(215)
Reclassification amount for net derivative losses (gains) realized in income
79
(13)
108
(32)
Change in unrealized gain on AFS debt securities
1,099
2,014
8,876
5,673
Change in unrealized gain of AFS debt security for which a portion of OTTI has been recognized in earnings
(108)
(1)
(107)
(34)
Total other comprehensive income before income tax
1,060
1,854
8,706
5,392
Tax effect
(265)
(389)
(2,178)
(1,133)
Total other comprehensive income, net of tax
795
1,465
6,528
4,259
COMPREHENSIVE INCOME
16,599
19,472
49,029
51,782
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended June 30, 2020
Common Stock
Accumulated
Class A
Class B
Additional
Total
Shares
Paid In
Retained
Comprehensive
Stockholders’
Outstanding
Amount
Capital
Earnings
Income (Loss)
Equity
Balance, April 1, 2020
18,687
2,200
4,890
141,928
628,397
8,831
784,046
Net change in accumulated other comprehensive income
Dividends declared on Common Stock:
Class A Shares ($0.286 per share)
(5,347)
Class B Shares ($0.260 per share)
(572)
Stock options exercised, net of shares withheld
7
291
298
Net change in notes receivable on Class A Common Stock
84
Deferred compensation - Class A Common Stock:
Directors
71
Designated key employees
134
Employee stock purchase plan - Class A Common Stock
135
Stock-based awards - Class A Common Stock:
Performance stock units
Restricted stock
60
Stock options
110
Balance, June 30, 2020
18,708
Three Months Ended June 30, 2019
Income
Balance, April 1, 2019
18,698
2,213
4,899
141,206
569,189
1,797
717,091
Class A Shares ($0.264 per share)
(4,932)
Class B Shares ($0.240 per share)
(530)
34
8
(110)
(102)
Repurchase of Class A Common Stock
(5)
(158)
41
58
114
Balance, June 30, 2019
18,740
2,208
141,525
581,734
3,262
731,428
Six Months Ended June 30, 2020
Balance, January 1, 2020
18,737
2,206
Adjustment for adoption of ASU 2016-13
(4,291)
Class A Shares ($0.572 per share)
(10,705)
Class B Shares ($0.520 per share)
(1,144)
19
248
256
Conversion of Class B to Class A Common Shares
(6)
(86)
(20)
(582)
(2,250)
(2,852)
150
277
9
289
18
(200)
247
202
Six Months Ended June 30, 2019
Balance, January 1, 2019
18,675
4,900
141,018
545,013
(997)
689,934
Adjustment for adoption of ASU 2016-02
Class A Shares ($0.528 per share)
(9,865)
Class B Shares ($0.480 per share)
(1,061)
(8)
(376)
(2)
(379)
(192)
106
226
235
23
(57)
475
200
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Net (accretion) amortization on investment securities
732
(21)
Net accretion on loans and amortization of core deposit intangible and operating lease components
(2,383)
(1,833)
Unrealized (gains) losses on equity securities with readily determinable fair value
173
(448)
Depreciation of premises and equipment
5,041
4,572
Amortization of mortgage servicing rights
1,593
733
Impairment of mortgage servicing rights
100
Provision for on-balance sheet exposures
Provision for off-balance sheet exposures
180
Net gain on sale of mortgage loans held for sale
(13,504)
(3,478)
Origination of mortgage loans held for sale
(343,941)
(122,696)
Proceeds from sale of mortgage loans held for sale
336,641
121,262
Net gain on sale of consumer loans held for sale
(3,006)
(2,618)
Origination of consumer loans held for sale
(282,612)
(346,413)
Proceeds from sale of consumer loans held for sale
284,898
324,260
Net gain realized on sale of other real estate owned
(4)
(220)
Impairment of premises held for sale
132
Deferred compensation expense - Class A Common Stock
427
332
Stock-based awards expense- Class A Common Stock
250
618
Net gain on sale of bank premises and equipment
(353)
(784)
(759)
Net change in other assets and liabilities:
Accrued interest receivable
1,765
(774)
Accrued interest payable
(1,685)
491
Other assets
(4,465)
581
Other liabilities
(9,486)
(7,775)
Net cash provided by operating activities
41,372
35,160
INVESTING ACTIVITIES:
Purchases of available-for-sale debt securities
(138,894)
Proceeds from calls, maturities and paydowns of available-for-sale debt securities
131,323
101,051
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities
6,628
1,315
Net change in outstanding warehouse lines of credit
(312,321)
(269,099)
Net change in other loans
(342,083)
(137,490)
Proceeds from redemption of Federal Home Loan Bank stock
14,202
2,102
Purchase of Federal Home Loan Bank stock
(9,000)
(2,277)
Proceeds from sales of other real estate owned
32
580
Proceeds from sale of bank premises and equipment
894
Net purchases of premises and equipment
(2,139)
(4,083)
Net cash used in investing activities
(651,358)
(307,901)
FINANCING ACTIVITIES:
Net change in deposits
1,232,077
257,729
Net change in securities sold under agreements to repurchase and other short-term borrowings
9,780
43,012
Net change in Federal Reserve Payment Protection Plan Lending Facility borrowings
Payments of Federal Home Loan Bank advances
(1,037,500)
(565,000)
Proceeds from Federal Home Loan Bank advances
425,000
670,000
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
Net proceeds from Class A Common Stock options exercised and PSUs awarded
Cash dividends paid
(11,383)
(10,449)
Net cash provided by financing activities
784,878
395,046
NET CHANGE IN CASH AND CASH EQUIVALENTS
174,892
122,305
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
351,474
CASH AND CASH EQUIVALENTS AT END OF PERIOD
473,779
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest
14,992
21,561
Income taxes
10,008
6,726
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans
2,109
1,295
Transfers from loans held for investment to held for sale
124,202
Unfunded commitments in low-income-housing investments
10,000
Right-of-use assets recorded
2,151
40,202
Allowance for credit losses recorded upon adoption of ASC 326
7,241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –JUNE 30, 2020 and 2019 AND DECEMBER 31, 2019 (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.
Republic Bancorp Capital Trust is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Form 10-K for the year ended December 31, 2019.
As of June 30, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.
The Company’s financial condition at June 30, 2020 and results of operation for the three and six months ended June 30, 2020 were impacted by the COVID-19 pandemic and the public’s response to it.
For additional discussion regarding the COVID-19 pandemic and its impact to the Company, see the following Footnotes in this section of the filing:
10
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2020, Republic had 42 full-service banking centers and two LPOs with locations as follows:
●
Kentucky — 28
Metropolitan Louisville — 18
Central Kentucky — 7
Georgetown — 1
Lexington — 5
Shelbyville — 1
Northern Kentucky — 3
Covington — 1
Crestview Hills — 1
Florence — 1
Southern Indiana — 3
Floyds Knobs — 1
Jeffersonville — 1
New Albany — 1
Metropolitan Tampa, Florida — 8*
Metropolitan Cincinnati, Ohio — 2
Metropolitan Nashville, Tennessee — 3*
*Includes one LPO
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
Traditional Banking results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Traditional Banking assets represent investment securities and commercial and consumer loans primarily secured by real estate and/or personal property. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources. FHLB advances have traditionally been a significant borrowing source for the Bank.
Other sources of Traditional Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, fees charged to clients for trust services, and increases in the cash surrender value of BOLI.
Traditional Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, interchange related expenses, marketing and development expenses, FDIC insurance expense, franchise tax expense and various other general and administrative costs. Traditional Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.
Warehouse Lending segment — Through its Warehouse segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the U.S. through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
11
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.
Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2019 and 2020:
The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. Provision on EAs are estimated when advances are made, with Provision for all expected EA losses made in the first quarter of each year. Unpaid EAs are charged off by June 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged off loans.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year’s tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund payment patterns change materially between years.
In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EAs product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company’s financial condition and results of operations.
12
Republic Payment Solutions — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees. Additionally, the Company’s portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “Interchange fee income.”
Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
The Bank sells participation interests in the RCS line-of-credit product. These participation interests are a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying RCS line-of-credit account with each borrower. The RCS line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale through this program are carried at the lower of cost or fair value.
Through a new program launched in December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. A third-party service provider subject to the Bank’s oversight and supervision provides the Bank with marketing services and loan servicing for these RCS installment loans. The Bank is the lender for these RCS installment loans, and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intention to sell these loans to its third-party service provider generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.
13
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
Recently Adopted Accounting Standards
Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and HTM securities. CECL also applies to certain off-balance sheet credit exposures. In addition to CECL, ASC 326 made changes to the accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on AFS debt securities that the Company does not intend or will likely not be compelled to sell.
The Company adopted ASC 326 primarily using the modified retrospective method for its financial instruments and off-balance sheet credit exposures. Results for periods beginning after December 31, 2019 will be presented under CECL while prior-period amounts will continue to be reported under previously applicable GAAP.
The Company adopted ASC 326 using the prospective transition approach for debt securities for which OTTI had been recognized prior to January 1, 2020. As a result, the amortized cost basis will remain the same before and after the effective date of CECL. The effective interest rate on these debt securities was not changed. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.
The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as PCI assets under ASC 310-30. As allowed by ASC 326, the Company did not reassess whether PCI assets met the PCD criteria as of the date of adoption. On January 1, 2020, the amortized cost basis of PCD assets was adjusted to reflect the addition of $1.4 million of ACLL formerly classified under previous GAAP as a non-accretable credit discount within gross loans. The remaining noncredit discount on PCD assets will be accreted into interest income at the effective interest rate as of January 1, 2020.
The Company elected the fair value option for its RCS installment loan product in 2016. This product will continue to be accounted for at fair value under CECL.
When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower “expected” threshold for loss recognition versus a higher “probable” threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts.
In accordance with the adoption of ASC 326 and CECL, the Company recorded on January 1, 2020 a $6.7 million, or 16%, increase in the ACLL for its loans, a $51,000 ACLS for its investment debt securities, and a $456,000 ACLC for its off-balance sheet credit exposures. Of the $6.7 million increase in ACLL, approximately $1.4 million was a gross-up reclassification of non-accretable discount on previously-PCI, now-PCD, loans as mentioned above, and the remaining $5.3 million was a difference in ACL between CECL and the probable-incurred method. The Company also made a cumulative effect entry of $4.3 million to reduce its opening balance of retained earnings upon adoption of ASC 326, with no impact on 2020 earnings for these adoption entries. The adoption date increase in ACLL for the Company’s loans primarily reflects additional ACLL for longer duration loan portfolios, such as the Company's residential real estate and consumer loan portfolios. No additional segmentation of the Bank's loan portfolios was deemed necessary upon adoption.
14
The following table illustrates the impact of ASC 326 adoption:
Allowance for Credit Losses as of January 1, 2020
As Reported
Impact
Under
Pre-ASC 326
of ASC 326
ASC 326
Adoption
Assets:
Allowance for credit losses on debt securities:
AFS debt securities - Corporate bonds
HTM debt securities - Corporate bond
51
Allowance for credit losses on debt securities
Allowance for credit losses on loans:
Traditional Banking:
Residential real estate:
Owner occupied
8,928
4,729
4,199
Nonowner occupied
1,885
1,737
Commercial real estate
10,759
10,486
273
Construction & land development
3,599
2,152
1,447
Commercial & industrial
1,564
2,882
(1,318)
Lease financing receivables
147
Home equity
4,373
2,721
1,652
Consumer:
Credit cards
1,053
1,020
33
Overdrafts
1,169
Automobile loans
605
612
(7)
Other consumer
857
550
307
Total Traditional Banking
34,939
28,205
6,734
Warehouse lines of credit
1,794
Total Core Banking
36,733
29,999
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
234
Republic Credit Solutions
13,118
Total Republic Processing Group
13,352
Allowance for credit losses on loans
50,085
43,351
Liabilities:
Allowance for credit losses on OBS credit exposures
456
The following ASUs were also adopted by the Company during the six months ended June 30, 2020:
ASU. No.
Topic
Nature of Update
Date Adopted
Method of Adoption
Financial Statement Impact
2017-04
Intangibles - Goodwill and Other (Topic 350)
This ASU simplifies goodwill impairment testing by eliminating Step 2 from the goodwill impairment test. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
January 1, 2020
Prospectively
Immaterial
2020-04
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help during the global market-wide reference rate transition period; therefore, it will be in effect for a limited time through December 31, 2022.
March 12, 2020
This ASU is expected to assist in the Company's transition away from LIBOR as a reference rate.
15
Debt Securities —Debt securities are classified as AFS when they might be sold before maturity. AFS debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Debt securities are classified as HTM and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to the earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.
Allowance for Credit Losses on Available-for-Sale Securities — For the Company’s AFS corporate bond, the Company uses third-party PD and LGD data to estimate an ACLS, which is limited by the amount that the bond’s fair value is less than its amortized cost basis.
For all other AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written-down to fair value through income. For other AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACLS is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACLS is recognized in other comprehensive income.
Changes in ACLS are recorded as a charge or credit to the Provision. Losses are charged against the ACLS when management believes the lack of collectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest on AFS debt securities totaled $1 million at June 30, 2020 and is excluded from the ACLS. Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet.
Allowance for Credit Losses on Held-to-Maturity Securities — The Company measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $167,000 at June 30, 2020 and is excluded from the ACLS. Accrued interest on HTM debt securities is presented as a component of other assets on the Company’s balance sheet.
The estimate of ACLS on HTM debt securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
The Company classifies its HTM portfolio into the following major security types: MBS, corporate bonds, and municipal bonds. MBS securities include CMOs. Nearly all of the MBS portfolio is issued by U.S. government entities or government sponsored entities. These securities are highly rated by major rating agencies and have a long history of no credit losses. The MBS portfolio also carries ratings no lower than investment grade. The Company uses PD and LGD estimates provided by a third-party to estimate an ACLS for its corporate and municipal bond portfolios. These PD and LGD estimates are updated at least quarterly by the Company, with these estimates incorporating the most recent market expectations and forecasted information.
Loans — The Bank’s financing receivables consist primarily of loans and lease financing receivables (together referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the ACLL. Amortized cost is the principal balance outstanding, net of premiums and discounts, and deferred loan fees and costs. Accrued interest on loans, which is excluded from the ACLL, totaled $9 million at June 30, 2020 and was reported as a component of other assets on the Company’s balance sheet.
16
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method. Premiums on loans held for investment are amortized into interest income on the level-yield method over the expected life of the loan.
Lease financing receivables, all of which are direct financing leases, are reported at their principal balance outstanding net of any unearned income, deferred loan fees and costs, and applicable ACLL. Leasing income is recognized on a basis that achieves a constant periodic rate of return on the outstanding lease financing balances over the lease terms.
Interest income on mortgage and commercial loans is typically discontinued at the time the loan is 80 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan, which may define past due status by the number of days or the number of payments past due. In most cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 80 days still on accrual include smaller balance, homogeneous loans that are evaluated collectively or individually for loss.
Interest accrued but not received for all classes of loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, typically a minimum of six months of performance. Consumer and credit card loans are not placed on nonaccrual status but are reviewed periodically and charged off when the loan is deemed uncollectible, generally no more than 120 days.
Purchased Credit Deteriorated Loans — The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. The Company will generally classify a loan acquired in a business acquisition as PCD if it meets any of the following criteria:
PCD loans are recorded at the amount paid. An ACLL is determined using the same methodology as other loans held for investment. The initial ACLL determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACLL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACLL are recorded through the Provision.
Allowance for Credit Losses on Loans — The ACLL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACLL when management believes the lack of collectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The ACLL is measured on a collective or pooled basis when similar risk characteristics exist. The first table of Footnote 4 illustrates the Company’s loan portfolio by ACLL risk pool. This pooling method is primarily based on the pool’s collateral type or the pool’s purpose and generally follows the Bank’s loan segmentation for regulatory reporting. For each of its loan pools, the Company uses a “static-pool” method, which analyzes historical closed pools of similar loans over their expected lives to attain a loss rate. This loss rate is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on a forecast of the U.S. national unemployment rate, which has shown a relatively strong historical correlation to the Bank’s loan losses. Subsequent to the one-year forecast, loss rates are assumed to immediately revert back to the historical loss rate calculated under a static pool analysis plus adjustments for current conditions.
Loans that do not share risk characteristics are evaluated on an individual basis, with the Company choosing to individually evaluate all TDRs. Loans evaluated individually are not also included in the pooled evaluation. When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate.
Determining Expected Loan Lives: Expected credit losses are estimated over the contractual loan term, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower, or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Troubled Debt Restructurings — A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The Company measures the ACLL for TDRs individually using either a discounted cash flow method or the collateral method, if the TDR is collateral dependent. TDRs whose ACLL is measured using a discounted cash flow method use the original pre-modification interest rate on the loan for discounting.
Performing loans modified due to COVID-19 are not classified as TDRs.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures — The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The likelihood that funding will occur is based on the historical usage rate of such commitments. A listing of off-balance sheet credit exposures the Company generally considers for an ACLC is illustrated in Footnote 9 in this section of the filing.
The ACLC is recorded as a component of other liabilities on the Company’s balance sheet. Any provision for the ACLC is recorded on the Company’s income statement as a component of other noninterest expense.
2. INVESTMENT SECURITIES
Available-for-Sale Debt Securities
The following tables summarize the amortized cost, fair value, and ACLS of AFS debt securities and the corresponding amounts of related gross unrealized gains and losses recognized in AOCI:
Gross
Allowance
Amortized
Unrealized
for
Fair
June 30, 2020 (in thousands)
Cost
Gains
Losses
Credit Losses
Value
U.S. Treasury securities and U.S. Government agencies
137,739
2,057
139,796
Private label mortgage backed security
1,845
1,178
3,023
Mortgage backed securities - residential
263,760
9,521
273,281
Collateralized mortgage obligations
57,030
678
57,598
Corporate bonds
(225)
(126)
9,649
Trust preferred security
3,597
(97)
3,500
Total available-for-sale debt securities
473,971
13,434
(432)
December 31, 2019 (in thousands)
134,765
59
(184)
134,640
2,210
1,285
3,495
253,288
2,916
(357)
255,847
63,284
258
63,371
10,002
3,575
425
4,000
467,122
4,945
(712)
Held-to-Maturity Debt Securities
The following tables summarize the amortized cost, fair value, and ACLS of HTM debt securities and the corresponding amounts of related gross unrecognized gains and losses:
Carrying
Unrecognized
102
107
15,338
15,469
39,991
40,220
(147)
Obligations of state and political subdivisions
461
470
Total held-to-maturity debt securities
55,892
396
(22)
56,266
104
16,970
94
17,043
44,995
544
45,539
462
464
646
63,156
Sales of Available-for-Sale Debt Securities
During the three and six months ended June 30, 2020 and 2019, there were no gains or losses on sales or calls of AFS debt securities.
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity at June 30, 2020 follow. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.
Available-for-Sale
Held-to-Maturity
Debt Securities
Due in one year or less
Due from one year to five years
147,739
149,445
35,395
35,654
Due from five years to ten years
4,952
4,931
Due beyond ten years
Total debt securities
Unrealized-Loss Analysis on Debt Securities
The following table summarizes AFS debt securities in an unrealized loss position for which an ACLS had not been recorded at June 30, 2020, aggregated by investment category and length of time in a continuous unrealized loss position:
Less than 12 months
12 months or more
Fair Value
Available-for-sale debt securities:
8,258
(101)
2,971
(9)
11,229
11,758
(198)
14,729
(207)
Debt securities with unrealized losses at December 31, 2019, aggregated by investment category and length of time in a continuous unrealized loss position, were as follows:
40,165
(176)
55,157
65,630
(269)
16,633
(88)
82,263
12,444
(36)
10,738
(135)
23,182
118,239
(481)
42,363
(231)
160,602
Held-to-maturity debt securities:
4,827
(19)
4,831
Total held-to-maturity debt securities:
At June 30, 2020, the Bank’s security portfolio consisted of 171 securities, 14 of which were in an unrealized loss position.
At December 31, 2019, the Bank’s security portfolio consisted of 173 securities, 34 of which were in an unrealized loss position.
At June 30, 2020 and December 31, 2019, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.
20
Mortgage Backed Securities and Collateralized Mortgage Obligations
At June 30, 2020, with the exception of the $3.0 million private label mortgage backed security, all other mortgage backed securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FHLMC and FNMA. At June 30, 2020 and December 31, 2019, there were gross unrealized losses of $110,000 and $528,000 related to AFS mortgage backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to have OTTI.
Trust Preferred Security
During 2015, the Parent Company purchased a $3 million floating rate TRUP at a price of 68% of par. The coupon on this security is based on the 3-month LIBOR rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.
Private Label Mortgage Backed Security
The Bank owns one private label mortgage backed security with a total carrying value of $3.0 million as of June 30, 2020. This security is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.
See additional discussion regarding the Bank’s private label mortgage backed security under Footnote 10 “Fair Value” in this section of the filing.
Rollforward of the Allowance for Credit Losses on Debt Securities
The tables below present a rollforward for the three and six months ended June 30, 2020 of the ACLS on AFS and HTM debt securities:
ACLS Rollforward
Beginning
Charge-
Ending
Balance
offs
Recoveries
Available-for-Sale Securities:
Corporate Bonds
Held-to-Maturity Securities:
171
(24)
297
The Company reduced the ACLS on its HTM corporate bonds during the three months ended June 30, 2020 due to the maturity of one $5 million bond.
96
222
The Company increased the ACLS on its AFS and HTM corporate bonds during the six months ended June 30, 2020 based on higher PD and LGD estimates on these bonds resulting from economic concerns from the COVID-19 pandemic.
There were no HTM debt securities on nonaccrual or past due over 89 days as of June 30, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of June 30, 2020.
There were no HTM debt securities considered collateral dependent as of June 30, 2020.
Pledged Debt Securities
Debt securities pledged to secure public deposits, securities sold under agreements to repurchase and debt securities held for other purposes, as required or permitted by law are as follows:
June 30, 2020
December 31, 2019
Carrying amount
259,808
229,700
Fair value
259,812
229,706
Equity Securities
The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:
Freddie Mac preferred stock
485
Community Reinvestment Act mutual fund
2,500
30
2,530
Total equity securities with readily determinable fair values
515
714
(26)
2,474
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
Realized
191
Total equity securities with readily determinable fair value
207
159
(229)
378
56
70
(173)
448
22
3. LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 11 “Mortgage Banking Activities” of this section of the filing.
Consumer Loans Held for Sale, at Fair Value
In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.
Activity for consumer loans held for sale and carried at fair value was as follows:
Balance, beginning of period
555
47,741
Proceeds from the sale of consumer loans held for sale
(3,963)
(49,691)
Net gain (loss) recognized on consumer loans held for sale
141
1,516
Balance, end of period
Consumer Loans Held for Sale, at the Lower of Cost or Fair Value
RCS originates for sale 90% of the balances from its line-of-credit product and a portion of its hospital receivables product. Ordinary gains or losses on the sale of these RCS products are reported as a component of “Program fees.”
Activity for consumer loans held for sale and carried at the lower of cost or market value was as follows:
12,089
12,864
12,838
86,936
200,327
234,871
346,413
(86,796)
(176,759)
(235,207)
(324,260)
571
1,177
1,490
2,618
37,609
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio follows:
885,325
949,568
254,700
258,803
1,322,290
1,303,000
157,254
159,702
Commercial & industrial*
904,727
477,236
11,864
14,040
265,266
293,186
14,265
17,836
488
1,522
41,059
52,923
78,585
68,115
3,935,823
3,595,931
Warehouse lines of credit**
1,029,779
717,458
4,965,602
4,313,389
Republic Processing Group**:
14,365
99,201
105,397
99,490
119,762
Total loans***
Total loans, net
*Includes $511 million of PPP loans at June 30, 2020.
**Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
***Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.
The following table reconciles the contractually receivable and carrying amounts of loans:
Contractually receivable
5,063,496
4,432,351
Unearned income
(944)
(1,139)
Unamortized premiums
279
366
Unaccreted discounts
(1,157)
(2,534)
Net unamortized deferred origination fees and costs
3,418
4,107
Carrying value of loans
24
Credit Quality Indicators
The Company’s loan segments as of June 30, 2020 remain unchanged from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The following tables include loans by segment and risk category. Risk categories, which are based on the Bank’s internal analyses, are defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. As of June 30, 2020, for non-revolving loans originated after 2016, loans are also classified by origination year. Loan extensions and renewals are generally considered originated in the year extended or renewed unless the loan is classified as a TDR. Loan extensions and renewals classified as TDRs generally receive no change in origination date upon extension or renewal.
Revolving Loans
Term Loans Amortized Cost Basis by Origination Year
Converted
As of June 30, 2020
2018
2017
Prior
Cost Basis
to Term
Residential real estate owner occupied:
Risk Rating
Pass or not rated
90,354
166,133
108,759
87,604
404,104
856,954
Special Mention
46
1,627
9,826
11,499
Substandard
1,543
691
13,816
16,872
Doubtful
167,676
109,627
89,922
427,746
Residential real estate nonowner occupied:
23,599
74,957
52,683
50,441
51,297
252,977
300
158
458
726
1,265
23,899
75,496
52,181
Commercial real estate:
116,710
328,746
209,251
217,425
398,039
36,887
1,307,058
878
2,883
2,846
6,607
2,964
1,222
4,439
8,625
120,552
218,647
405,361
39,733
Construction and land development:
55,961
55,460
16,050
11,719
15,455
154,645
2,421
188
58,069
Commercial and industrial:
594,084
149,970
50,438
49,358
56,571
2,087
902,508
450
35
635
490
118
201
754
1,584
594,555
150,460
50,706
56,807
2,841
Lease financing receivables:
711
4,602
2,510
3,232
809
Home equity:
262,318
128
2,820
17,151
48,923
29,201
11,644
12,524
14,402
133,845
38
64
199
240
541
48,961
29,265
11,843
12,764
14,413
134,397
25
Term Loans Amortized Cost Basis by Origination Year (Continued)
Warehouse:
TRS:
77
212
RCS:
7,098
8,596
3,622
1,677
2,779
74,734
98,506
695
75,429
Grand Total:
905,668
837,387
472,514
433,100
941,578
1,383,397
5,010,531
1,628
196
12,902
139
21,759
2,985
2,798
1,004
2,112
19,422
4,481
32,802
Grand Total
910,281
842,606
473,714
436,839
973,902
1,388,017
Special
Doubtful /
PCI Loans -
Total Rated
Pass
Mention
Loss
Group 1
Loans*
12,153
14,441
140
1,281
28,015
487
1,772
1,286,623
4,623
11,123
631
157,165
2,339
198
473,094
1,968
3,276
3,286
351
353
1,930,922
21,754
32,889
797
1,289
1,987,651
2,648,380
2,705,109
53
355
408
Total rated loans
33,297
2,705,517
*The above table excludes all non-classified residential real estate, home equity and consumer loans.
26
The following table presents the activity in the ACLL by portfolio class:
ACLL Rollforward
Three Months Ended June 30,
9,387
(127)
43
9,303
5,801
(442)
(367)
221
5,213
2,165
2,274
1,720
48
1,775
13,381
3,187
(270)
10,235
329
10,566
4,536
404
4,940
2,443
467
2,910
2,541
2,405
3,235
983
4,221
133
31
181
5,290
(178)
5,124
3,337
(221)
3,124
978
(71)
928
1,079
(76)
1,028
758
(189)
(159)
78
892
(299)
546
(74)
473
768
(61)
708
839
(49)
817
512
29
(48)
549
40,554
3,104
(700)
219
43,177
30,172
1,427
(791)
361
31,169
2,126
449
2,575
1,397
417
1,814
42,680
3,553
45,752
31,569
1,844
32,983
15,270
4,305
(19,575)
(13,425)
95
143
(28)
211
149
(264)
232
12,386
(1,443)
(2,008)
9,134
12,862
2,224
(2,683)
365
12,768
27,751
3,005
(21,611)
9,345
26,392
2,616
(16,372)
364
13,000
70,431
6,558
(22,311)
419
55,097
57,961
(17,163)
725
45,983
27
Six Months Ended June 30,
320
(27)
82
6,035
(697)
(384)
259
385
1,662
178
(73)
5,338
10,030
532
1,341
2,555
989
44
2,873
1,343
664
87
3,477
(378)
(177)
1,140
(226)
(311)
(503)
1,102
269
(593)
116
(153)
724
(23)
(142)
(45)
591
(65)
(114)
137
8,447
(1,222)
1,013
30,347
1,616
(1,403)
609
781
1,172
642
9,228
31,519
2,258
19,533
42
13,420
(72)
406
(281)
263
(4,717)
13,049
5,607
(6,507)
619
19,844
(24,364)
513
13,156
19,433
(20,213)
624
29,072
(25,586)
1,526
44,675
(21,616)
1,233
The cumulative loss rate used as the basis for the estimate of ACLL at June 30, 2020 was primarily based on a static pool analysis of each of the Company’s loan pools using the Company’s loss experience from 2013 through 2019, adjusted for current and forecasted conditions that consider the economic impact of the COVID-19 pandemic and the public’s response to it. The U.S. unemployment rate rose from 4.4% in March 2020 to 11.1% in June 2020. As of June 30, 2020 the Company forecasted for the upcoming year that the U.S. unemployment rate would remain above 8%, and the Company’s loan losses would rise to levels consistent with this continued elevated level of U.S. unemployment. Furthermore, it is management’s expectation that the Company’s loss rates will immediately revert back after this one-year forecast to long-term historical averages, which include periods of economic expansion and contraction.
28
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans, nonperforming assets and select credit quality ratios follows:
(dollars in thousands)
Loans on nonaccrual status*
19,884
23,332
Loans past due 90-days-or-more and still on accrual**
535
157
Total nonperforming loans
20,419
23,489
Total nonperforming assets
22,613
23,602
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans
0.40
%
0.53
Nonperforming assets to total loans (including OREO)
0.45
Nonperforming assets to total assets
0.35
0.42
Credit Quality Ratios - Core Bank:
0.54
0.44
0.36
0.43
*
Loans on nonaccrual status include collateral-dependent loans.
**
Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
The following tables present the recorded investment in nonaccrual loans and loans past due 90-days-or-more and still on accrual by class of loans:
Past Due 90-Days-or-More
Nonaccrual
and Still Accruing Interest*
14,106
12,220
952
623
881
6,865
1,563
1,424
2,209
1,865
152
179
182
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Interest Income
Loans with
Loans without
Recognized
Loans
on Nonaccrual Loans*
2,999
11,107
169
380
611
270
686
2,076
Consumer
66
3,850
16,034
203
1,095
* Includes interest income for loans on nonaccrual loans as of the beginning of the period that were paid off during the period.
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous loans. Nonaccrual loans are typically returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future contractual payments are reasonably assured. TDRs on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.
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
Days
Delinquent
Delinquent*
Delinquent**
Current
1,527
576
4,214
881,111
254,161
543
1,321,747
872
1,362
903,365
397
633
264,213
14,258
91
394
41,032
78,563
2,020
1,128
4,713
7,861
3,927,962
4,957,741
4,371
1,202
5,926
93,275
1,279
6,185
93,305
6,391
2,407
5,248
14,046
5,051,046
Delinquency ratio***
0.13
0.05
0.10
0.28
* All loans past due 90-days-or-more, excluding small balance consumer loans, were on nonaccrual status.
** Delinquent status may be determined by either the number of days past due or number of payments past due.
*** Represents total loans 30-days-or-more past due by aging category divided by total loans.
1,460
1,153
1,821
4,434
945,134
258,264
155
3,145
3,300
1,299,700
1,027
1,355
475,881
1,810
166
942
2,918
290,268
80
75
17,681
278
283
1,239
49
52,874
68,106
4,001
1,547
7,494
13,042
3,582,889
4,300,347
119
14,246
6,054
1,485
7,643
97,754
6,089
7,762
112,000
10,090
3,063
7,651
20,804
4,412,347
0.23
0.07
0.17
0.47
* All loans past due 90-days-or-more, excluding smaller balance consumer loans, were on nonaccrual status.
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2020:
Secured
by Real
by Personal
Estate
Property
17,044
1,423
8,571
138
1,601
523
30,017
2,124
Collateral-dependent loans are generally secured by real estate or personal property. If there is insufficient collateral value to secure the Company’s recorded investment in these loans, they are charged down to collateral value less estimated selling cost, when selling costs are applicable. Selling costs range from 10%-13%, with those percentages based on annual studies performed by the Company.
Impaired Loans
Information regarding the Bank’s impaired loans follows:
Loans with no allocated ACLL
33,061
Loans with allocated ACLL
17,289
Total recorded investment in impaired loans
50,350
Amount of ACLL allocated
2,512
The following table presents the balance in the ACLL and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2019:
Individually
PCI with
PCI without
Evaluated
Collectively
Post-Acquisition
Allowance to
Excluding PCI
Impairment
Total Loans
1,207
185
25,384
922,764
1,420
0.50
1,448
257,355
0.67
426
10,054
15,144
1,287,225
0.80
159,504
1.35
2,860
1,989
475,225
0.60
1.05
174
2,547
289,900
0.93
5.72
76.81
569
52,676
1.16
333
217
350
67,762
0.81
2,205
25,809
48,036
3,545,809
2,063
0.25
27,603
4,263,267
0.70
1.63
13,002
251
105,146
12.45
13,236
119,511
11.15
2,321
40,839
48,287
4,382,778
0.98
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019 and for the three and six months ended June 30, 2019. The difference between the “Unpaid Principal Balance” and “Recorded Investment” columns represents life-to-date partial write downs/charge offs taken on individual impaired credits.
As of
June 30, 2019
Cash Basis
Unpaid
Average
Principal
Recorded
Allocated
Investment
Impaired loans with no allocated ACLL:
14,768
13,893
11,768
11,540
1,515
1,733
15,028
12,547
3,573
3,917
47
3,308
1,792
622
616
3,107
1,591
1,352
206
160
Impaired loans with allocated ACLL:
12,954
12,911
1,392
14,464
14,910
216
162
3,228
432
3,951
4,106
83
197
2,662
1,913
480
510
701
690
492
505
520
Total impaired loans
55,473
41,345
41,370
597
Troubled Debt Restructurings
A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of their debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Bank’s internal underwriting policy.
The majority of the Bank’s commercial-related and construction TDRs involve a restructuring of financing terms, such as a reduction in the payment amount to require only interest and escrow (if required) and/or extending the maturity date of the debt. The substantial majority of the Bank’s residential real estate TDR concessions involve reducing the client’s loan payment through a rate reduction for a set period based on the borrower’s ability to service the modified loan payment. Retail loans may also be classified as TDRs due to legal modifications, such as bankruptcies.
Nonaccrual loans modified as TDRs typically remain on nonaccrual status and continue to be reported as nonperforming loans for a minimum of six consecutive months. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. At June 30, 2020 and December 31, 2019, $5 million and $10 million of TDRs were on nonaccrual status.
Detail of TDRs differentiated by loan type and accrual status follows:
Troubled Debt
Restructurings on
Nonaccrual Status
Accrual Status
Restructurings
Number of
June 30, 2020 (dollars in thousands)
Residential real estate
4,684
130
12,901
190
17,585
271
6,788
7,059
50
319
807
1,126
2,132
650
2,133
659
Total troubled debt restructurings
65
5,283
21,196
26,479
December 31, 2019 (dollars in thousands)
4,402
15,368
19,770
4,040
4,885
8,925
54
1,446
1,613
586
61
9,866
1,767
20,915
1,828
30,781
The Bank considers a TDR to be performing to its modified terms if the loan is in accrual status and not past due 30-days-or-more as of the reporting date. A summary of the categories of TDR loan modifications outstanding and respective performance under modified terms at June 30, 2020 and December 31, 2019 follows:
Performing to
Not Performing to
Modified Terms
Residential real estate loans (including home equity loans):
Interest only payments
862
Rate reduction
109
11,660
389
115
12,049
Principal deferral
835
163
998
Legal modification
3,111
565
3,676
Total residential TDRs
16,468
1,117
Commercial related and construction/land development loans:
1,393
1,110
45
1,155
4,589
225
4,814
873
Total commercial TDRs
7,092
1,143
8,235
Consumer loans:
2,130
301
341
2,131
Total consumer TDRs
318
2,317
23,878
2,601
904
13,847
352
123
14,199
845
1,024
3,200
443
3,643
18,796
974
1,568
1,252
5,981
6,578
8,756
1,669
10,425
1,612
577
1,811
28,138
2,643
As of June 30, 2020 and December 31, 2019, 90% and 91% of the Bank’s TDRs were performing according to their modified terms. The Bank had provided $2 million and $2 million of specific ACLL allocations to clients whose loan terms have been modified in TDRs as of June 30, 2020 and December 31, 2019. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships at June 30, 2020 or December 31, 2019.
36
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2020 and 2019 that were modified during the three months ended June 30, 2020 and 2019 follows:
161
884
885
889
302
227
891
529
June 30, 2019 (dollars in thousands)
804
965
4,426
4,587
5,391
The tables above are inclusive of loans that were TDRs at the end of previous periods and were re-modified, e.g., a maturity date extension during the current period.
As of June 30, 2020 and 2019, 57% and 15% of the Bank’s TDRs that occurred during the second quarters of 2020 and 2019 were performing according to their modified terms. The Bank provided approximately $0 and $980,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during the second quarters of 2020 and 2019.
There was no significant change between the pre and post modification loan balances for the three months ending June 30, 2020 and 2019.
37
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2020 and 2019 that were modified during the six months ended June 30, 2020 and 2019 follows:
454
231
897
685
901
1,112
907
1,118
566
592
5,018
1,499
4,637
6,136
As of June 30, 2020 and 2019, 66% and 24% of the Bank’s TDRs that occurred during the first six months of 2020 and 2019 were performing according to their modified terms. The Bank provided approximately $28,000 and $1.0 million in specific ACLL allocations to clients whose loan terms were modified in TDRs during the first six months of 2020 and 2019.
There was no significant change between the pre and post modification loan balances for the six months ending June 30, 2020 and 2019.
The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of June 30, 2020 and 2019 and for which there was a payment default during the three and/or months ended June 30, 2020 and 2019.
218
358
5,209
CARES Act, COVID-19 Loan Accommodations, and the Paycheck Protection Program
On March 27, 2020, the U.S. Congress passed the CARES Act, which provided several forms of economic relief designed to defray the impact of COVID-19. In April 2020, through its own independent relief efforts and CARES Act provisions, the Company began offering loan accommodations through deferrals and forbearances. These accommodations were generally under three-month terms for commercial clients, with residential and consumer accommodations in line with prevailing regulatory and legal parameters. Loans modified as a result of the pandemic are generally not considered TDRs by the Company if, prior to the pandemic, the borrower was performing in accordance with loan terms.
The CARES Act also provided for the SBA PPP. The PPP allows the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the pandemic. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. To provide liquidity to banks administering the SBA’s PPP, the FRB created the PPPLF, a lending facility secured by the PPP loans of the participating banks. As of June 30, 2020, the Bank had borrowed $169 million from the FRB under its PPPLF at a rate of 0.35%. PPPLF borrowings mature as the underlying PPP loans mature, generally within two to five years.
The following table presents the balances of loans in COVID-19 accommodations, the balance of PPP loans, and the remainder of the Traditional Bank’s loan portfolio by loan class as of June 30, 2020:
Accommodations
PPP Loans
Other Loans
Traditional Banking
51,570
833,755
58,754
195,946
491,314
830,976
141,720
511,065
251,942
28,927
128,327
9,421
13,776
251,490
4,678
129,719
793,182
2,631,576
Percent of Total Traditional Banking
67
Foreclosures
The following table presents the carrying amount of foreclosed properties held as a result of the Bank obtaining physical possession of such properties:
Total other real estate owned
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:
Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure
3,595
2,201
The Company’s TRS segment offered its EA product during the first two months of 2020 and 2019. The Company based its estimated Provision for EAs on the current year’s EA delinquency information and the prior year’s tax refund payment patterns subsequent to the first quarter. Each year, all unpaid EAs are charged off by June 30th.
Information regarding EAs follows:
Easy Advances originated
387,762
388,970
Net charge to the Provision for Easy Advances
Provision to total Easy Advances originated
5.04
3.45
Easy Advances net charge-offs
19,575
Easy Advances net charge-offs to total Easy Advances originated
40
5. DEPOSITS
The composition of the deposit portfolio follows:
Core Bank:
Demand
1,124,321
922,972
Money market accounts
748,832
793,950
Savings
207,729
175,588
Individual retirement accounts (1)
51,715
51,548
Time deposits, $250 and over (1)
111,725
104,412
Other certificates of deposit (1)
258,884
248,161
Reciprocal money market and time deposits (1)
290,441
189,774
Brokered deposits (1)
400,000
200,072
Total Core Bank interest-bearing deposits
3,193,647
2,686,477
Total Core Bank noninterest-bearing deposits
1,431,866
981,164
Total Core Bank deposits
4,625,513
3,667,641
3,038
66,152
Total RPG interest-bearing deposits
Brokered prepaid card deposits
256,703
9,128
Other noninterest-bearing deposits
132,831
43,087
Total RPG noninterest-bearing deposits
389,534
52,215
Total RPG deposits
392,572
118,367
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit clients arising from the Bank’s treasury management program. While comparable to deposits in their transactional nature, these overnight liabilities to clients are in the form of repurchase agreements. Repurchase agreements collateralized by securities are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. Should the fair value of currently pledged securities fall below the associated repurchase agreements, the Bank would be required to pledge additional securities. To mitigate the risk of under collateralization, the Bank typically pledges at least two percent more in securities than the associated repurchase agreements. All such securities are under the Bank’s control.
At June 30, 2020 and December 31, 2019, all securities sold under agreements to repurchase had overnight maturities. Additional information regarding securities sold under agreements to repurchase follows:
Outstanding balance at end of period
Weighted average interest rate at end of period
0.04
0.32
Fair value of securities pledged:
7,515
70,015
167,945
134,265
12,915
17,030
Total securities pledged
188,375
221,310
Average outstanding balance during the period
176,541
220,189
192,755
225,864
Average interest rate during the period
0.14
Maximum outstanding at any month end during the period
226,002
7. RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
The Company records as operating lease liabilities the present value of its required minimum lease payments plus any amounts probable of being owed under a residual value guarantee. Offsetting these operating lease liabilities, the Company records right-of-use assets for the underlying leased property.
At June 30, 2020, the Company was under 49 separate and distinct operating lease contracts to lease the land and/or buildings for 38 of its offices, with 15 such operating leases contracted with a related party of the Company. As of June 30, 2020, payments on 26 of the Company’s operating leases were considered variable because such payments were adjustable based on periodic changes in the Consumer Price Index.
Prior to the release of these financial statements, the Company executed a new operating lease for its Corporate Center location that commences in August 2020. The estimated right-of-use asset and lease liability to be recorded for this lease is approximately $19 million.
The following table presents information concerning the Company’s operating lease expense recorded as a noninterest expense within the category “Occupancy and equipment, net” for the three and six months ended June 30, 2020 and 2019:
Operating lease expense:
Related Party:
Variable lease expense
1,183
1,156
2,371
2,314
Fixed lease expense
Third Party:
435
368
384
738
745
Short-term lease expense
Total operating lease expense
1,754
1,773
3,521
3,538
Other information concerning operating leases:
Cash paid for amounts included in the measurement of operating lease liabilities
1,793
3,630
3,577
Short-term lease payments not included in the measurement of lease liabilities
The following table presents the weighted average remaining term and weighted average discount rate for the Company’s non-short-term operating leases as of June 30, 2020 and December 31, 2019:
Weighted average remaining term in years
7.99
8.02
Weighted average discount rate
3.55
3.46
The following table presents a maturity schedule of the Company’s operating lease liabilities based on undiscounted cash flows, and a reconciliation of those undiscounted cash flows to the operating lease liabilities recognized on the Company’s balance sheet as of June 30, 2020:
Year (in thousands)
Related Party
Third Party
2,283
1,345
3,628
2021
4,194
2,525
6,719
2022
3,332
2,120
5,452
2023
1,600
4,932
2024
3,205
4,378
Thereafter
12,718
3,376
16,094
Total undiscounted cash flows
29,064
12,139
41,203
Discount applied to cash flows
(4,103)
(1,529)
(5,632)
Total discounted cash flows reported as operating lease liabilities
24,961
10,610
8. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances were as follows:
Overnight advances
200,000
Variable interest rate advance indexed to 3-Month LIBOR plus 0.14%
Fixed interest rate advances
127,500
540,000
Total FHLB advances
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity. FHLB advances are collateralized by a blanket pledge of eligible real estate loans. At June 30, 2020 and December 31, 2019, Republic had available borrowing capacity of $814 million and $259 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million and $125 million available through various other financial institutions as of June 30, 2020 and December 31, 2019.
Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such advances are detailed below:
Weighted
Year (dollars in thousands)
Rate
2020 (Overnight)
2020 (Term)
67,500
1.58
30,000
1.93
20,000
2.12
2.56
1.87
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:
42,198
448,077
43,681
331,768
0.22
2.50
0.92
2.49
165,000
785,000
250,000
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
First lien, single family residential real estate
1,031,671
1,099,941
Home equity lines of credit
250,257
274,990
9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
COVID-19 Pandemic
COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. Since March 2020, to slow the spread of COVID-19, jurisdictions within the U.S. have imposed economic and social restrictions on the population in general and non-essential businesses in particular. These restrictions in combination with the public’s response to them effectively suspended or curtailed economic activity for many industries across the U.S., with industries in the Company’s market footprint impacted.
The potential financial impact of the COVID-19 pandemic is unknown at this time; however, this pandemic and the public’s response to it could cause the Company to experience a material adverse impact on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, MSRs, deferred tax assets, or counterparty risk derivatives.
Commitments to Extend Credit
The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. These financial instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.
The Company also extends binding commitments to clients and prospective clients. Such commitments assure a borrower of financing for a specified period of time at a specified rate. The risk to the Company under such loan commitments is limited by the terms of the contracts. For example, the Company may not be obligated to advance funds if the client’s financial condition deteriorates or if the client fails to meet specific covenants.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding.
The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments, for each period ended:
Unused warehouse lines of credit
174,220
436,541
Unused home equity lines of credit
362,177
363,195
Unused loan commitments - other
803,204
757,657
Standby letters of credit
10,791
11,252
FHLB letter of credit
643
2,485
Total commitments
1,351,035
1,571,130
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third-party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material.
The following tables present a rollforward of the ACLC for the three and six months ended June 30, 2020:
ACLC Rollforward
Loan Commitments
55
112
391
63
558
636
The Company increased its ACLC during the three months ended June 30, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations.
89
312
142
The Company increased its ACLC during the six months ended June 30, 2020 based on higher loss expectations on expected usage of unused commitments. Current and forecasted economic concerns driven by the COVID-19 pandemic drove the Company’s higher loss expectations.
10. FAIR VALUE
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Available-for-sale debt securities: Except for the Bank’s private label mortgage backed security and its TRUP investment, the fair value of AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
The Bank’s private label mortgage backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (present value model) approach in determining the fair value of this security.
See in this section of the filing under Footnote 2 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage backed security.
The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value at June 30, 2020. The Company’s TRUP investment is considered highly illiquid and also valued using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.
Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s Community Reinvestment Act mutual fund investment and fall within Level 1 of the fair value hierarchy.
The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).
Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.
Consumer loans held for sale, at fair value: In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. Fair value for these loans is based on contractual sales terms, Level 3 inputs.
Consumer loans held for investment, at fair value: The Bank held an immaterial amount of consumer loans at fair value through a consumer loan program the Company is currently unwinding. The fair value of these loans was based on the discounted cash flows of the underlying loans, Level 3 inputs. Further disclosure of these loans is omitted due to materiality.
Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. Forward contracts and rate lock loan commitments are classified as Level 2 in the fair value hierarchy.
Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant dealer counterparty and validated against the Company’s calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.
Collateral-dependent loans: Collateral-dependent loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Mortgage servicing rights: On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded, and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and can generally be validated against available market data (Level 2).
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below. Information as of June 30, 2020 is presented net of any applicable ACL.
Fair Value Measurements at
June 30, 2020 Using:
Quoted Prices in
Significant
Active Markets
for Identical
Observable
Unobservable
Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial assets:
480,324
6,523
Equity securities with readily determinable fair value:
Mortgage loans held for sale
Consumer loans held for sale
Consumer loans held for investment
667
Rate lock loan commitments
4,436
Interest rate swap agreements
15,324
Financial liabilities:
Mandatory forward contracts
15,491
December 31, 2019 Using:
463,860
7,495
789
5,062
131
5,166
All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2 or 3 assets during the three and six months ended June 30, 2020 and 2019.
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):
3,249
3,660
3,712
Total gains or losses included in earnings:
Net change in unrealized gain
Recovery of actual losses previously recorded
Principal paydowns
(119)
(81)
(365)
(138)
3,615
The fair value of the Bank’s single private label mortgage backed security is supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying mortgages, including consideration of geographic location, original loan-to-value and the weighted average FICO score of the borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of default, and prepayment probabilities) and 3) discounted cash flow modeling.
The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage backed security are prepayment rates, probability of default and loss severity in the event of default. Significant fluctuations in any of those inputs in isolation would result in a significantly different fair value measurement.
Quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage backed security follows:
Valuation
Technique
Unobservable Inputs
Range
Discounted cash flow
(1) Constant prepayment rate
3.0% - 4.5%
(2) Probability of default
1.8% - 6.9%
(3) Loss severity
50% - 75%
2.3% - 5.0%
1.8% - 6.3%
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):
4,100
4,075
Discount accretion
(611)
(111)
(522)
(96)
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.
52
Mortgage Loans Held for Sale
The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of June 30, 2020 and December 31, 2019.
The aggregate fair value, contractual balance, and unrealized gain were as follows:
Aggregate fair value
Contractual balance
38,238
18,690
Unrealized gain
1,790
534
The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2020 and 2019 for mortgage loans held for sale are presented in the following table:
Interest income
170
632
272
Change in fair value
614
1,256
Total included in earnings
1,033
1,888
Consumer Loans Held for Sale
RCS carries loans originated through its installment loan program at fair value. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of June 30, 2020 and December 31, 2019.
The significant unobservable inputs in the fair value measurement of the Bank’s short-term installment loans are the net contractual premiums and level of loans sold at a discount price. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.
The following table presents quantitative information about recurring Level 3 fair value measurement inputs for installment loans:
Contract Terms
(1) Net Premium
1.4%
(2) Discounted Sales
5.00%
The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, were as follows:
593
Unrealized (loss) gain
The total amount of net gains from changes in fair value included in earnings for consumer loans held for sale, at fair value, are presented in the following table:
1,521
1,517
Assets measured at fair value on a non-recurring basis are summarized below:
Collateral-dependent loans:
3,655
98
1,055
323
Total collateral-dependent loans*
5,131
Mortgage servicing rights
Impaired loans:
1,562
Total impaired loans*
8,920
The difference between the carrying value and the fair value of collateral-dependent/impaired loans measured at fair value is reconciled in a subsequent table of this Footnote.
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:
(Weighted
Average)
Collateral-dependent loans - residential real estate owner occupied
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 51% (11%)
Collateral-dependent loans - commercial real estate
7% (7%)
Collateral-dependent loans - commercial & industrial
0% - 29% (6%)
Collateral-dependent loans - home equity
2% (2%)
Impaired loans - residential real estate owner occupied
0% - 58% (12%)
Impaired loans - residential real estate nonowner occupied
5% (5%)
Impaired loans - commercial real estate
1% - 10% (4%)
Impaired loans - commercial & industrial
Income approach
Adjustments for differences between net operating income expectations
3% - 50% (37%)
Impaired loans - home equity
Collateral Dependent/Impaired Loans
Collateral-dependent impaired loans are generally measured for loss using the fair value for reasonable disposition of the underlying collateral. The Bank’s practice is to obtain new or updated appraisals or BPOs on the loans subject to the initial impairment review and then to evaluate the need for an update to this value on an as-necessary or possibly annual basis thereafter (depending on the market conditions impacting the value of the collateral). The Bank may discount the valuation amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal or BPO is not available at the time of a loan’s loss review, the Bank may apply a discount to the existing value of an old valuation to reflect the property’s current estimated value if it is believed to have deteriorated in either: (I) the physical or economic aspects of the subject property or (ii) material changes in market conditions. The impairment review generally results in a partial charge-off of the loan if fair value less selling costs are below the loan’s carrying value. Collateral-dependent loans are valued within Level 3 of the fair value hierarchy.
Collateral-dependent/impaired loans are as follows:
Carrying amount of loans measured at fair value
4,331
7,729
Estimated selling costs considered in carrying amount
802
1,193
Valuation allowance
Total fair value
Provision on collateral-dependent, impaired loans
57
The carrying amounts and estimated exit price fair values of all financial instruments follow:
June 30, 2020:
Level 1
Level 2
Level 3
Available-for-sale debt securities
Held-to-maturity debt securities
Equity securities with readily determinable fair values
4,979,895
Federal Home Loan Bank stock
11,146
Noninterest-bearing deposits
Transaction deposits
2,305,085
Time deposits
891,600
901,588
139,831
31,805
December 31, 2019:
4,381,396
12,937
2,018,687
733,942
737,733
749,667
32,587
2,802
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:
39,384
11,313
8,971
218,668
81,982
343,941
122,696
Proceeds from the sale of mortgage loans held for sale
(226,723)
(81,630)
(336,641)
(121,262)
8,699
2,218
13,504
3,478
13,883
The following table presents the components of Mortgage Banking income:
Net gain realized on sale of mortgage loans held for sale
6,050
1,896
2,771
Net change in fair value recognized on loans held for sale
Net change in fair value recognized on rate lock loan commitments
(132)
379
866
Net change in fair value recognized on forward contracts
2,167
(185)
(527)
(205)
Net gain recognized
Loan servicing income
707
1,382
1,210
(1,008)
(411)
(1,593)
(733)
Change in mortgage servicing rights valuation allowance
(100)
Net servicing income recognized
(301)
477
Total Mortgage Banking income
Activity for capitalized mortgage servicing rights was as follows:
5,994
4,935
5,888
4,919
Additions
1,725
634
2,516
972
Amortized to expense
Change in valuation allowance
6,711
5,158
Activity in the valuation allowance for capitalized mortgage servicing rights follows:
Beginning valuation allowance
Charge (credit) during the period
Ending valuation allowance
Other information relating to mortgage servicing rights follows:
Fair value of mortgage servicing rights portfolio
6,892
9,068
Monthly weighted average prepayment rate of unpaid principal balance*
Discount rate
10.00
Weighted average foreclosure rate
Weighted average life in years
4.12
5.76
Rates are applied to individual tranches with similar characteristics.
Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.
Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.
The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.
The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives as of the period ends presented:
Notional
Included in Mortgage loans held for sale:
Included in other assets:
110,176
32,776
Included in other liabilities:
128,040
44,919
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:
Pay
Receive
Assets /
Gain (Loss)
(Liabilities)
in AOCI
Interest rate swap on money market deposits
2.17
1M LIBOR
12/2013 - 12/2020
(68)
(51)
(46)
Interest rate swap on FHLB advance
2.33
3M LIBOR
(99)
(58)
(43)
(167)
(125)
(104)
(77)
The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income:
(16)
Total interest (benefit) expense on swap transactions
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:
Gains (losses) recognized in OCI on derivative (effective portion)
Gains (losses) reclassified from OCI on derivative (effective portion)
(79)
Gains (losses) recognized in income on derivative (ineffective portion)
The estimated net amount of the existing losses reported in AOCI at June 30, 2020 expected to be reclassified into earnings within the next 12 months is considered immaterial.
62
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:
Bank Position
Interest rate swaps with Bank clients - Assets
Pay variable/receive fixed
141,474
95,411
Interest rate swaps with Bank clients - Liabilities
6,640
(55)
Interest rate swaps with Bank clients - Total
102,051
5,007
Offsetting interest rate swaps with institutional swap dealer
Pay fixed/receive variable
(15,324)
(5,007)
282,948
204,102
The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with dealer counterparties when such net loss positions exceed $250,000. The fair value of cash or investment securities pledged as collateral by the Bank to cover such net loss positions totaled $15.7 million and $7.5 million at June 30, 2020 and December 31, 2019.
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:
Class A Shares
Class B Shares
Undistributed net income for basic earnings per share
9,885
12,545
30,652
36,597
Weighted average potential dividends on Class A shares upon exercise of dilutive options
Undistributed net income for diluted earnings per share
9,878
12,513
30,628
36,529
Weighted average shares outstanding:
18,804
18,821
18,785
2,212
2,202
Effect of dilutive securities on Class A Shares outstanding
Weighted average shares outstanding including dilutive securities
21,029
21,138
21,065
21,125
Basic earnings per share:
Class A Common Stock:
Per share dividends distributed
0.29
0.26
0.57
Undistributed earnings per share*
0.48
1.47
1.76
Total basic earnings per share - Class A Common Stock
Class B Common Stock:
0.24
0.52
0.55
1.34
1.60
Total basic earnings per share - Class B Common Stock
Diluted earnings per share:
1.75
Total diluted earnings per share - Class A Common Stock
1.33
1.59
Total diluted earnings per share - Class B Common Stock
*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:
Antidilutive stock options
427,000
160,000
247,000
Average antidilutive stock options
365,000
156,000
172,000
159,000
14. OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
Available-for-Sale Debt Securities:
Net unrealized (losses) gains
2,013
8,769
5,639
(248)
(422)
(2,193)
(1,186)
Net of tax
6,576
4,453
Cash Flow Hedges:
Net unrealized gains
69
(63)
(247)
(17)
(194)
Total other comprehensive (loss) income components, net of tax
The table below presents the significant amounts reclassified out of each component of AOCI:
Amounts Reclassified from AOCI
Affected Line Items
in the Consolidated
Statements of Income
Interest benefit (expense) on deposits
(38)
Interest benefit (expense) on FHLB advances
(41)
(53)
Total derivative gains (losses) on cash flow hedges
Total interest benefit (expense)
Income tax (benefit) expense
(3)
(59)
The following is a summary of the AOCI balances, net of tax:
Change
Unrealized gain on AFS debt securities
2,211
6,657
8,868
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
964
883
Unrealized loss on cash flow hedges
Total unrealized gain
December 31, 2018
Unrealized loss on AFS debt securities
(2,165)
4,480
2,315
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings
1,078
1,051
Unrealized gain (loss) on cash flow hedges
Total unrealized gain (loss)
15. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company’s net revenue by reportable segment:
Core Banking
Tax
Republic
Traditional
Mortgage
Core
Refund
Credit
Banking
Lending
Solutions
Company
Net interest income(1)
39,035
6,063
45,517
1,081
6,688
Noninterest income:
2,438
2,455
Mortgage banking income(1)
2,724
Program fees(1)
Increase in cash surrender value of BOLI(1)
Net gains (losses) on OREO
568
6,126
8,406
14,549
3,682
4,202
Total net revenue
45,161
6,080
8,825
60,066
4,763
6,127
10,890
70,956
Net-revenue concentration(2)
41,877
3,957
46,004
710
7,232
7,942
3,585
3,168
987
689
7,853
2,472
10,338
3,768
1,019
4,787
49,730
3,970
56,342
4,478
8,251
12,729
69,071
72
79,656
10,370
90,658
21,606
12,679
34,285
5,576
5,604
5,217
930
2,832
1,780
1,812
13,361
13,225
26,614
19,874
22,706
93,017
10,398
13,857
117,272
41,480
15,511
56,991
174,263
83,224
6,852
90,348
21,148
14,749
35,897
6,878
5,794
1,915
1,098
1,194
4,051
18,823
21,145
2,574
23,719
97,973
4,323
109,171
42,293
17,323
59,616
168,787
The following represents information for significant revenue streams subject to ASC 606:
Service charges on deposits – The Company earns revenue for account-based and event-driven services on its retail and commercial deposit accounts. Contracts for these services are generally in the form of deposit agreements, which disclose fees for deposit services. Revenue for event-driven services is recognized in close proximity or simultaneously with service performance. Revenue for certain account-based services may be recognized at a point in time or over the period the service is rendered, typically no longer than a month. Examples of account-based and event-driven service charges on deposits include per item fees, paper-statement fees, check-cashing fees, and analysis fees.
Net refund transfer fees – An RT is a fee-based product offered by the Bank through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”), with the Bank acting as an independent contractor of the Tax Providers. An RT allows a taxpayer to pay any applicable tax preparation and filing related fees directly from his federal or state government tax refund, with the remainder of the tax refund disbursed directly to the taxpayer. RT fees and all applicable tax preparation, transmitter, audit, and any other taxpayer authorized amounts are deducted from the tax refund by either the Bank or the Bank’s service provider and automatically forwarded to the appropriate party as authorized by the taxpayer. RT fees generally receive first priority when applying fees against the taxpayer’s refund, with the Bank’s share of RT fees generally superior to the claims of other third-party service providers, including the Tax Providers. The remainder of the refund is disbursed to the taxpayer by a Bank check printed at a tax office, direct deposited to the taxpayer’s personal bank account, loaded to a Prepaid Card or Walmart Direct2Cash®.
The Company executes contracts with individual Tax Providers to offer RTs to their taxpayers. RT revenue is recognized by the Bank immediately after the taxpayer’s refund is disbursed in accordance with the RT contract with the taxpayer. The fee paid by the taxpayer for the RT is shared between the Bank and the Tax Providers based on contracts executed between the parties.
The Company presents RT revenue net of any amounts shared with the Tax Providers. The Bank’s share of RT revenue is generally based on the obligations undertaken by the Tax Provider for each individual RT program with more obligations generally corresponding to higher RT revenue share. The significant majority of net RT revenue is recognized and obligations under RT contracts fulfilled by the Bank during the first half of each year. Incremental expenses associated with the fulfillment of RT contracts are generally expensed during the first half of the year.
Interchange fee income – As an “issuing bank” for card transactions, the Company earns interchange fee income on transactions executed by its cardholders with various third-party merchants. Through third-party intermediaries, merchants compensate the Company for each transaction for the ability to efficiently settle the transaction and for the Company’s willingness to accept certain risks inherent in the transaction. There is no written contract between the merchant and the Company, but a contract is implied between the two parties by customary business practices. Interchange fee income is recognized almost simultaneously by the Company upon the completion of a related card transaction.
The Company compensates its cardholders by way of cash or other “rewards” for generating card transactions. These rewards are disclosed in cardholder agreements between the Company and its cardholders. Reward costs are accrued over time based on card transactions generated by the cardholder. Interchange fee income is presented net of reward costs within noninterest income.
Net gains/(losses) on other real estate – The Company routinely sells OREO it has acquired through loan foreclosure. Net gains/(losses) on OREO reflect both 1) the gain or loss recognized upon an executed deed and 2) mark-to-market writedowns the Company takes on its OREO inventory.
The Company generally recognizes gains or losses on OREO at the time of an executed deed, although gains may be recognized over a financing period if the Company finances the sale. For financed OREO sales, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.
Mark-to-market writedowns taken by the Company during the property’s holding period are generally at least 10% per year, but may be higher based on updated real estate appraisals or BPOs. Incremental expenditures to bring OREO to salable condition are generally expensed as-incurred.
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16. SEGMENT INFORMATION
Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.
As of June 30, 2020, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company’s national branchless banking platform, is part of the Traditional Banking segment.
The nature of segment operations and the primary drivers of net revenue by reportable segment are provided below:
Reportable Segment:
Nature of Operations:
Primary Drivers of Net Revenue:
Core Banking:
Provides traditional banking products to clients in its market footprint primarily via its network of banking centers and to clients outside of its market footprint primarily via its digital delivery channels.
Loans, investments, and deposits.
Warehouse Lending
Provides short-term, revolving credit facilities to mortgage bankers across the United States.
Mortgage warehouse lines of credit.
Mortgage Banking
Primarily originates, sells and services long-term, single-family, first-lien residential real estate loans primarily to clients in the Bank's market footprint.
Loan sales and servicing.
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.
Offers consumer credit products. RCS products are primarily provided to clients outside of the Bank’s market footprint, with a substantial portion of RCS clients considered subprime or near-prime borrowers.
Unsecured, consumer loans.
The accounting policies used for Republic’s reportable segments are generally the same as those described in the summary of significant accounting policies in the Company’s 2019 Annual Report on Form 10-K. The Company did update its accounting policies during the first quarter of 2020 upon adoption of the CECL standard. Republic evaluates segment performance using operating income. The Company allocates goodwill to the Traditional Banking segment. Republic generally allocates income taxes based on income before income tax expense unless reasonable and specific segment allocations can be made. The Company makes transactions among reportable segments at carrying value.
Segment information follows:
Net interest income
3,080
3,529
4,448
Other noninterest income
6,151
151
6,302
36,688
811
2,689
40,188
3,734
903
Income (loss) before income tax expense
5,393
4,820
16,349
(3,419)
6,667
3,248
Income tax expense (benefit)
729
1,085
1,288
3,102
(853)
1,544
Net income (loss)
4,664
3,735
4,848
13,247
(2,566)
5,123
2,557
Period-end assets
4,967,759
1,028,400
54,518
6,050,677
306,583
103,315
409,898
Net interest margin
3.26
3.01
3.23
3.62
Net-revenue concentration*
392
7,922
8,043
37,764
792
1,354
39,910
2,849
669
3,518
Income before income tax expense
10,539
2,761
14,588
1,237
5,358
6,595
Income tax expense
744
621
1,635
288
1,253
1,541
9,795
2,140
12,953
949
4,105
5,054
4,805,449
738,300
20,568
5,564,317
36,834
121,983
158,817
5,723,134
3.75
* Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.
8,669
9,450
19,581
Net gain on branch divestiture
13,421
208
13,629
73,335
1,614
4,685
79,634
10,363
12,160
11,013
8,003
9,172
28,188
11,536
13,451
24,987
1,189
1,801
1,926
4,916
2,644
3,114
5,758
9,824
6,202
7,246
23,272
8,892
10,337
19,229
3.52
2.86
3.43
4.55
13,826
14,868
879
15,747
73,314
1,550
2,674
77,538
9,963
1,436
11,399
23,043
4,683
1,649
29,375
18,504
10,280
28,784
2,509
1,054
346
3,909
4,318
2,409
6,727
20,534
1,303
25,466
14,186
7,871
22,057
3.81
2.63
3.69
4.88
17. INCOME TAXES
The following table illustrates the difference between the Company’s effective tax rate and the federal rates for the three and six months ended June 30, 2020 and 2019:
Federal corporate tax rate
21.00
Effect of:
State taxes, net of federal benefit
1.66
(2.47)
1.61
(0.51)
General business tax credits
(1.61)
(0.55)
(1.47)
(0.68)
Nontaxable income
(0.71)
(1.27)
(0.89)
Other, net
(0.98)
(1.72)
(0.36)
(0.63)
Effective tax rate
19.36
14.99
20.07
18.29
The following matters positively impacted the Company’s effective tax rate for the three and six months ended June 30, 2019:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank as well, as a group of third-party insurance captives for which insurance may not be available or economically feasible.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I Item 1 “Financial Statements.”
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements, except as required by applicable law.
Broadly speaking, forward-looking statements include:
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:
For disclosure regarding the impact to the Company’s financial statements of recently adopted ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods.
A summary of the Company's significant accounting policies is set forth in Part II “Item 8. Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.
Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.
Republic believes its critical accounting policies and estimates relate to the following:
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ACLL and Provision — At June 30, 2020, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly, and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.
Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaces the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures.
When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower “expected” threshold for loss recognition versus a higher “probable” threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts. The Company’s CECL method is a “static-pool” method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use the U.S. national unemployment rate as its primary forecasting tool.
Management’s evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast.
Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on a forecast of the U.S. national unemployment rate, which has shown a relatively strong historical correlation to the Bank’s loan losses. Subsequent to the one-year forecast, loss rates are assumed to immediately revert back to the historical loss rate calculated under a static pool analysis plus adjustments for current conditions.
Prospectively, the impact of utilizing the CECL approach to calculate the ACLL will be significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company’s reported earnings.
See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” and Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Goodwill and Other Intangible Assets — The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely goodwill impairment has occurred. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is likely that goodwill impairment has occurred. If, after assessing the totality of events or circumstances, the Company determines it is likely that goodwill impairment has not occurred, then performing a quantitative impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform an impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit.
The Company typically performs its impairment test annually as of September 30, however, the Company performed an interim qualitative assessment of its goodwill at June 30, 2020 due to the economic turmoil and market volatility resulting from the COVID-19 pandemic. Under its qualitative analysis, management concluded there was insufficient evidence of impairment of the Company’s $16 million of goodwill at June 30, 2020.
All goodwill is attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes.
Mortgage Servicing Rights — Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value, with the income statement effect recorded as a component of net servicing income within Mortgage Banking income. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage Banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a quarterly basis based on the weighted average remaining life of the underlying loans.
MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance is recorded as an increase to income. Changes in valuation allowances are reported within Mortgage Banking income on the income statement. The fair value of the MSR portfolio is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates.
A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs is expected to increase, as prepayment speeds on the underlying loans would be anticipated to decline. Based on the estimated fair value at June 30, 2020, management determined there was $100,000 of impairment within the Company’s $7 million MSR portfolio.
Income Tax Accounting — Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities and assets are also established for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. A deferred tax liability or deferred tax asset is recognized for the estimated future tax effects attributable to temporary differences and deductions that can be carried forward (used) in future years. The valuation of current and deferred income tax liabilities and assets is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax liabilities and assets involves the use of estimates, assumptions, interpretations and judgments concerning certain accounting pronouncements and federal and state tax codes.
There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, or additional information concerning the TCJA’s impact on the Company’s net deferred tax asset, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. The Company believes its tax assets and liabilities are adequate and are properly recorded in the consolidated financial statements at June 30, 2020 and December 31, 2019.
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BUSINESS SEGMENT COMPOSITION
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2020, Republic had 42 full-service banking centers and two LPOs with locations as follows:
As of June 30, 2020 and through the date of this filing, generally all Traditional Banking products and services, except for a selection of deposit products offered through the Bank’s separately branded national branchless banking platform, MemoryBank, were offered through the Company’s traditional RB&T brand.
The Bank’s principal lending activities consist of the following:
Retail Mortgage Lending — Through its retail banking centers and its Consumer Direct channel, the Bank originates single family, residential real estate loans. In addition, the Bank originates HEALs and HELOCs through its retail banking centers. Such loans are generally collateralized by owner occupied property.
Consumer Direct Lending — Through its Consumer Direct channel, formerly named its Internet Lending channel, the Bank accepts online loan applications for its RB&T branded products through its website at www.republicbank.com. Historically, the majority of loans originated through its Consumer Direct channel have been within the Bank’s traditional markets of Kentucky, Florida, Indiana, and Tennessee. Other states where loans are marketed include Alabama, Arizona, California, Colorado, Connecticut, Georgia, Illinois, Louisiana, Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia, Washington, and Wisconsin, as well as, the District of Columbia.
Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial Banking, Business Banking, and Retail Banking channels.
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. Clients are generally located within the Bank’s market footprint, or in adjacent, nearby areas to the market footprint.
Construction and Land Development Lending — The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots.
Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank’s markets.
Aircraft Lending — In October 2017, the Bank created an Aircraft Lending division. At the beginning, the initial loan size was offered up to $500,000. In 2019, the Bank increased the opportunity to finance up to $1.0 million. All aircraft loans typically range in amounts from $55,000 to $1,000,000, with terms up to 20 years, to purchase or refinance personal aircraft, along with engine overhauls and avionic upgrades. The aircraft loan program is open to all states, except for Alaska and Hawaii.
The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank’s other Traditional Banking activities generally consist of the following:
MemoryBank — MemoryBank, a national branchless banking platform, is a separately branded division of the Bank, which from a marketing perspective, focuses on technologically savvy clients that prefer to carry larger balances in highly liquid interest-bearing bank accounts. MemoryBank products are offered through its website, www.mymemorybank.com.
Private Banking — The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank’s Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele.
Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank’s Treasury Management department.
Internet Banking — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services — The Bank also provides title insurance and other financial institution-related products and services.
Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(II) Warehouse Lending segment
Through its Warehouse segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the U.S. through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
See additional detail regarding the Warehouse Lending segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(III) Mortgage Banking segment
Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
See additional detail regarding the Mortgage Banking segment under Footnote 11 “Mortgage Banking Activities” and Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(IV) Tax Refund Solutions segment
Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Republic Payment Solutions division — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
(V) Republic Credit Solutions segment
Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
81
OVERVIEW (Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019)
Total Company net income for the second quarter of 2020 was $15.8 million, a $2.2 million, or 12%, decrease from the same period in 2019. Diluted EPS decreased to $0.76 for the three months ended June 30, 2020 compared to $0.86 for the same period in 2019. Net income was down from the second quarter of 2019, as it was negatively impacted by Provision expense directly related to the on-going COVID-19 pandemic.
The following are general highlights by reportable segment:
Traditional Banking segment
Mortgage Banking segment
RESULTS OF OPERATIONS (Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019)
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.
Total Company net interest income decreased 3% during the second quarter of 2020 compared to the same period in 2019. Total Company net interest margin decreased to 3.62% during the second quarter of 2020 compared to 4.12% for the same period in 2019.
A large amount of the Company’s financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended higher from December 2015 through December 2018 but began trending lower again during 2019 as the FOMC reduced the FFTR by 75 basis points during the year. The FOMC further lowered the FFTR 100 basis points during the first quarter of 2020 following market reactions to the COVID-19 pandemic. Consistent with decreases in market rates in the previous 12 months, the Total Company’s net interest spread and net interest margin compressed 30 basis points and 50 basis points, respectively, from the second quarter of 2019 to the same period in 2020. The Company’s net interest spread, the difference between the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed primarily because the Company’s interest-bearing liabilities had less room to reprice downward than its interest-earning assets. The Company’s net interest margin compressed 20 basis points more than its net interest spread due to the reduction in benefit the Bank receives from its noninterest-bearing funding in a falling rate environment. Management believes the Company’s net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice lower.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
The Traditional Banking’s net interest income decreased $2.8 million, or 7%, for the second quarter of 2020 compared to the same period in 2019. Traditional Banking’s net interest margin was 3.26% for the second quarter of 2020, a decrease of 49 basis points from the same period in 2019.
The decrease in the Traditional Bank’s net interest income and net interest margin during the second quarter of 2020 was primarily attributable to the following factors:
Warehouse net interest income increased $2.1 million, or 53%, for the second quarter of 2020 compared to the same period in 2019.
Falling mortgage rates during 2020 drove a surge in consumer refinance volume for Warehouse clients resulting in a 27% increase in average Warehouse loans for the second quarter of 2020 over the same period in 2019. Overall usage rates on Warehouse lines of credit were 68% for the second quarter of 2020 compared to 57% for the second quarter of 2019.
RCS’s net interest income decreased $1.6 million, or 22%, from the second quarter of 2019 to the second quarter of 2020. The decrease was driven primarily by a decrease in fee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income decreased to $4.6 million during the second quarter of 2020 compared to $6.2 million during the same period in 2019 and accounted for 79% and 79% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances, as the Company reduced marketing for the product.
Future loan fee income from RCS’s higher-yielding line-of-credit product will likely continue to be negatively impacted by the on-going COVID-19 pandemic. As of June 30, 2020 the current on-balance-sheet Board-approved risk limit was $40 million for the Company. As of June 30, 2020, the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was $20 million.
Table 1 — Total Company Average Balance Sheets and Interest Rates
Interest-earning assets:
Federal funds sold and other interest-earning deposits
299,760
0.12
297,205
1,753
2.36
Investment securities, including FHLB stock (1)
605,776
2,819
514,366
3,700
2.88
TRS Easy Advance loans (2)
22,039
3.76
16,687
195
4.67
Other RPG loans (3) (6)
112,769
5,693
20.19
109,747
7,659
27.92
Outstanding Warehouse lines of credit (4) (6)
806,771
7,294
634,688
7,872
4.96
All other Traditional Bank loans (5) (6)
3,926,043
40,991
4.18
3,663,783
44,485
4.86
Total interest-earning assets
5,773,158
3.96
5,236,476
5.02
Allowance for credit loss
(70,496)
(58,825)
Noninterest-earning assets:
Noninterest-earning cash and cash equivalents
112,624
74,763
43,733
43,783
67,079
65,470
Other assets (1)
168,323
118,858
Total assets
6,094,421
5,480,525
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts
1,264,581
1,138,347
1,586
0.56
727,516
754,207
2,024
1.07
424,190
2,188
2.06
413,530
2,058
1.99
Reciprocal money market and time deposits
289,804
192,486
1.42
Brokered deposits
174,897
617
1.41
90,266
2.44
Total interest-bearing deposits
2,880,988
0.51
2,588,836
122,769
0.34
263,296
1.25
710,879
4.10
Total interest-bearing liabilities
3,484,834
3,561,144
1.32
Noninterest-bearing liabilities and Stockholders’ equity:
1,697,603
1,098,817
114,757
91,841
Stockholders’ equity
797,227
728,723
Total liabilities and stockholders’ equity
Net interest spread
3.40
3.70
85
Table 2 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 2 — Total Company Volume/Rate Variance Analysis
Compared to
Total Net
Increase / (Decrease) Due to
Volume
Interest income:
(1,666)
(1,681)
Investment securities, including FHLB stock
(881)
(1,461)
TRS Easy Advance loans*
Other RPG loans
(1,966)
(2,172)
Outstanding Warehouse lines of credit
(578)
(2,423)
All other Traditional Bank loans
(3,494)
3,034
(6,528)
Net change in interest income
(8,573)
5,679
(14,252)
Interest expense:
(1,427)
(1,586)
(1,776)
(69)
(1,707)
(250)
253
(313)
(258)
(3,240)
(1,883)
(1,357)
(128)
Net change in interest expense
(6,832)
(1,070)
(5,762)
Net change in net interest income
(1,741)
6,749
(8,490)
Volume for Easy Advances is based on total loans originated during the period presented.
See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
Total Company Provision was $6.5 million for the second quarter of 2020 compared to $4.5 million for the same period in 2019.
86
The following were the most significant components comprising the Company’s Provision by reportable segment:
The Traditional Banking Provision during the second quarter of 2020 was $3.1 million, compared to $1.4 million for the second quarter of 2019. An analysis of the Provision for the second quarter of 2020 compared to the same period in 2019 follows:
As a percentage of total loans, the Traditional Banking ACLL was 1.10% at June 30, 2020 compared to 0.78% at December 31, 2019 and 0.87% at June 30, 2019. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at June 30, 2020.
See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.
See additional detail regarding the impact of COVID-19 under:
Warehouse recorded a net charge to the Provision of $449,000 for the second quarter of 2020 compared to a net charge of $417,000 for the same period in 2019. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $179 million during the second quarter of 2020 compared to an increase of $167 million during the second quarter of 2019.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% at June 30, 2020, December 31, 2019 and June 30, 2019. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at June 30, 2020.
The TRS Provision increased from a net charge of $392,000 during the second quarter of 2019 to a net charge of $4.4 million during the second quarter of 2020. The higher net charges to the Provision during the second quarter of 2020 resulted from repayment rates on EA loans from the U.S. Treasury that significantly lagged those during the second quarter of 2019. Management believes the significant decline in repayment rates from the U.S. Treasury during the second quarter of 2020 was directly related to the impact of the current COVID-19 pandemic and the resulting delay in tax-return processing by the IRS for certain types of tax returns that require further taxpayer communication and verification. While EA loss rates for 2020 could still finish more in-line with those from the prior year, management is uncertain if or when this turnaround could occur. As a result, the Company completely charged-off all remaining unpaid EAs as of June 30, 2020, in-line with its customary June 30th charge-off policy for EA loans. Any EA payments received after June 30, 2020 will be credited as a direct recovery to the Provision in the period it is received.
As illustrated in Table 3 below, RCS recorded a credit to the Provision of $1.4 million during the second quarter of 2020 compared to a charge to the Provision of $2.2 million for the same period in 2019. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS’s line-of-credit product, as the Company reduced marketing for RCS’s line-of-credit product in response to the COVID-19 pandemic.
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 9.21% at June 30, 2020, 12.45% at December 31, 2019 and 13.19% at June 30, 2019. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at June 30, 2020.
The following table presents net charges (credits) to the RCS Provision by product:
Table 3 — RCS Provision by Product
Three Months Ended Jun. 30,
$ Change
% Change
Product:
Line of credit
(1,454)
(3,667)
(166)
Hospital receivables
(165)
88
Table 4 — Summary of Loan and Lease Loss Experience
ACLL at beginning of period
Charge-offs:
(368)
(238)
(423)
Total charge-offs
Recoveries:
229
Total recoveries
Net loan charge-offs
(21,892)
(16,438)
Provision - Core Banking
Provision - RPG
Total Provision
ACLL at end of period
ACLL to total loans
1.09
1.04
ACLL to nonperforming loans
237
Net loan charge-offs to average loans
1.80
1.49
Credit Quality Ratios - Core Banking:
230
Noninterest Income
Total Company noninterest income increased $3.6 million, or 24%%, during the second quarter of 2020 compared to the same period in 2019. The following were the most significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking’s noninterest income decreased $1.7 million for the second quarter of 2020 compared to the same period in 2019. Service charges on deposit accounts decreased $1.1 million and interchange income decreased $444,000 from the second quarter of 2019 to the same period in 2020. Both decreases largely reflect a change in client savings and spending patterns during the pandemic-driven economic restrictions. In general, during the second quarter of 2020, client spending decreased meaningfully from the second quarter of 2019, while client deposit balances increased, thus producing less overdraft activity and less interchange revenue for the Bank. Client spending patterns did return to more normalized levels in June 2020, however, management is uncertain at this time if this pattern will continue given the on-going spread of COVID-19 nationally.
The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months ended June 30, 2020 and 2019 were $893,000 and $2.2 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended June 30, 2020 and 2019 were $0 and $566,000, with the Bank suspending its daily overdraft charges during the second quarter of 2020 to cushion the economic blow of the COVID-19 pandemic on its clients. The Bank expects to reinstitute the daily overdraft fee charge in the third quarter of 2020, with this expectation subject to changing pandemic-related circumstances.
Within the Mortgage Banking segment, mortgage banking income increased $6.0 million, or 248%, during the second quarter of 2020 compared to the same period in 2019. Falling mortgage rates during 2020 drove strong growth in the Company’s consumer refinance activity, particularly within the Company’s relatively new Consumer Direct channel. Overall, the Company originated $219 million of secondary market mortgage loans during the second quarter of 2020 compared to $82 million for the second quarter of 2019.
In addition to the strong mortgage banking origination volume during the second quarter of 2020, the Company’s gain recognized as a percent of total originations increased to 3.98% during the second quarter of 2020 from 2.71% during the same period in 2019. The stronger gain percentages resulted from favorable market conditions on pricing during the quarter. If and when consumer refinance volume begins to slow down in the future, management believes market conditions for pricing will become more competitive and return to a range of 2.0%-3.0%, which is more in-line with historical averages for gains-as-a-percentage-of-loans-sold.
TRS’s noninterest income decreased $86,000 during the second quarter of 2020 compared to the same period in 2019 resulting from a $716,000, or 20%, decrease in net RT revenue partially offset by a $568,000 increase in prepaid card program fees as a result of the Company’s May 1, 2020 acquisition of $250 million in prepaid card balances. RTs processed decreased 8% and revenue per RT decreased 1% from 2019 to 2020. As with the lag in payments from the U.S. Treasury related to EAs, management believes the COVID-19 pandemic also negatively impacted 2020 RT volume, particularly within the second quarter of 2020.
RCS’s noninterest income decreased $499,000, or 49%, during the second quarter of 2020 compared to the same period in 2019. As illustrated in Table 5 below, RCS program fees decreased $467,000 resulting primarily from a decline in outstanding line-of-credit balances as the Company reduced marketing for its installment loan product and its line-of-credit product in response to the COVID-19 pandemic.
The following table presents RCS program fees by product:
Table 5 — RCS Program Fees by Product
1,121
(592)
(117)
Installment loans*
193
(467)
(47)
The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees.
Noninterest Expense
Total Company noninterest expense increased $1.4 million, or 3%, during the second quarter of 2020 compared to the same period in 2019. The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Driven by pandemic-related influences primarily on Marketing, Interchange, and Travel & Entertainment expenses, Traditional Banking noninterest expense decreased $1.1 million, or 3%, for the second quarter of 2020 compared to the same period in 2019.
Noninterest expense at the Mortgage Banking segment increased, $1.3 million or 99%, during the second quarter of 2020 compared to the same period in 2019 primarily due to higher mortgage commissions recorded during 2020.
Income Tax Expense
The Total Company effective income tax rate was 19% for the second quarter of 2020 compared to 15% for the same period in 2019. The following drove the lower rate in 2019:
OVERVIEW (Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019)
Total Company net income for the first six months of 2020 was $42.5 million, a $5.0 million, or 11%, decrease from the same period in 2019. Diluted EPS decreased to $2.04 for the six months ended June 30, 2020 compared to $2.28 for the same period in 2019. Net income was down from the first six months of 2019, as it was significantly impacted by the increase in the Company’s estimated ACL in response to the potential impact of the COVID-19 pandemic.
92
RESULTS OF OPERATIONS (Six months Ended June 30, 2020 Compared to Six months Ended June 30, 2019)
Total Company net interest income decreased 1% during the first six months of 2020 compared to the same period in 2019. Total Company net interest margin decreased to 4.55% during the first six months of 2020 compared to 4.88% for the same period in 2019.
93
A large amount of the Company’s financial instruments track closely with or are primarily indexed to either the FFTR, Prime, or LIBOR. These market rates trended higher from December 2015 through December 2018 but began trending lower again during 2019 as the FOMC reduced the FFTR by 75 basis points during the year. The FOMC further lowered the FFTR 100 basis points during the first quarter of 2020 following market reactions to the COVID-19 pandemic. Consistent with decreases in market rates in the previous 12 month, the Total Company’s net interest spread and net interest margin compressed 20 basis points and 33 basis points, respectively, from the first six months of 2019 to the same period in 2020. The Company’s net interest spread, the difference between the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed primarily because the Company’s interest-bearing liabilities had less room to reprice downward than its interest-earning assets. The Company’s net interest margin compressed 13 basis points more than its net interest spread due to the reduction in benefit the Bank sees from noninterest-bearing funding in a falling rate environment. Management believes the Company’s net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice lower.
The Traditional Banking’s net interest income decreased $3.6 million, or 4%, for the first six months of 2020 compared to the same period in 2019. Traditional Banking’s net interest margin was 3.52% for the first six months of 2020, a decrease of 29 basis points from the same period in 2019.
The decrease in the Traditional Bank’s net interest income and net interest margin during the first six months of 2020 was primarily attributable to the following factors:
Net interest income increased $3.5 million, or 51%, for the first six months of 2020 compared to the same period in 2019.
Falling mortgage rates during 2020 drove a surge in consumer refinance volume for Warehouse clients resulting in a 39% increase in average Warehouse loans for the first six months of 2020 over the same period in 2019. Overall usage rates on Warehouse lines of credit were 63% for the first six months of 2020 compared to 48% for the first six months of 2019.
TRS’s net interest income increased $458,000 for the first six months of 2020 compared to the same period in 2019. TRS’s EA product earned $19.5 million in interest income during the first six months of 2020, a $416,000 increase resulting primarily from modifications to the product’s pricing tiers. EA pricing includes a direct fee to the taxpayer, with the annual percentage rate to the taxpayer for his or her portion of the total fee being less than 36% for all offering tiers.
RCS’s net interest income decreased $2.1 million, or 14%, from the first six months of 2019 to the first six months of 2020. The decrease was driven primarily by a decrease in fee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income decreased to $10.7 million during the first six months of 2020 compared to $12.8 million during the same period in 2019 and accounted for 79% and 80% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances, as the Company reduced marketing for the product in response to the COVID-19 pandemic.
Table 6 — Total Company Average Balance Sheets and Interest Rates
253,548
293,587
2.37
562,751
5,828
538,923
7,781
2.89
78,673
19,468
49.49
68,667
19,052
55.49
129,281
14,455
22.36
119,632
16,930
28.30
724,977
14,339
521,643
13,314
5.10
3,747,449
83,436
4.45
3,631,312
87,743
4.83
5,496,679
5.03
5,173,764
5.73
(62,157)
(54,588)
156,068
132,931
44,680
44,051
66,866
65,283
158,547
117,168
5,860,683
5,478,609
1,196,681
841
1,129,824
744,745
750,434
3,803
1.01
421,257
4,345
399,252
3,889
1.95
248,887
0.85
194,971
1,274
1.31
256,590
2,220
1.73
134,707
1,581
2.35
2,868,160
2,609,188
61,384
317,307
1.56
611,695
2.22
3.14
4.16
3,480,846
3,487,987
1.26
1,473,314
1,178,198
118,459
94,586
788,064
717,838
Total liabilities and stock-holders’ equity
4.27
4.47
Table 7 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 7 — Total Company Volume/Rate Variance Analysis
(2,753)
(419)
(2,334)
(1,953)
331
(2,284)
416
(1,927)
2,343
(2,475)
1,286
(3,761)
4,449
(3,424)
(4,307)
2,742
(7,049)
(10,047)
6,462
(16,509)
(2,263)
(2,437)
(2,313)
(29)
236
(519)
639
1,139
(500)
(615)
(4,322)
(2,666)
(1,656)
(211)
(8,745)
(855)
(7,890)
(1,302)
7,317
(8,619)
97
Total Company Provision was $29.3 million for the first six months of 2020 compared to $21.7 million for the same period in 2019.
The Traditional Banking Provision during the first six months of 2020 was $8.7 million, compared to $1.6 million for the first six months of 2019. An analysis of the Provision for the first six months of 2020 compared to the same period in 2019 follows:
Warehouse recorded a net charge to the Provision of $781,000 for the first six months of 2020 compared to a net charge of $642,000 for the same period in 2019. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $312 million during the first six months of 2020 compared to an increase of $257 million during the first six months of 2019.
TRS recorded a net charge to the Provision of $19.6 million during the first six months of 2020 compared to a net charge of $13.8 million for the same period in 2019. Substantially all TRS Provision in both periods was related to its EA product.
TRS’s Provision for EA loan losses was $19.5 million, or 5.04% of its $388 million in EAs originated during the first six months of 2020, compared to a Provision of $13.4 million, or 3.45% of its $389 million of EAs originated during the first six months of 2019. The higher net charges to the Provision during the first six months of 2020 resulted from EA repayment rates from the U.S. Treasury that significantly lagged those during the same period in 2019. Management believes the significant decline in repayment rates from the U.S. Treasury during 2020, particularly during the second quarter, was directly related to the impact of the current COVID-19 pandemic and the resulting delay in tax return processing by the IRS for certain types of tax returns that require further taxpayer communication and verification. While EA loss rates for 2020 could still finish more in-line with those from the prior year, management is uncertain if or when this turnaround could occur. As a result, the Company completely charged-off all remaining unpaid EAs as of June 30, 2020, in-line with its customary June 30th charge-off policy for EA loans. Any EA payments received after June 30, 2020 will be credited as a direct recovery to the Provision in the period it is received.
As illustrated in Table 8 below, RCS recorded a charge to the Provision of $263,000 during the first six months of 2020 compared to a charge to the Provision of $5.6 million for the same period in 2019. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS’s line-of-credit product, as the Company reduced marketing for RCS’s line-of-credit product in response to the COVID-19 pandemic.
The following table presents net charges to the RCS Provision by product:
Table 8 — RCS Provision by Product
Six Months Ended Jun. 30,
5,573
(5,320)
(95)
(5,344)
99
Table 9 — Summary of Loan and Lease Loss Experience
Adoption of ASC 326
(457)
(933)
267
(24,060)
(20,383)
1.03
0.94
0.01
Total Company noninterest income increased $6.8 million, or 16%, during the first six months of 2020 compared to the same period in 2019. The following were the most significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking’s noninterest income decreased $1.4 million, or 9%, for the first six months of 2020 compared to the same period in 2019. Service charges on deposit accounts decreased $1.3 million and interchange income decreased $577,000 from the first six months of 2019 to the same period in 2020. Both decreases largely reflect a change in client savings and spending patterns during the pandemic-driven economic restrictions. In general, during the second quarter of 2020, client spending decreased meaningfully from the second quarter of 2019, while client deposit balances increased, thus producing less overdraft activity and less interchange revenue for the Bank. Client spending patterns did return to more normalized levels in June 2020, however, management is uncertain at this time if this pattern will continue given the on-going spread of COVID-19 nationally.
The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the six months ended June 30, 2020 and 2019 were $2.7 million and $4.2 million. The total daily overdraft charges, net of refunds, included in interest income for the six months ended June 30, 2020 and 2019 were $417,000 and $1.1 million, with the Bank suspending its daily overdraft charges during the second quarter of 2020 to cushion the economic blow of the COVID-19 pandemic on its clients. The Bank expects to reinstitute the daily overdraft fee charge in the third quarter of 2020, with this expectation subject to changing pandemic-related circumstances.
The Bank recognized a $353,000 net gain on sale of one of its former banking centers during the first six months of 2020. The now-sold property is located in Tampa, Florida.
Within the Mortgage Banking segment, mortgage banking income increased $9.2 million, or 234%, during the first six months of 2020 compared to the same period in 2019. Falling mortgage rates during 2020 drove strong growth in the Company’s consumer refinance activity, particularly within the Company’s relatively new Consumer Direct channel. Overall, the Company originated $344 million of secondary market mortgage loans during the first six months of 2020 compared to $123 million for the first six months of 2019.
In addition to the strong mortgage banking origination volume during the first six months of 2020, the Company’s gain recognized as a percent of total originations increased to 3.93% during the first six months of 2020 from 2.83% during the same period in 2019. The stronger gain percentages resulted from favorable market conditions on pricing during the first six months of 2020. If and when consumer refinance volume begins to slow down in the future, management believes market conditions for pricing will become more competitive and return to a range of 2.0%-3.0%, which is more in-line with historical averages for gains-as-a-percentage-of-loans-sold.
TRS’s noninterest income decreased $1.3 million during the first six months of 2020 compared to the same period in 2019 resulting from a $2.0 million, or 10%, decrease in net RT revenue. RTs processed decreased 8% and revenue per RT decreased 1% from 2019 to 2020.
101
RCS’s noninterest income increased $258,000, or 10%, during the first six months of 2020 compared to the same period in 2019. As illustrated in Table 10 below, RCS program fees increased $917,000 resulting primarily from $1.4 million in fees from RCS’s new installment loan product launched in December 2019 partially offset by a $599,000 reduction in fees for RCS’s line-of-credit product. The Company reduced marketing for RCS’s installment loan product during 2020 in response to the COVID-19 pandemic.
Table 10 — RCS Program Fees by Product
2,047
(599)
(85)
(91)
1,376
917
Total Company noninterest expense increased $2.9 million, or 3%, during the first six months of 2020 compared to the same period in 2019. The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking noninterest expense increased $21,000 for the first six months of 2020 compared to the same period in 2019. The following primarily drove the change in noninterest expense:
Noninterest expense at the Mortgage Banking segment increased $2.0 million, or 75%, during the first six months of 2020 compared to the same period in 2019 primarily due to higher mortgage commissions recorded during 2020.
The Total Company effective income tax rate was 20% for the first six months of 2020 compared to 18% for the same period in 2019. The following drove the lower rate in 2019:
103
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2020 AND DECEMBER 31, 2019
Table 11 — Loan Portfolio Composition
(64,243)
19,290
(2,448)
427,491
(2,176)
(15)
(27,920)
(3,571)
(1,034)
(11,864)
10,470
339,892
312,321
652,213
(14,076)
(98)
(6,196)
(20,272)
631,941
(11,746)
620,195
***Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans increased by $632 million, or 14%, during the first six months of 2020 to $5.1 billion at June 30, 2020. The most significant components comprising the change in loans by reportable segment follow:
Period-end balances for Traditional Banking loans increased $340 million, or 9%, from December 31, 2019 to June 30, 2020. The following primarily drove the change in loan balances during the first six months of 2020:
Regarding the Company’s PPP loans, these loans have a stated maturity of two years, an annualized fixed coupon rate of 1.0% to the client, are 100% guaranteed by the SBA, and 100% forgivable to the client if certain program metrics are met. The Bank earns an origination fee of 1%, 3%, or 5% based on the size of the loan.
Republic carried $15 million in unaccreted PPP loan fees as of June 30, 2020, which it expects to accrete into income over the life of the loan. While no guarantee can be made as to the overall life of these loans, management believes the loans are likely to remain on the Company’s balance sheet less than one year, as it expects the substantial majority of its clients to request forgiveness for their loans at the earliest possible time, presuming these clients achieve the required program metrics.
Outstanding Warehouse period end balances increased $312 million from December 31, 2019 to June 30, 2020. A sharp decline in long-term fixed mortgage rates during the first six months of 2020 drove the increase in Warehouse balances. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 59% during 2019.
Outstanding TRS loans decreased $14 million from December 31, 2019 to June 30, 2020 primarily reflecting a $14 million reduction in other TRS loans. Other TRS loans at December 31, 2019 were primarily commercial loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first quarter of the following year.
Outstanding RCS loans decreased $6 million from December 31, 2019 to June 30, 2020 primarily reflecting a $10 million decrease in outstanding balances for RCS’s line-of-credit product partially offset by a $4 million increase in hospital receivables. As previously mentioned, the decrease in balances for RCS’s line-of-credit product was the direct result of a reduction in marketing for the product in response to the COVID-19 pandemic.
At June 30, 2020, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.
In accordance with the adoption of ASC 326 and CECL, the Company recorded on January 1, 2020 a $6.7 million, or 16%, increase in the ACLL for its loans, a $51,000 ACLS for its investment debt securities, and a $456,000 ACLC for its off-balance sheet credit exposures. Of the $6.7 million increase in ACLL, approximately $1.4 million was a gross-up reclassification of non-accretable discount on previously-PCI, now-PCD loans, and the remaining $5.3 million was a difference in ACL between CECL and the probable-incurred method. The Company also made a cumulative effect entry of $4.3 million to reduce its opening balance of retained earnings upon adoption of ASC 326, with no impact on 2020 earnings for these adoption entries. The adoption date increase in ACLL for the Company’s loans primarily reflects additional ACLL for longer duration loan portfolios, such as the Company's residential real estate and consumer loan portfolios. No additional segmentation of the Bank's loan portfolios was deemed necessary upon adoption.
The Company’s ACLL increased $12 million from $43 million at December 31, 2019 to $55 million at June 30, 2020. As a percent of total loans, the total Company’s ACLL increased to 1.09% at June 30, 2020 compared to 0.98% at December 31, 2019. An analysis of the ACL by reportable segment follows:
The Traditional Banking ACLL increased $15 million to $43 million at June 30, 2020, driven partially by the Company’s January 1, 2020 CECL adoption entry of approximately $7 million and partially by approximately $11 million of reserves for the expected impact of the COVID-19 pandemic. The pandemic is projected to increase the Traditional Bank’s losses in the near-term to loss levels consistent with unemployment levels above 8%. Offsetting the increase in the ACLL due to the pandemic was a reduction in the ACLL of approximately $2 million driven by a $170 million decrease in non-PPP Traditional Bank spot balances from January 1, 2020 to June 30, 2020. The Traditional Bank ACLL to total Traditional Bank loans increased 32 basis points to 1.10% when comparing June 30, 2020 to December 31, 2019.
Following the Company’s $51,000 ASC 326 adoption entry on January 1, 2020 establishing an ACLS for its debt securities, the Company increased its ACLS $222,000 during the first six months of 2020 to $273,000 based on higher PD and LGD expectations on its corporate bond portfolios. These higher PD and LGD expectations generally reflect economic concerns from the COVID-19 pandemic.
Following the Company’s ASC 326 adoption entry on January 1, 2020 for an ACLC on its off-balance sheet credit exposures of $456,000, the Company increased its ACLC $180,000 during the first six months of 2020 to $636,000 at June 30, 2020. The higher ACLC at June 30, 2020 reflects higher assumed loss rates on these exposures as they convert to outstanding balances over their expected lives. The ACLC is recorded on the liability side of the balance sheet, with any provision for loss recorded within other noninterest expense.
The Warehouse ACLL increased to approximately $2.6 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing June 30, 2020 to December 31, 2019. As of June 30, 2020, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first six months of 2020. Warehouse lines are generally short-term, sound quality facilities secured by marketable collateral; therefore, the Company made no adjustment to the Warehouse ACLL upon adoption of CECL. Additionally, the Company made no ACLL adjustment for Warehouse lines for COVID-19 concerns at June 30, 2020, as its Warehouse clients are experiencing relatively high demand for refinance transactions as borrowers take advantage of the low interest rate environment.
The RCS ACLL decreased $4 million to $9 million at June 30, 2020 from $13 million at December 31, 2019. The decrease in ACLL was driven by a $10 million decrease in outstanding balances for RCS’s line-of-credit product partially offset by a higher estimated loss rate on this product to account for COVID-19 economic concerns. As previously mentioned, the decrease in balances for RCS’s line-of-credit product was the direct result of a reduction in marketing for the product in response to the COVID-19 pandemic.
RCS maintained an ACLL for two distinct credit products offered at June 30, 2020, including its line-of-credit product and its healthcare-receivables product. At June 30, 2020, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables product to as high as 49% for its line-of-credit product. The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.
Asset Quality
Classified and Special Mention Loans
The Bank applies credit quality indicators, or “ratings,” to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard,” and PCI/PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCI/PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans decreased $3 million during the first six months of 2020 resulting primarily from the transfer of one $2 million CRE classified loan to OREO.
See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.
Table 12 — Classified and Special Mention Loans
30,804
(2,493)
PCI/PCD* - Substandard
1,998
709
Total Classified Loans
34,586
(1,784)
20,803
(951)
PCI/PCD* - Special Mention
956
Total Special Mention Loans
22,551
(792)
Total Classified and Special Mention Loans
54,561
57,137
(2,576)
The Bank’s PCI loans at December 31, 2019 were reclassified to PCD loans on January 1, 2020 in connection with the Company’s adoption of ASC 326. See Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements” for additional discussion regarding the Company’s adoption of ASC 326.
Nonperforming Loans
Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately $5 million and $10 million at June 30, 2020 and December 31, 2019.
Nonperforming loans to total loans decreased to 0.40% at June 30, 2020 from 0.53% at December 31, 2019, as the total balance of nonperforming loans decreased by $3 million, or 13%, while total loans increased $632 million, or 14%, during the first six months of 2020. The ultimate impact to the Company’s nonperforming loans related to the COVID-19 pandemic is currently unknown due to COVID-19-related loan accommodations the Bank made to businesses and consumers, including deferrals and forbearances. During the second quarter of 2020, the Bank entered into accommodations for loans totaling $793 million. These accommodations generally lasted for a term of three months.
Management expects a significant amount of these borrower accommodations to expire during the third quarter of 2020, at which time management expects the majority of these clients to continue repayment of their loans. When evaluating further borrower accommodations for borrowers needing additional relief, the Bank considers prudent accommodation options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by the CARES Act and states and localities; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s nonperforming loans would substantially increase and negatively impact the Company’s overall operating performance.
Table 13 — Nonperforming Loans and Nonperforming Assets Summary
Loans on nonaccrual status include collateral-dependent loans. See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans.
Table 14 — Nonperforming Loan Composition
Percent of
Loan Class
1.29
0.37
0.09
0.30
0.83
0.64
0.03
0.02
0.65
62.98
Table 15 — Stratification of Nonperforming Loans
Number of Nonperforming Loans and Recorded Investment
> $100 &
No.
<= $100
<= $500
> $500
5,482
4,717
3,907
334
540
837
906
204
6,683
8,000
5,201
7,218
5,005
4,525
2,690
6,211
1,070
6,121
6,744
10,467
228
6,278
Table 16 — Rollforward of Nonperforming Loans
Nonperforming loans at the beginning of the period
20,853
15,560
16,138
Loans added to nonperforming status during the period that remained nonperforming at the end of the period
3,069
6,575
4,658
7,680
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)
(2,981)
(2,119)
(7,898)
Principal balance paydowns of loans nonperforming at both period ends
(561)
(208)
(956)
Net change in principal balance of other loans nonperforming at both period ends*
Nonperforming loans at the end of the period
19,404
Includes relatively small consumer portfolios, e.g., RCS loans.
Table 17 — Detail of Loans Removed from Nonperforming Status
Loans charged off
(273)
(285)
(298)
Loans transferred to OREO
(2,109)
(980)
(1,036)
Loans refinanced at other institutions
(490)
(830)
(2,445)
(2,060)
Loans returned to accrual status
(109)
(3,342)
(84)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period
Based on the Bank’s review at June 30, 2020, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.
Total Company delinquent loans to total loans decreased to 0.28% at June 30, 2020, from 0.47% at December 31, 2019, primarily due to a $7 million, or 32%, decrease in delinquent loans and a $632 million, or 14%, increase in total loans during the first six months of 2020. The ultimate impact to the Company’s delinquent loans related to the COVID-19 pandemic is currently unknown due to COVID-19-related loan accommodations the Bank made to businesses and consumers, including deferrals and forbearances. During the second quarter of 2020, the Bank entered into accommodations for loans totaling $793 million. These accommodations generally lasted for a term of three months.
Management expects a significant amount of these borrower accommodations to expire during the third quarter of 2020, at which time management expects the majority of these clients to continue repayment of their loans. When evaluating further borrower accommodations for borrowers needing additional relief, the Bank considers prudent accommodation options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by the CARES Act and states and localities; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s delinquent loans would substantially increase and negatively impact the Company’s overall operating performance.
Core Bank delinquent loans to total Core Bank loans decreased to 0.16% at June 30, 2020 from 0.30% at December 31, 2019. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of June 30, 2020 and December 31, 2019 were on nonaccrual status.
111
Table 18 — Delinquent Loan Composition*
0.21
0.15
1.00
0.87
19.26
18.59
0.20
0.16
89.62
5.97
7.25
6.22
6.48
Total delinquent loans
* 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.
Table 19 — Rollforward of Delinquent Loans
Delinquent loans at the beginning of the period
42,627
34,187
15,962
Loans added to delinquency status during the period and remained in delinquency status at the end of the period
2,823
8,685
8,519
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below)
(29,901)
(22,991)
(7,513)
(4,661)
Principal balance paydowns of loans delinquent at both period ends
(1,394)
(2,189)
(293)
Net change in principal balance of other loans delinquent at both period ends*
(471)
(136)
(201)
Delinquent loans at the end of period
19,326
Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 20 — Detail of Loans Removed from Delinquent Status
(306)
(316)
Easy Advances paid-off or charged-off
(23,467)
(19,099)
(1,062)
(1,119)
(1,270)
(746)
(3,012)
(1,309)
Loans paid current
(3,053)
(1,778)
(2,390)
(1,917)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period
Collateral Dependent Loans and Troubled Debt Restructurings
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. The Bank’s policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected.
A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank’s TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan’s interest rate and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt.
Table 21 — Collateral-Dependent Loans and Troubled Debt Restructurings
Cashflow-dependent TDRs
12,575
14,348
Collateral-dependent TDRs
13,904
16,433
Total TDRs
Collateral dependent loans (which are not TDRs)
18,237
19,569
Total recorded investment in TDRs and collateral-dependent loans
44,716
See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans and TDRs.
COVID-19 Loan Accommodations
The ultimate impact to the Company’s nonperforming and delinquent loans related to the COVID-19 pandemic is currently unknown due to COVID-19-related loan accommodations the Bank made to businesses and consumers, including deferrals and forbearances. These accommodations generally lasted for a term of three months. During the second quarter of 2020, the Bank entered into COVID-19 loan accommodations for loans totaling $793 million.
Management expects a significant amount of these borrower accommodations to expire during the third quarter of 2020, at which time management expects the majority of these clients to continue repayment of their loans. When evaluating further borrower accommodations for borrowers needing additional relief, the Bank considers prudent accommodation options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by the CARES Act and states and localities; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s nonperforming and delinquent loans would substantially increase and negatively impact the Company’s overall operating performance. The following table presents the balances of loans in COVID-19 accommodations, the balance of PPP loans, and the remainder of the Traditional Bank’s loan portfolio by loan class as of June 30, 2020:
Table 22 — COVID-19 Accommodations, PPP Loans, and Other Traditional Bank Loans
As of June 30, 2020, 80% of the Traditional Banking segment’s loans under COVID-19 accommodations were either within the CRE or C&I categories. Table 23 below presents CRE and C&I COVID-19 accommodations by industry as of June 30, 2020:
Table 23 — Traditional Bank Commercial Real Estate and Commercial & Industrial Loans under COVID-19 Accommodations by Industry
Total CRE & C&I
% Concentration
Industry:
Lessors of Nonresidential Buildings (except Miniwarehouses)
184,087
Hotels (except Casino Hotels) and Motels
66,969
Lessors of Residential Buildings and Dwellings
55,835
Limited-Service Restaurants
45,155
Full-Service Restaurants
38,947
Offices of Physicians (except Mental Health Specialists)
37,957
Fitness and Recreational Sports Centers
29,199
Offices of Dentists
14,122
Religious Organizations
11,909
Sports Teams and Clubs
Car Washes
9,951
General Freight Trucking, Long-Distance, Truckload
6,606
Golf Courses and Country Clubs
6,570
Public Relations Agencies
5,757
General Freight Trucking, Local
5,189
All other industries
103,137
Total CRE and C&I
633,034
Table 24 — Deposit Composition
201,349
(45,118)
32,141
167
0
7,313
10,723
100,667
199,928
507,170
450,702
957,872
(63,114)
247,575
89,744
337,319
274,205
Total Company deposits increased $1.2 billion, or 33%, from December 31, 2019 to $5.0 billion at June 30, 2020.
Total Company noninterest-bearing deposits increased $788 million, or 76%, with the following primarily driving growth:
Total Company interest-bearing deposits increased approximately $444 million for the first six months of 2020, with the following primarily driving growth:
Federal Reserve Paycheck Protection Program Lending Facility
The Bank began participating in the Federal Reserve’s PPPLF on April 24, 2020, with $169 million of borrowings outstanding through this program as of June 30, 2020. Under the PPPLF program, the Bank can fully fund its PPP loans on a dollar-for-dollar basis at a borrowing rate of 0.35%, with the Bank’s PPP loans serving as collateral for its PPPLF borrowings. PPPLF borrowings mature as the underlying PPP loans mature, generally within two to five years. Through June 30, 2020, the Bank chose not to fully fund its PPP loans through the PPPLF since a significant portion of the Bank’s PPP loan clients retained their PPP funds within their deposit accounts at the Bank. Management is currently uncertain of the Bank’s level of PPPLF usage for the remainder of the year.
Federal Home Loan Bank Advances
As the overall increase in deposits outpaced the overall increase in interest-earning assets for the first six months of 2020, FHLB advances declined by $613 million from December 31, 2019 to June 30, 2020. The Bank held no overnight advances at June 30, 2020, compared to $200 million in overnight advances at a rate of 1.63% at December 31, 2019. The usage of overnight FHLB advances is expected to continue to fluctuate based on the overall usage rates for the Bank’s warehouse lines of credit, which are also tied to short-term repricing indices, as well as current favorable deposit gathering trends.
The Bank currently borrows from the FHLB substantially on an overnight or short-term basis due to its current interest rate risk position. The overall use and types of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. Because of the Bank’s current interest rate position, management expects the Company will continue to predominately borrow on an overnight or short-term basis from the FHLB. If a meaningful amount of the Bank’s loan originations in the future have repricing terms longer than five years, management could elect to borrow additional longer-term funds from the FHLB to mitigate its risk of future increases in market interest rates. Whether the Bank ultimately does so, and how much in advances it extends out, will be dependent upon circumstances at that time.
Interest Rate Swaps
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.
The Bank also enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 “Interest Rate Swaps” of Part I Item 1 “Financial Statements” for additional discussion regarding the Bank’s interest rate swaps.
Liquidity
The Bank had a loan to deposit ratio (excluding brokered deposits) of 110% at June 30, 2020 and 126% at December 31, 2019. At June 30, 2020 and December 31, 2019, the Company had cash and cash equivalents on-hand of $560 million and $385 million. The Bank also had available borrowing capacity of $814 million and $259 million from the FHLB at June 30, 2020 and December 31, 2019. In addition, the Bank’s liquidity resources included unencumbered debt securities of $283 million and $304 million as of June
30, 2020 and December 31, 2019 and unsecured lines of credit of $125 million available through various other financial institutions as of the same period-ends.
The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage backed securities and proceeds realized from loans held for sale. The Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. At June 30, 2020 and December 31, 2019, these pledged investment securities had a fair value of $260 million and $230 million. Republic’s banking centers and its websites, www.republicbank.com and www.mymemorybank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.
At June 30, 2020, the Bank had approximately $1.4 billion in deposits from 226 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $631 million, or 13%, of the Company’s total deposit balances at June 30, 2020. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.
Due to its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached and, periodically during each quarter, has fallen short of its Board-approved minimum internal policy limits for liquidity management. Most recently, the Bank has experienced a significant increase in its outstanding Warehouse line-of-credit balances. Because management deems this increase in Warehouse balances to not be long-term in nature and the Bank is asset sensitive for its interest rate risk position, it has elected to utilize overnight borrowings from the FHLB in order to fund these outstanding balances. While the Bank was in compliance with all Board-approved liquidity policies as of June 30, 2020, it was not always within policy parameters for each day of the quarter. The Bank will likely continue to maintain its liquidity levels near the Bank’s Board-approved minimums for the foreseeable future and will also likely utilize much of its FHLB borrowing capacity or short-term brokered deposits to fund the current spike in Warehouse balances.
In addition to its typical operations which impacts liquidity, the COVID-19 pandemic could create both substantially positive and negative impacts to the Bank’s liquidity over the short-term and long-term. The overall impact to Bank’s liquidity over the long-term will likely depend heavily on the length and breadth of the economy’s shut-down.
A near-term positive to the Bank’s liquidity is the apparent flight to safety by its clients and the increase in the Bank’s deposit balances. Management is uncertain as to how long these deposit balances might stay in the Bank, however, as a protracted shut-down of the economy could put a financial strain on the Banks’ clients requiring them to drawdown their deposit funds in order to meet their own liquidity demands.
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Total stockholders’ equity increased from $764 million at December 31, 2019 to $796 million at June 30, 2020. The increase in stockholders’ equity was primarily attributable to net income earned during 2019 reduced by cash dividends declared.
See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” for additional detail regarding stock repurchases and stock buyback programs.
Common Stock — The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.
Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At June 30, 2020, RB&T could, without prior approval, declare dividends of approximately $155 million.
Regulatory Capital Requirements — The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.
Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 10.0% Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, the Company and Bank must hold a capital conservation buffer of 2.5% composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements.
Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based Capital, Tier I Risk Based Capital and Tier I Leverage Capital. Republic and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the Capital Conservation Buffer. Republic’s average stockholders’ equity to average assets ratio was 13.45% at June 30, 2020 compared to 13.16% at December 31, 2019. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. The sole asset of RBCT represents the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. The RBCT TPS are treated as part of Republic’s Tier I Capital.
The subordinated note and related interest expense are included in Republic’s consolidated financial statements. The subordinated note paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to 3-month LIBOR plus 1.42% on a quarterly basis thereafter. The subordinated note matures on December 31, 2035 and is redeemable at the Company’s option on a quarterly basis. The Company chose not to redeem the subordinated note on July 1, 2020 and is currently carrying the note at a cost of LIBOR plus 1.42%.
Table 25 — Capital Ratios (1)
As of December 31, 2019
Ratio
Total capital to risk-weighted assets
864,422
17.37
825,987
17.01
754,493
15.18
723,248
14.91
Common equity tier 1 capital to risk-weighted assets
777,068
15.62
742,636
15.29
707,139
14.22
679,897
14.01
Tier 1 (core) capital to risk-weighted assets
817,068
16.42
782,636
16.11
Tier 1 leverage capital to average assets
14.89
13.93
11.90
12.11
Asset/Liability Management and Market Risk
Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards and achieve acceptable net interest income based on the Bank’s risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank’s overall earnings and balance sheet.
The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances and other factors.
The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank’s deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.
As of June 30, 2020, a dynamic simulation model was run for interest rate changes from “Down 100” basis points to “Up 400” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning July 1, 2020 and ending June 30, 2021 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.
Table 26 — Bank Interest Rate Sensitivity
Change in Rates
+100
+200
+300
+400
Basis Points
% Change from base net interest income at June 30, 2020
(0.1)
(4.9)
(8.0)
(9.5)
(7.8)
% Change from base net interest income at December 31, 2019
(4.3)
0.9
1.6
1.9
2.5
The Bank’s dynamic simulation model run for June 2020 projected a decrease in the Bank’s net interest income plus secondary market loan fees for all down-rate and Up-rate scenarios, while the projections as of December 2019 reflected a decrease in the Down-100 scenario and an increase in all Up-rate scenarios. As compared to December 2019, the deterioration in the Up-rate scenarios for June 2020 was generally due to the impact of an expected reduction in secondary market loan fees in a rising rate environment. The improvement in the Down-100 scenario primarily related to the number of loans that have reached or are expected to reach their interest rate floors, and therefore not subject to further rate reductions.
The Company’s interest rate risk projections generally assume parallel shifts in the yield curve across all points on the yield curve. A flattening or inverting of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease or invert, would likely have a further negative impact on the Company’s net interest income and net interest margin. Under any interest rate scenario, however, if the Core Bank is unable to reasonably maintain its deposit balances and the cost of those deposits at acceptable levels, it will likely have a negative impact to the Core Bank’s net interest income and net interest margin.
120
For additional discussion regarding the Bank’s net interest income, see the sections titled “Net Interest Income” in this section of the filing under “RESULTS OF OPERATIONS (Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019)” and RESULTS OF OPERATIONS (Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019).”
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
Information required by this item is included under Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4.Controls and Procedures.
As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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 the Company’s risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. You should carefully consider the risk factor discussed below and in Republic’s 2019 Form 10-K, which could materially affect its business, financial condition or future results.
The COVID-19 pandemic and the public’s response to this pandemic present unique risks to the Company’s operations and the markets it serves. The Company’s operations and the markets it serves have been and will continue to be significantly impacted by the COVID-19 pandemic and the public’s response to this pandemic. The following are relevant to the Company and its operations:
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Details of Republic’s Class A Common Stock purchases during the second quarter of 2020 are included in the following table:
Total Number of
Maximum Number
Shares Purchased
of Shares that May
as Part of Publicly
Yet Be Purchased
Average Price
Announced Plans
Under the Plan
Period
Paid Per Share
or Programs
April 1 - April 30
May 1 - May 31
June 1 - June 30
87,423
The Company repurchased no shares during the second quarter of 2020. In connection with employee stock awards, there were 272 shares withheld upon vesting of stock grants to cover withholding taxes and 1,432 shares withheld upon exercise of stock options to cover withholding taxes and the exercise price. During 2011, the Company’s Board of Directors amended its existing share repurchase program by approving the repurchase of 300,000 additional shares from time to time, as market conditions are deemed attractive to the Company. The repurchase program will remain effective until the total number of shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of June 30, 2020, the Company had 87,423 shares that could be repurchased under its current share repurchase programs.
During the second quarter of 2020, there were no shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock by stockholders of Republic in accordance with the share-for-share conversion option of the Class B Common Stock. The exemption from registration of newly issued Class A Common Stock relies upon Section (3)(a)(9) of the Securities Act of 1933.
There were no equity securities of the registrant sold without registration during the quarter covered by this report.
Item 6.Exhibits.
The following exhibits are filed or furnished as a part of this report:
Exhibit Number
Description of Exhibit
10.1
Master Office Lease between Republic Bank & Trust Company and Makbe LLC, dated August 1, 2020, relating to property at 601 West Market Street
31.1
Certification of Principal Executive Officer pursuant to the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002
32*
Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following financial statements from the Company’s quarterly report on form 10-Q were formatted in iXBRL(Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019, (iii) Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 and (v) Notes to Consolidated Financial Statements
Cover Page Interactive Data File formatted in iXBRL and contained in Exhibit 101.
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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.
(Registrant)
Principal Executive Officer:
Date: August 7, 2020
/s/ Steven E. Trager
By: Steven E. Trager
Chairman and Chief Executive Officer
Principal Financial Officer:
/s/ Kevin Sipes
By: Kevin Sipes
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer