Republic Bank - 10-Q quarterly report FY2019 Q2

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, 2019

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, 2019, was 18,739,086 and 2,207,626.

Table of Contents

TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements.	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	68

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	110

Item 4.	Controls and Procedures.	110

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings.	110

Item 1A.	Risk Factors.	110

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	111

Item 6.	Exhibits.	112

	SIGNATURES	113

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS

The acronyms and terms identified in alphabetical order below are used throughout this Form 10-Q. You may find it helpful to refer to this page as you read this report.


Acronym or Term	Definition	Acronym or Term	Definition	Acronym or Term	Definition

ACH	Automated Clearing House	FASB	Financial Accounting Standards Board	PCI-1	PCI - Group 1
AFS	Available for Sale	FDIA	Federal Deposit Insurance Act	PCI-Sub	PCI - Substandard
Allowance	Allowance for Loan and Lease Losses	FDIC	Federal Deposit Insurance Corporation	Prime	The Wall Street Journal Prime Interest Rate
AOCI	Accumulated Other Comprehensive Income	FFTR	Federal Funds Target Rate	Provision	Provision for Loan and Lease Losses
APR	Annual Percentage Rate	FHLB	Federal Home Loan Bank	PSU	Performance Stock Unit
ASC	Accounting Standards Codification	FHLMC	Federal Home Loan Mortgage Corporation	R&D	Research and Development
ASU	Accounting Standards Update	FICO	Fair Isaac Corporation	RB&T / the Bank	Republic Bank & Trust Company
Basic EPS	Basic earnings per Class A Common Share	FNMA	Federal National Mortgage Association	RBCT	Republic Bancorp Capital Trust
BOLI	Bank Owned Life Insurance	FRB	Federal Reserve Bank	RCS	Republic Credit Solutions
BPO	Brokered Price Opinion	FTE	Full Time Equivalent	Republic / the Company	Republic Bancorp, Inc.
C&D	Construction and Development	GAAP	Generally Accepted Accounting Principles in the United States	ROA	Return on Average Assets
C&I	Commercial and Industrial	HELOC	Home Equity Line of Credit	ROE	Return on Average Equity
CECL	Current Expected Credit Loss	HTM	Held to Maturity	RPG	Republic Processing Group
CMO	Collateralized Mortgage Obligation	IRS	Internal Revenue Service	RPS	Republic Payment Solutions
Core Bank	The Traditional Banking, Warehouse Lending, and Mortgage Banking reportable segments	LIBOR	London Interbank Offered Rate	RT	Refund Transfer
CRA	Community Reinvestment Act	LPO	Loan Production Office	SEC	Securities and Exchange Commission
CRE	Commercial Real Estate	LTV	Loan to Value	SSUAR	Securities Sold Under Agreements to Repurchase
Diluted EPS	Diluted earnings per Class A Common Share	MBS	Mortgage Backed Securities	SVP	Senior Vice President
DTA	Deferred Tax Assets	MSRs	Mortgage Servicing Rights	TCJA	2017 Tax Cuts and Jobs Act
DTL	Deferred Tax Liabilities	NA	Not Applicable	TDR	Troubled Debt Restructuring
EA	Easy Advance	NM	Not Meaningful	The Captive	Republic Insurance Services, Inc.
EBITDA	Earnings Before Interest, Taxes, Depreciation and Amortization	OCI	Other Comprehensive Income	TPS	Trust Preferred Securities
EFTA	Electronic Fund Transfers Act	OREO	Other Real Estate Owned	TRS	Tax Refund Solutions
ESPP	Employee Stock Purchase Plan	OTTI	Other than Temporary Impairment	TRUP	TPS Investment
EVP	Executive Vice President	PCI	Purchased Credit Impaired	Warehouse	Warehouse Lending

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)


	June 30,		December 31,
	2019		2018
ASSETS

Cash and cash equivalents	$	473,779	$	351,474
Available-for-sale debt securities		380,356		475,738
Held-to-maturity debt securities (fair value of $64,433 in 2019 and $64,858 in 2018)		63,902		65,227
Equity securities with readily determinable fair value		3,254		2,806
Mortgage loans held for sale, at fair value		13,883		8,971
Reverse mortgage loans held for sale, at the lower of cost or fair value		12,457		—
Consumer loans held for sale, at the lower of cost or fair value		37,609		12,838
Loans held for sale in connection with sale of banking centers, at the lower of cost or fair value		111,745		—
Loans (loans carried at fair value of $1,369 in 2019 and $1,922 in 2018)		4,410,669		4,148,227
Allowance for loan and lease losses		(45,983)		(44,675)
Loans, net		4,364,686		4,103,552
Federal Home Loan Bank stock, at cost		32,242		32,067
Premises and equipment, net		42,647		43,126
Premises, held for sale		1,552		1,694
Right-of-use assets		37,450		—
Goodwill		16,300		16,300
Other real estate owned		1,095		160
Bank owned life insurance		65,642		64,883
Other assets and accrued interest receivable		64,535		61,568

TOTAL ASSETS	$	5,723,134	$	5,240,404

LIABILITIES

Deposits:
Noninterest-bearing	$	1,003,793	$	1,003,969
Interest-bearing		2,557,127		2,452,176
Deposits held for assumption in connection with sale of banking centers		152,954		—
Total deposits		3,713,874		3,456,145

Securities sold under agreements to repurchase and other short-term borrowings		226,002		182,990
Operating lease liabilities		38,852		—
Federal Home Loan Bank advances		915,000		810,000
Subordinated note		41,240		41,240
Other liabilities and accrued interest payable		56,738		60,095

Total liabilities		4,991,706		4,550,470

Commitments and contingent liabilities (Footnote 9)		—		—

STOCKHOLDERS’ EQUITY

Preferred stock, no par value		—		—
Class A Common Stock and Class B Common Stock, no par value		4,907		4,900
Additional paid in capital		141,525		141,018
Retained earnings		581,734		545,013
Accumulated other comprehensive income (loss)		3,262		(997)

Total stockholders’ equity		731,428		689,934

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,723,134	$	5,240,404

See accompanying footnotes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
INTEREST INCOME:

Loans, including fees	$	60,211	$	53,944	$	137,039	$	123,571
Taxable investment securities		3,284		2,708		6,875		5,342
Federal Home Loan Bank stock and other		2,169		1,704		4,383		3,276
Total interest income		65,664		58,356		148,297		132,189

INTEREST EXPENSE:

Deposits		6,903		3,934		13,651		7,294
Securities sold under agreements to repurchase and other short-term borrowings		330		222		751		435
Federal Home Loan Bank advances		4,062		2,723		6,792		4,997
Subordinated note		423		393		858		714
Total interest expense		11,718		7,272		22,052		13,440

NET INTEREST INCOME		53,946		51,084		126,245		118,749

Provision for loan and lease losses		4,460		4,932		21,691		22,187

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		49,486		46,152		104,554		96,562

NONINTEREST INCOME:

Service charges on deposit accounts		3,598		3,574		6,901		7,129
Net refund transfer fees		3,629		3,473		20,729		19,825
Mortgage banking income		2,416		1,316		3,955		2,336
Interchange fee income		3,257		2,891		6,014		5,558
Program fees		1,037		1,323		2,111		3,019
Increase in cash surrender value of bank owned life insurance		377		379		759		750
Net gains on other real estate owned		90		320		220		452
Other		721		1,020		1,853		2,772
Total noninterest income		15,125		14,296		42,542		41,841

NONINTEREST EXPENSE:

Salaries and employee benefits		25,286		22,766		50,362		46,600
Occupancy and equipment, net		6,472		6,391		13,056		12,612
Communication and transportation		1,071		1,241		2,232		2,623
Marketing and development		1,278		1,283		2,380		2,199
FDIC insurance expense		295		345		743		870
Bank franchise tax expense		935		860		3,431		3,378
Data processing		2,217		2,443		4,313		4,829
Interchange related expense		1,302		1,098		2,617		2,105
Supplies		582		303		1,066		684
Other real estate owned and other repossession expense		148		16		194		61
Legal and professional fees		844		728		1,730		1,771
Other		2,998		3,158		6,813		5,945
Total noninterest expense		43,428		40,632		88,937		83,677

INCOME BEFORE INCOME TAX EXPENSE		21,183		19,816		58,159		54,726
INCOME TAX EXPENSE		3,176		4,150		10,636		11,591

NET INCOME	$	18,007	$	15,666	$	47,523	$	43,135

BASIC EARNINGS PER SHARE:
Class A Common Stock	$	0.86	$	0.75	$	2.29	$	2.08
Class B Common Stock		0.79		0.68		2.08		1.89

DILUTED EARNINGS PER SHARE:
Class A Common Stock	$	0.86	$	0.74	$	2.28	$	2.06
Class B Common Stock		0.78		0.68		2.07		1.88

See accompanying footnotes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018

Net income	$	18,007	$	15,666	$	47,523	$	43,135

OTHER COMPREHENSIVE INCOME

Change in fair value of derivatives used for cash flow hedges		(146)		77		(215)		276
Reclassification amount for net derivative losses realized in income		(13)		9		(32)		35
Change in unrealized (loss) gain on AFS debt securities		2,014		(546)		5,673		(2,663)
Adjustment for adoption of ASU 2016-01		—		—		—		(428)
Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings		(1)		(15)		(34)		(17)
Total other comprehensive income (loss) before income tax		1,854		(475)		5,392		(2,797)
Tax effect		(389)		99		(1,133)		588
Total other comprehensive income (loss), net of tax		1,465		(376)		4,259		(2,209)

COMPREHENSIVE INCOME	$	19,472	$	15,290	$	51,782	$	40,926

See accompanying footnotes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)


	Three Months Ended June 30, 2019

	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands)	Outstanding	Outstanding	Amount		Capital		Earnings		Income (Loss)		Equity

Balance, April 1, 2019	18,698	2,213	$	4,899	$	141,206	$	569,189	$	1,797	$	717,091

Net income	—	—		—		—		18,007		—		18,007
Net change in accumulated other comprehensive income	—	—		—		—		—		1,465		1,465
Dividends declared on Common Stock:
Class A Shares ($0.264 per share)	—	—		—		—		(4,932)		—		(4,932)
Class B Shares ($0.240 per share)	—	—		—		—		(530)		—		(530)
Stock options exercised, net of shares redeemed	34	—		8		(110)		—		—		(102)
Conversion of Class B to Class A Common Shares	5	(5)		—		—		—		—		—
Net change in notes receivable on Class A Common Stock	—	—		—		(158)		—		—		(158)
Deferred compensation - Class A Common Stock:
Directors	—	—		—		41		—		—		41
Designated key employees	—	—		—		58		—		—		58
Employee stock purchase plan - Class A Common Stock	2	—		—		114		—		—		114
Stock-based awards - Class A Common Stock:
Performance stock units	—	—		—		—		—		—		—
Restricted stock	1	—		—		295		—		—		295
Stock options	—	—		—		79		—		—		79

Balance, June 30, 2019	18,740	2,208	$	4,907	$	141,525	$	581,734	$	3,262	$	731,428


	Three Months Ended June 30, 2018

	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands)	Outstanding	Outstanding	Amount		Capital		Earnings		Income		Equity

Balance, April 1, 2018	18,645	2,243	$	4,902	$	139,646	$	510,123	$	(1,417)	$	653,254

Net income	—	—		—		—		15,666		—		15,666
Net change in accumulated other comprehensive income	—	—		—		—		—		(376)		(376)
Dividends declared Common Stock:
Class A Shares ($0.242 per share)	—	—		—		—		(4,518)		—		(4,518)
Class B Shares ($0.220 per share)	—	—		—		—		(487)		—		(487)
Stock options exercised, net of shares redeemed	2	—		—		48		—		—		48
Conversion of Class B to Class A Common Shares	28	(28)		—		—		—		—		—
Net change in notes receivable on Class A Common Stock	—	—		—		36		—		—		36
Deferred director compensation expense - Class A Common Stock	2	—		1		47		—		—		48
Stock-based awards - Class A Common Stock:
Performance stock units	—	—		—		27		—		—		27
Restricted stock	—	—		—		254		—		—		254
Stock options	—	—		—		56		—		—		56

Balance, June 30, 2018	18,677	2,215	$	4,903	$	140,114	$	520,784	$	(1,793)	$	664,008

See accompanying footnotes to consolidated financial statements.

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	Six Months Ended June 30, 2019

	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands)	Outstanding	Outstanding	Amount		Capital		Earnings		Income (Loss)		Equity

Balance, January 1, 2019	18,675	2,213	$	4,900	$	141,018	$	545,013	$	(997)	$	689,934

Adjustment for adoption of ASU 2016-02	—	—		—		—		126		—		126
Net income	—	—		—		—		47,523		—		47,523
Net change in accumulated other comprehensive income	—	—		—		—		—		4,259		4,259
Dividends declared on Common Stock:
Class A Shares ($0.528 per share)	—	—		—		—		(9,865)		—		(9,865)
Class B Shares ($0.480 per share)	—	—		—		—		(1,061)		—		(1,061)
Stock options exercised, net of shares redeemed	34	—		8		(110)		—		—		(102)
Conversion of Class B to Class A Common Shares	5	(5)		—		—		—		—		—
Repurchase of Class A Common Stock	(8)	—		(1)		(376)		(2)		—		(379)
Net change in notes receivable on Class A Common Stock	—	—		—		(192)		—		—		(192)
Deferred compensation - Class A Common Stock:
Directors	5	—		—		106		—		—		106
Designated key employees	—	—		—		226		—		—		226
Employee stock purchase plan - Class A Common Stock	5	—		—		235		—		—		235
Stock-based awards - Class A Common Stock:
Performance stock units	23	—		—		(57)		—		—		(57)
Restricted stock	1	—		—		475		—		—		475
Stock options	—	—		—		200		—		—		200

Balance, June 30, 2019	18,740	2,208	$	4,907	$	141,525	$	581,734	$	3,262	$	731,428


	Six Months Ended June 30, 2018

	Common Stock								Accumulated
	Class A	Class B			Additional				Other		Total
	Shares	Shares			Paid In		Retained		Comprehensive		Stockholders’
(in thousands)	Outstanding	Outstanding	Amount		Capital		Earnings		Income		Equity

Balance, January 1, 2018	18,607	2,243	$	4,902	$	139,406	$	487,700	$	416	$	632,424

Adjustment for adoption of ASU 2016-01	—	—		—		—		(35)		(338)		(373)
Net income	—	—		—		—		43,135		—		43,135
Net change in accumulated other comprehensive income	—	—		—		—		—		(1,871)		(1,871)
Dividends declared Common Stock:
Class A Shares ($0.484 per share)	—	—		—		—		(9,035)		—		(9,035)
Class B Shares ($0.440 per share)	—	—		—		—		(981)		—		(981)
Stock options exercised, net of shares redeemed	2	—		—		48		—		—		48
Conversion of Class B to Class A Common Shares	28	(28)		—		—		—		—		—
Net change in notes receivable on Class A Common Stock	—	—		—		69		—		—		69
Deferred director compensation expense - Class A Common Stock	5	—		1		102		—		—		103
Stock-based awards - Class A Common Stock:
Performance stock units	—	—		—		53		—		—		53
Restricted stock	35	—		—		318		—		—		318
Stock options	—	—		—		118		—		—		118

Balance, June 30, 2018	18,677	2,215	$	4,903	$	140,114	$	520,784	$	(1,793)	$	664,008

See accompanying footnotes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Six Months Ended
	June 30,
	2019		2018
OPERATING ACTIVITIES:
Net income	$	47,523	$	43,135
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization on investment securities		(21)		(231)
Net accretion on loans and amortization of core deposit intangible and operating lease components		(1,833)		(1,863)
Unrealized (gains) losses on equity securities with readily determinable fair value		(448)		135
Depreciation of premises and equipment		4,572		4,998
Amortization of mortgage servicing rights		733		731
Provision for loan and lease losses		21,691		22,187
Net gain on sale of mortgage loans held for sale		(3,478)		(1,862)
Origination of mortgage loans held for sale		(122,696)		(84,124)
Proceeds from sale of mortgage loans held for sale		121,262		79,094
Net gain on sale of consumer loans held for sale		(2,618)		(2,836)
Origination of consumer loans held for sale		(346,413)		(373,409)
Proceeds from sale of consumer loans held for sale		324,260		371,552
Net gain realized on sale of other real estate owned		(220)		(452)
Impairment of premises held for sale		132		230
Deferred compensation expense - Class A Common Stock		332		103
Stock-based awards expense - Class A Common Stock		618		489
Increase in cash surrender value of bank owned life insurance		(759)		(750)
Net change in other assets and liabilities:
Accrued interest receivable		(774)		(476)
Accrued interest payable		491		(30)
Other assets		581		2,778
Other liabilities		(7,775)		3,574
Net cash provided by operating activities		35,160		62,973

INVESTING ACTIVITIES:
Purchases of available-for-sale debt securities		—		(99,026)
Purchases of held-to-maturity debt securities		—		(4,934)
Proceeds from calls, maturities and paydowns of available-for-sale debt securities		101,051		204,811
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities		1,315		2,400
Net change in outstanding warehouse lines of credit		(269,099)		(108,269)
Net change in other loans		(137,490)		(89,503)
Proceeds from redemption of Federal Home Loan Bank stock		2,102		—
Purchase of Federal Home Loan Bank stock		(2,277)		—
Proceeds from sales of other real estate owned		580		751
Net purchases of premises and equipment		(4,083)		(6,108)
Net cash used in investing activities		(307,901)		(99,878)

FINANCING ACTIVITIES:
Net change in deposits		257,729		40,211
Net change in securities sold under agreements to repurchase and other short-term borrowings		43,012		(28,730)
Payments of Federal Home Loan Bank advances		(565,000)		(377,500)
Proceeds from Federal Home Loan Bank advances		670,000		500,000
Repurchase of Class A Common Stock		(379)		—
Net proceeds from Class A Common Stock purchased through employee stock purchase plan		235		48
Net proceeds from Class A Common Stock options exercised		(102)		—
Cash dividends paid		(10,449)		(9,519)
Net cash provided by (used in) financing activities		395,046		124,510

NET CHANGE IN CASH AND CASH EQUIVALENTS		122,305		87,605
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		351,474		299,351
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	473,779	$	386,956

SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest	$	21,561	$	13,470
Income taxes		6,726		8,177

SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans	$	1,295	$	184
Transfers from loans held for sale to held for investment		—		2,237
Transfers from loans held for investment to held for sale		124,202		—
Unfunded commitments in low-income-housing investments		—		9,033
Right-of-use assets recorded upon adoption of ASU 2016-02		40,202		—

See accompanying footnotes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – JUNE 30, 2019 and 2018 AND DECEMBER 31, 2018 (UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Form 10-K for the year ended December 31, 2018.

As of June 30, 2019, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.

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Core Bank

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

Kentucky — 32

Metropolitan Louisville — 18

Central Kentucky — 9

Elizabethtown — 1*

Frankfort — 1*

Georgetown — 1

Lexington — 5

Shelbyville — 1

Western Kentucky — 2

Owensboro — 2*

Northern Kentucky — 3

Covington — 1

Crestview Hills — 1

Florence — 1

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 8**

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3**

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

** Includes an LPO

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

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

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

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

The Traditional Bank has acquired for investment single family, first lien mortgage loans that meet the Traditional Bank’s specifications through its Correspondent Lending channel. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium.

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

Mortgage Banking segment — Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.

Republic Processing Group

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

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

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

EA features consistent during 2018 and 2019:

·

Offered only during the first two months of each year;

·

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

·

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

·

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

·

If an insufficient refund to repay the EA occurs:

o

there is no recourse to the taxpayer,

o

no negative credit reporting on the taxpayer, and

o

no collection efforts against the taxpayer.

EA features modified from 2018 to 2019:

·

During 2019, the taxpayer was given the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250. This compares to a maximum loan amount of $3,500 during 2018; and

·

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

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The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with provisions for all probable EA losses made in the first quarter of each year. Unpaid EAs are charged off by June 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged off loans.

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

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

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

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

·

RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United States with certain services provided by Elevate Credit, Inc., its third-party servicer provider. RCS sells participation interests equal to 90% of the balances generated within three business days to a third-party special purpose entity and retains the remaining 10% interest. The line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale are carried at the lower of cost or fair value.

·

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

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

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

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Accounting Standards Updates Issued

The following ASUs were issued prior to June 30, 2019 and are considered relevant to the Company’s financial statements. Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to the Company has been disclosed in prior Company financial statements, it will not be re-disclosed below.


ASU. No.	Topic	Nature of Update	Date Adoption Required	Permitted Adoption Methods	Expected Financial Statement Impact
2016-13	Financial Instruments – Credit Losses (Topic 326)	This ASU amends guidance on reporting credit losses for assets held at amortized-cost basis and available-for-sale debt securities.	January 1, 2020	Modified-retrospective approach.	As a result of this ASU, the Company expects an as yet undetermined increase in its allowance for credit losses. A committee formed by the Company to oversee its transition to a current expected credit losses (“CECL”) methodology has analyzed the Company’s loan-level data and preliminarily concluded that no additional loan level segmentation beyond its current methodology segmentation would be warranted under CECL. The Company is also currently performing iterations of its allowance calculation under a “beta” CECL model provided by the same third-party software solution currently-employed to calculate the Company's allowance for loan and lease losses.

2019-04	Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement.	Based on areas amended.	Based on areas amended.	Immaterial

2019-05	Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	This ASU provides the fair value option for certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses.	January 1, 2020	Modified-retrospective approach.	The Company has this ASU under consideration.

Accounting Standards Updates Adopted

The following ASUs were adopted by the Company during the six months ended June 30, 2019:


ASU. No.	Topic	Nature of Update	Date Adopted	Method of Adoption	Financial Statement Impact
2016-02	Leases (Topic 842)	Most leases are considered operating leases, which are not accounted for on the lessees’ balance sheets. The significant change under this ASU is that those operating leases will be recorded on the balance sheet.	January 1, 2019	Modified-retrospective approach, which includes a number of optional practical expedients.	The Company adopted this ASU on January 1, 2019 and upon adoption recorded $40 million of right-of-use lease assets and $42 million of operating lease liabilities on its balance sheet. The adoption of this ASU did not have a meaningful impact on the Company's performance metrics, including regulatory capital ratios and return on average assets. Additionally, the Company does not believe that the adoption of this ASU by its clients will have a significant impact on the Company's ability to underwrite credit when client financial statements are presented inclusive of the requirements of this ASU. See Note 7 in this section of the filing regarding disclosures by the Company to comply with this ASU.

2018-10	Codification Improvements to Topic 842, Leases	This ASU affects narrow aspects of the guidance issued in the amendments in ASU 2016-02.	January 1, 2019	Adoption should conform to the adoption of ASU 2016-02 above.	See Note 7 in this section of the filing regarding disclosures by the Company to comply with this ASU.

2018-11	Leases (Topic 842): Targeted Improvements	This ASU provides the Company with an additional (and optional) transition method to adopt ASU 2016-02. This ASU also provides the Company with a practical expedient to not separate non-lease components from the associated lease component under certain circumstances.	January 1, 2019	Adoption should conform to the adoption of ASU 2016-02 above.	The Company elected the optional transition method permitted by this ASU, allowing the Company to adopt ASU 2016-02, effective January 1, 2019 with a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019.

2017-12	Derivatives and Hedging (Topic 815)	The amendments in this ASU make certain targeted improvements to simplify the application of hedge accounting.	January 1, 2019	Prospectively.	Immaterial

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2. INVESTMENT SECURITIES

Available-for-Sale Debt Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019 (in thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	139,608	$	20	$	(293)	$	139,335
Private label mortgage backed security		2,285		1,330		—		3,615
Mortgage backed securities - residential		151,504		2,911		(223)		154,192
Collateralized mortgage obligations		69,143		375		(139)		69,379
Corporate bonds		10,000		—		(165)		9,835
Trust preferred security		3,554		446		—		4,000
Total available-for-sale debt securities	$	376,094	$	5,082	$	(820)	$	380,356


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018 (in thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	218,502	$	25	$	(1,654)	$	216,873
Private label mortgage backed security		2,348		1,364		—		3,712
Mortgage backed securities - residential		168,992		1,470		(1,253)		169,209
Collateralized mortgage obligations		73,740		222		(1,151)		72,811
Corporate bonds		10,000		—		(942)		9,058
Trust preferred security		3,533		542		—		4,075
Total available-for-sale debt securities	$	477,115	$	3,623	$	(5,000)	$	475,738

Held-to-Maturity Debt Securities

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


			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
June 30, 2019 (in thousands)	Value		Gains		Losses		Value

Mortgage backed securities - residential	$	129	$	8	$	—	$	137
Collateralized mortgage obligations		18,232		116		(17)		18,331
Corporate bonds		45,079		441		(17)		45,503
Obligations of state and political subdivisions		462		—		—		462
Total held-to-maturity debt securities	$	63,902	$	565	$	(34)	$	64,433


			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
December 31, 2018 (in thousands)	Value		Gains		Losses		Value

Mortgage backed securities - residential	$	132	$	8	$	—	$	140
Collateralized mortgage obligations		19,544		178		(46)		19,676
Corporate bonds		45,088		16		(514)		44,590
Obligations of state and political subdivisions		463		—		(11)		452
Total held-to-maturity debt securities	$	65,227	$	202	$	(571)	$	64,858

Sales of Available-for-Sale Debt Securities

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

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Debt Securities by Contractual Maturity

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2019 follow. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.


	Available-for-Sale				Held-to-Maturity
	Debt Securities				Debt Securities
	Amortized		Fair		Carrying		Fair
June 30, 2019 (in thousands)	Cost		Value		Value		Value

Due in one year or less	$	77,383	$	77,167	$	5,075	$	5,103
Due from one year to five years		72,225		72,003		35,522		35,935
Due from five years to ten years		—		—		4,944		4,927
Due beyond ten years		3,554		4,000		—		—
Private label mortgage backed security		2,285		3,615		—		—
Mortgage backed securities - residential		151,504		154,192		129		137
Collateralized mortgage obligations		69,143		69,379		18,232		18,331
Total debt securities	$	376,094	$	380,356	$	63,902	$	64,433

Unrealized-Loss Analysis on Debt Securities

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


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
June 30, 2019 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	—	$	—	$	107,091	$	(293)	$	107,091	$	(293)
Mortgage backed securities - residential		—		—		39,033		(223)		39,033		(223)
Collateralized mortgage obligations		4,189		(5)		20,687		(134)		24,876		(139)
Corporate bonds		—		—		9,835		(165)		9,835		(165)
Total available-for-sale debt securities	$	4,189	$	(5)	$	176,646	$	(815)	$	180,835	$	(820)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2018 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	71,627	$	(598)	$	106,136	$	(1,056)	$	177,763	$	(1,654)
Mortgage backed securities - residential		43,691		(484)		32,003		(769)		75,694		(1,253)
Collateralized mortgage obligations		16,487		(473)		31,071		(678)		47,558		(1,151)
Corporate bonds		9,058		(942)		—		—		9,058		(942)
Total available-for-sale debt securities	$	140,863	$	(2,497)	$	169,210	$	(2,503)	$	310,073	$	(5,000)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
June 30, 2019 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Held-to-maturity debt securities:
Collateralized mortgage obligations	$	—	$	—	$	5,213	$	(17)	$	5,213	$	(17)
Corporate bonds		4,927		(17)		—		—		4,927		(17)
Total held-to-maturity debt securities:	$	4,927	$	(17)	$	5,213	$	(17)	$	10,140	$	(34)

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	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2018 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Held-to-maturity debt securities:
Collateralized mortgage obligations	$	—	$	—	$	5,539	$	(46)	$	5,539	$	(46)
Corporate bonds		39,499		(514)		—		—		39,499		(514)
Obligations of state and political subdivisions		105		(1)		347		(10)		452		(11)
Total held-to-maturity debt securities:	$	39,604	$	(515)	$	5,886	$	(56)	$	45,490	$	(571)

At June 30, 2019, the Bank’s security portfolio consisted of 168 securities, 37 of which were in an unrealized loss position.

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

At June 30, 2019 and December 31, 2018, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Corporate Bonds

From 2013 to 2018, the Bank purchased various floating-rate corporate bonds. These bonds were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 10% and 10% of the Bank’s investment portfolio as of June 30, 2019 and December 31, 2018. During 2018, one of these bonds was downgraded to BBB+ (S&P/Fitch), driving a significant decrease in the bond’s market value. As of June 30, 2019, this bond reflected an unrealized loss of $165,000. The Bank does not intend to sell this bond, and it is likely that it will not be required to sell this bond before the bond’s anticipated recovery, therefore, management does not consider this bond to have OTTI.

Mortgage Backed Securities and Collateralized Mortgage Obligations

At June 30, 2019, with the exception of the $3.6 million private label mortgage backed security, all other mortgage backed securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FHLMC and FNMA. At June 30, 2019 and December 31, 2018, there were gross unrealized losses of $362,000 and $2.4 million related to AFS mortgage backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to have OTTI.

Trust Preferred Security

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

Other-than-temporary impairment

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

Any rating changes by a rating agency; and

·

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

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

The Bank owns one private label mortgage backed security with a total carrying value of $3.6 million at June 30, 2019. This security is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

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

Pledged Debt Securities

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


(in thousands)	June 30, 2019		December 31, 2018

Carrying amount	$	274,545	$	240,590
Fair value		274,652		240,700

Equity Securities

The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2019 (in thousands)	Cost		Gains		Losses		Value

Freddie Mac preferred stock	$	—	$	787	$	—	$	787
Community Reinvestment Act mutual fund		2,500		—		(33)		2,467
Total equity securities with readily determinable fair values	$	2,500	$	787	$	(33)	$	3,254


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2018 (in thousands)	Cost		Gains		Losses		Value

Freddie Mac preferred stock	$	—	$	410	$	—	$	410
Community Reinvestment Act mutual fund		2,500		—		(104)		2,396
Total equity securities with readily determinable fair values	$	2,500	$	410	$	(104)	$	2,806

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For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:


	Gains (Losses) Recognized on Equity Securities
	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total

Freddie Mac preferred stock	$	—	$	126	$	126	$	—	$	60	$	60
Community Reinvestment Act mutual fund		—		33		33		—		(14)		(14)
Total equity securities with readily determinable fair value	$	—	$	159	$	159	$	—	$	46	$	46


	Gains (Losses) Recognized on Equity Securities
	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total

Freddie Mac preferred stock	$	—	$	378	$	378	$	—	$	(84)	$	(84)
Community Reinvestment Act mutual fund		—		70		70		—		(51)		(51)
Total equity securities with readily determinable fair value	$	—	$	448	$	448	$	—	$	(135)	$	(135)

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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. Additionally, as described below, the Company took possession of a portfolio of reverse mortgages during the second quarter of 2019 and sold this portfolio in July 2019.

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.

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

During the second quarter of 2019, the Company reached an agreement with one of its Warehouse clients to take possession of certain first lien, residential reverse mortgage loans as payment for the approximate $12 million outstanding on the client’s Warehouse facility with the Bank. The Bank took possession of these loans as payment on the Warehouse facility after the client informed the Bank of its intent to close its business operations. These loans were sold by the Company in July 2019 at a loss of approximately $200,000.

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

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

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Balance, beginning of period	$	12,864	$	7,380	$	12,838	$	8,551
Origination of consumer loans held for sale		200,327		198,903		346,413		356,424
Proceeds from the sale of consumer loans held for sale		(176,759)		(194,263)		(324,260)		(354,529)
Net gain on sale of consumer loans held for sale		1,177		1,664		2,618		3,238
Balance, end of period	$	37,609	$	13,684	$	37,609	$	13,684

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

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

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4. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of the loan portfolio follows:


(in thousands)	June 30, 2019		December 31, 2018

Traditional Banking:
Residential real estate:
Owner occupied	$	907,826	$	907,005
Owner occupied - correspondent*		78,943		94,827
Nonowner occupied		259,166		242,846
Commercial real estate		1,253,868		1,248,940
Construction & land development		190,984		175,178
Commercial & industrial		447,295		430,355
Lease financing receivables		17,271		15,031
Home equity		296,834		332,548
Consumer:
Credit cards		17,429		19,095
Overdrafts		894		1,102
Automobile loans		63,553		63,475
Other consumer		53,768		46,642
Total Traditional Banking		3,587,831		3,577,044
Warehouse lines of credit*		725,337		468,695
Total Core Banking		4,313,168		4,045,739

Republic Processing Group*:
Tax Refund Solutions:
Easy Advances		—		—
Other TRS loans		711		13,744
Republic Credit Solutions		96,790		88,744
Total Republic Processing Group		97,501		102,488

Total loans**		4,410,669		4,148,227
Allowance for loan and lease losses		(45,983)		(44,675)

Total loans, net	$	4,364,686	$	4,103,552

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

**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.

The following table reconciles the contractually receivable and carrying amounts of loans:


(in thousands)	June 30, 2019		December 31, 2018

Contractually receivable	$	4,409,882	$	4,147,249
Unearned income(1)		(1,287)		(1,038)
Unamortized premiums(2)		487		588
Unaccreted discounts(3)		(3,064)		(3,400)
Net unamortized deferred origination fees and costs(4)		4,651		4,828
Carrying value of loans	$	4,410,669	$	4,148,227

(1)

Unearned income relates to lease financing receivables.

(2)

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

(3)

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

(4)

Primarily attributable to the Traditional Banking segment.

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Purchased Credit-Impaired Loans

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


(in thousands)	June 30, 2019		December 31, 2018

Contractually required principal	$	3,882	$	4,251
Non-accretable amount		(1,379)		(1,521)
Accretable amount		(50)		(50)
Carrying value of loans	$	2,453	$	2,680

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Balance, beginning of period	$	(50)	$	(140)	$	(50)	$	(140)
Transfers between non-accretable and accretable*		(26)		(241)		(142)		(241)
Net accretion into interest income on loans, including loan fees		26		281		142		281
Balance, end of period	$	(50)	$	(100)	$	(50)	$	(100)

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

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Credit Quality Indicators

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


June 30, 2019			Special				Doubtful /		PCI Loans -		PCI Loans -		Total Rated
(in thousands)	Pass		Mention		Substandard		Loss		Group 1		Substandard		Loans*

Traditional Banking:
Residential real estate:
Owner occupied	$	—	$	13,234	$	11,043	$	—	$	165	$	1,378	$	25,820
Owner occupied - correspondent		—		—		848		—		—		—		848
Nonowner occupied		—		491		1,310		—		—		—		1,801
Commercial real estate		1,246,137		3,632		3,226		—		873		—		1,253,868
Construction & land development		188,719		2,205		60		—		—		—		190,984
Commercial & industrial		440,956		1,264		5,051		—		24		—		447,295
Lease financing receivables		17,271		—		—		—		—		—		17,271
Home equity		—		—		2,333		—		3		7		2,343
Consumer:
Credit cards		—		—		—		—		—		—		—
Overdrafts		—		—		—		—		—		—		—
Automobile loans		—		—		80		—		—		—		80
Other consumer		—		—		386		—		—		3		389
Total Traditional Banking		1,893,083		20,826		24,337		—		1,065		1,388		1,940,699
Warehouse lines of credit		725,337		—		—		—		—		—		725,337
Total Core Banking		2,618,420		20,826		24,337		—		1,065		1,388		2,666,036

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—		—		—		—
Other TRS loans		—		—		13		—		—		—		13
Republic Credit Solutions		—		—		108		—		—		—		108
Total Republic Processing Group		—		—		121		—		—		—		121

Total rated loans	$	2,618,420	$	20,826	$	24,458	$	—	$	1,065	$	1,388	$	2,666,157


December 31, 2018			Special				Doubtful /		PCI Loans -		PCI Loans -		Total Rated
(in thousands)	Pass		Mention		Substandard		Loss		Group 1		Substandard		Loans*

Traditional Banking:
Residential real estate:
Owner occupied	$	—	$	14,536	$	11,690	$	—	$	170	$	1,476	$	27,872
Owner occupied - correspondent		—		—		382		—		—		—		382
Nonowner occupied		—		575		1,889		—		—		—		2,464
Commercial real estate		1,239,576		5,281		3,162		—		921		—		1,248,940
Construction & land development		175,113		—		65		—		—		—		175,178
Commercial & industrial		428,897		813		620		—		25		—		430,355
Lease financing receivables		15,031		—		—		—		—		—		15,031
Home equity		—		—		1,361		—		5		81		1,447
Consumer:
Credit cards		—		—		—		—		—		—		—
Overdrafts		—		—		—		—		—		—		—
Automobile loans		—		—		91		—		—		—		91
Other consumer		—		—		462		—		—		2		464
Total Traditional Banking		1,858,617		21,205		19,722		—		1,121		1,559		1,902,224
Warehouse lines of credit		468,695		—		—		—		—		—		468,695
Total Core Banking		2,327,312		21,205		19,722		—		1,121		1,559		2,370,919

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—		—		—		—
Other TRS loans		—		—		—		—		—		—		—
Republic Credit Solutions		—		—		138		—		—		—		138
Total Republic Processing Group		—		—		138		—		—		—		138

Total rated loans	$	2,327,312	$	21,205	$	19,860	$	—	$	1,121	$	1,559	$	2,371,057

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

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Allowance for Loan and Lease Losses

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


	Allowance Rollforward
	Three Months Ended June 30,
	2019										2018
	Beginning				Charge-				Ending		Beginning				Charge-				Ending
(in thousands)	Balance		Provision		offs		Recoveries		Balance		Balance		Provision		offs		Recoveries		Balance

Traditional Banking:
Residential real estate:
Owner occupied	$	5,579	$	(417)	$	(367)	$	221	$	5,016	$	5,988	$	(116)	$	(15)	$	178	$	6,035
Owner occupied - correspondent		222		(25)		—		—		197		278		(15)		—		—		263
Nonowner occupied		1,720		48		(1)		8		1,775		1,461		93		(7)		5		1,552
Commercial real estate		10,235		329		—		2		10,566		9,460		352		—		3		9,815
Construction & land development		2,443		467		—		—		2,910		2,720		80		—		25		2,825
Commercial & industrial		3,235		983		—		3		4,221		2,247		84		(17)		4		2,318
Lease financing receivables		150		31		—		—		181		165		(5)		—		—		160
Home equity		3,337		(221)		—		8		3,124		3,669		(180)		(34)		203		3,658
Consumer:
Credit cards		1,079		14		(76)		11		1,028		756		124		(95)		20		805
Overdrafts		892		250		(299)		51		894		791		296		(270)		61		878
Automobile loans		768		(61)		—		1		708		706		(39)		(4)		1		664
Other consumer		512		29		(48)		56		549		990		(151)		(136)		73		776
Total Traditional Banking		30,172		1,427		(791)		361		31,169		29,231		523		(578)		573		29,749
Warehouse lines of credit		1,397		417		—		—		1,814		1,335		250		—		—		1,585
Total Core Banking		31,569		1,844		(791)		361		32,983		30,566		773		(578)		573		31,334

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		13,381		39		(13,425)		5		—		9,572		(881)		(8,773)		82		—
Other TRS loans		149		353		(264)		(6)		232		125		(7)		(55)		4		67
Republic Credit Solutions		12,862		2,224		(2,683)		365		12,768		12,078		5,047		(3,769)		290		13,646
Total Republic Processing Group		26,392		2,616		(16,372)		364		13,000		21,775		4,159		(12,597)		376		13,713

Total	$	57,961	$	4,460	$	(17,163)	$	725	$	45,983	$	52,341	$	4,932	$	(13,175)	$	949	$	45,047

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	Allowance Rollforward
	Six Months Ended June 30,
	2019										2018
	Beginning				Charge-				Ending		Beginning				Charge-				Ending
(in thousands)	Balance		Provision		offs		Recoveries		Balance		Balance		Provision		offs		Recoveries		Balance

Traditional Banking:
Residential real estate:
Owner occupied	$	5,798	$	(657)	$	(384)	$	259	$	5,016	$	6,182	$	(307)	$	(39)	$	199	$	6,035
Owner occupied - correspondent		237		(40)		—		—		197		292		(29)		—		—		263
Nonowner occupied		1,662		178		(73)		8		1,775		1,396		449		(319)		26		1,552
Commercial real estate		10,030		532		—		4		10,566		9,043		644		—		128		9,815
Construction & land development		2,555		355		—		—		2,910		2,364		434		—		27		2,825
Commercial & industrial		2,873		1,343		—		5		4,221		2,198		210		(125)		35		2,318
Lease financing receivables		158		23		—		—		181		174		(14)		—		—		160
Home equity		3,477		(378)		(13)		38		3,124		3,754		(291)		(34)		229		3,658
Consumer:
Credit cards		1,140		79		(226)		35		1,028		607		359		(188)		27		805
Overdrafts		1,102		269		(593)		116		894		974		313		(559)		150		878
Automobile loans		724		(23)		—		7		708		687		(20)		(4)		1		664
Other consumer		591		(65)		(114)		137		549		1,162		(286)		(256)		156		776
Total Traditional Banking		30,347		1,616		(1,403)		609		31,169		28,833		1,462		(1,524)		978		29,749
Warehouse lines of credit		1,172		642		—		—		1,814		1,314		271		—		—		1,585
Total Core Banking		31,519		2,258		(1,403)		609		32,983		30,147		1,733		(1,524)		978		31,334

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		13,420		(13,425)		5		—		—		12,396		(12,478)		82		—
Other TRS loans		107		406		(281)		—		232		12		105		(55)		5		67
Republic Credit Solutions		13,049		5,607		(6,507)		619		12,768		12,610		7,953		(7,465)		548		13,646
Total Republic Processing Group		13,156		19,433		(20,213)		624		13,000		12,622		20,454		(19,998)		635		13,713

Total	$	44,675	$	21,691	$	(21,616)	$	1,233	$	45,983	$	42,769	$	22,187	$	(21,522)	$	1,613	$	45,047

Nonperforming Loans and Nonperforming Assets

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


(dollars in thousands)	June 30, 2019			December 31, 2018

Loans on nonaccrual status*	$	19,238		$	15,993
Loans past due 90-days-or-more and still on accrual**		166			145
Total nonperforming loans		19,404			16,138
Other real estate owned		1,095			160
Total nonperforming assets	$	20,499		$	16,298

Credit Quality Ratios - Total Company:

Nonperforming loans to total loans		0.44	%		0.39	%
Nonperforming assets to total loans (including OREO)		0.46			0.39
Nonperforming assets to total assets		0.36			0.31

Credit Quality Ratios - Core Bank:

Nonperforming loans to total loans		0.45	%		0.40	%
Nonperforming assets to total loans (including OREO)		0.47			0.40
Nonperforming assets to total assets		0.37			0.32

*Loans on nonaccrual status include impaired loans.

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

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


					Past Due 90-Days-or-More
	Nonaccrual				and Still Accruing Interest*
(in thousands)	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018

Traditional Banking:
Residential real estate:
Owner occupied	$	8,879	$	10,800	$	—	$	—
Owner occupied - correspondent		848		382		—		—
Nonowner occupied		461		669		—		—
Commercial real estate		2,361		2,318		—		—
Construction & land development		134		—		—		—
Commercial & industrial		5,046		630		—		—
Lease financing receivables		—		—		—		—
Home equity		1,444		1,095		—		—
Consumer:
Credit cards		—		—		—		—
Overdrafts		—		—		—		—
Automobile loans		47		75		—		—
Other consumer		18		24		—		13
Total Traditional Banking		19,238		15,993		—		13
Warehouse lines of credit		—		—		—		—
Total Core Banking		19,238		15,993		—		13

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—
Other TRS loans		—		—		13		4
Republic Credit Solutions		—		—		153		128
Total Republic Processing Group		—		—		166		132

Total	$	19,238	$	15,993	$	166	$	145

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

Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Nonaccrual loans are typically returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future contractual payments are reasonably assured. TDRs on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.

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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
June 30, 2019	Days			Days			Days			Total			Total
(dollars in thousands)	Delinquent			Delinquent			Delinquent*			Delinquent**			Current		Total

Traditional Banking:
Residential real estate:
Owner occupied	$	1,252		$	962		$	1,844		$	4,058		$	903,768	$	907,826
Owner occupied - correspondent		—			—			—			—			78,943		78,943
Nonowner occupied		240			—			431			671			258,495		259,166
Commercial real estate		—			597			301			898			1,252,970		1,253,868
Construction & land development		412			128			—			540			190,444		190,984
Commercial & industrial		507			4,426			—			4,933			442,362		447,295
Lease financing receivables		—			—			—			—			17,271		17,271
Home equity		216			498			264			978			295,856		296,834
Consumer:
Credit cards		76			14			—			90			17,339		17,429
Overdrafts		272			6			—			278			616		894
Automobile loans		39			25			—			64			63,489		63,553
Other consumer		7			7			—			14			53,754		53,768
Total Traditional Banking		3,021			6,663			2,840			12,524			3,575,307		3,587,831
Warehouse lines of credit		—			—			—			—			725,337		725,337
Total Core Banking		3,021			6,663			2,840			12,524			4,300,644		4,313,168

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—			—			—			—			—		—
Other TRS loans		38			24			13			75			636		711
Republic Credit Solutions		5,322			1,252			153			6,727			90,063		96,790
Total Republic Processing Group		5,360			1,276			166			6,802			90,699		97,501

Total	$	8,381		$	7,939		$	3,006		$	19,326		$	4,391,343	$	4,410,669
Delinquency ratio***		0.19	%		0.18	%		0.07	%		0.44	%

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

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

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

27

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	30 - 59			60 - 89			90 or More
December 31, 2018	Days			Days			Days			Total			Total
(dollars in thousands)	Delinquent			Delinquent			Delinquent*			Delinquent**			Current		Total

Traditional Banking:
Residential real estate:
Owner occupied	$	1,137		$	748		$	3,640		$	5,525		$	901,480	$	907,005
Owner occupied - correspondent		—			—			—			—			94,827		94,827
Nonowner occupied		349			—			659			1,008			241,838		242,846
Commercial real estate		511			—			588			1,099			1,247,841		1,248,940
Construction & land development		—			—			—			—			175,178		175,178
Commercial & industrial		—			—			25			25			430,330		430,355
Lease financing receivables		—			—			—			—			15,031		15,031
Home equity		558			—			226			784			331,764		332,548
Consumer:
Credit cards		82			46			1			129			18,966		19,095
Overdrafts		223			5			2			230			872		1,102
Automobile loans		—			28			—			28			63,447		63,475
Other consumer		27			7			13			47			46,595		46,642
Total Traditional Banking		2,887			834			5,154			8,875			3,568,169		3,577,044
Warehouse lines of credit		—			—			—			—			468,695		468,695
Total Core Banking		2,887			834			5,154			8,875			4,036,864		4,045,739

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—			—			—			—			—		—
Other TRS loans		2			4			4			10			13,734		13,744
Republic Credit Solutions		5,734			1,215			128			7,077			81,667		88,744
Total Republic Processing Group		5,736			1,219			132			7,087			95,401		102,488

Total	$	8,623		$	2,053		$	5,286		$	15,962		$	4,132,265	$	4,148,227
Delinquency ratio***		0.21	%		0.05	%		0.13	%		0.38	%

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

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

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

Impaired Loans

Information regarding the Bank’s impaired loans follows:


(in thousands)	June 30, 2019		December 31, 2018

Loans with no allocated Allowance	$	20,733	$	19,555
Loans with allocated Allowance		21,947		21,880
Total recorded investment in impaired loans	$	42,680	$	41,435

Amount of the allocated Allowance	$	3,768	$	3,764

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

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


	Allowance for Loan and Lease Losses								Loans
	Individually				PCI with				Individually				PCI with		PCI without
June 30, 2019	Evaluated		Collectively		Post-Acquisition		Total		Evaluated		Collectively		Post-Acquisition		Post-Acquisition		Total		Allowance to
(dollars in thousands)	Excluding PCI		Evaluated		Impairment		Allowance		Excluding PCI		Evaluated		Impairment		Impairment		Loans		Total Loans

Traditional Banking:
Residential real estate:
Owner occupied	$	1,342	$	3,392	$	282	$	5,016	$	23,043	$	883,240	$	1,543	$	—	$	907,826		0.55	%
Owner occupied - correspondent		—		197		—		197		848		78,095		—		—		78,943		0.25
Nonowner occupied		3		1,772		—		1,775		1,477		257,689		—		—		259,166		0.68
Commercial real estate		230		10,328		8		10,566		6,523		1,246,473		872		—		1,253,868		0.84
Construction & land development		—		2,910		—		2,910		60		190,924		—		—		190,984		1.52
Commercial & industrial		1,204		3,017		—		4,221		5,464		441,807		—		24		447,295		0.94
Lease financing receivables		—		181		—		181		—		17,271		—		—		17,271		1.05
Home equity		241		2,883		—		3,124		2,339		294,484		11		—		296,834		1.05
Consumer:
Credit cards		—		1,028		—		1,028		—		17,429		—		—		17,429		5.90
Overdrafts		—		894		—		894		—		894		—		—		894		100.00
Automobile loans		80		628		—		708		80		63,473		—		—		63,553		1.11
Other consumer		364		185		—		549		386		53,379		3		—		53,768		1.02
Total Traditional Banking		3,464		27,415		290		31,169		40,220		3,545,158		2,429		24		3,587,831		0.87
Warehouse lines of credit		—		1,814		—		1,814		—		725,337		—		—		725,337		0.25
Total Core Banking		3,464		29,229		290		32,983		40,220		4,270,495		2,429		24		4,313,168		0.76

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—		—		—		—		—		—		—
Other TRS loans		—		232		—		232		—		711		—		—		711		32.63
Republic Credit Solutions		14		12,754		—		12,768		31		96,759		—		—		96,790		13.19
Total Republic Processing Group		14		12,986		—		13,000		31		97,470		—		—		97,501		13.33
Total	$	3,478	$	42,215	$	290	$	45,983	$	40,251	$	4,367,965	$	2,429	$	24	$	4,410,669		1.04	%


	Allowance for Loan and Lease Losses								Loans
	Individually				PCI with				Individually				PCI with		PCI without
December 31, 2018	Evaluated		Collectively		Post-Acquisition		Total		Evaluated		Collectively		Post-Acquisition		Post-Acquisition		Total		Allowance to
(dollars in thousands)	Excluding PCI		Evaluated		Impairment		Allowance		Excluding PCI		Evaluated		Impairment		Impairment		Loans		Total Loans

Traditional Banking:
Residential real estate:
Owner occupied	$	2,052	$	3,365	$	381	$	5,798	$	24,860	$	880,500	$	1,645	$	—	$	907,005		0.64	%
Owner occupied - correspondent		—		237		—		237		382		94,445		—		—		94,827		0.25
Nonowner occupied		4		1,658		—		1,662		2,406		240,440		—		—		242,846		0.68
Commercial real estate		294		9,727		9		10,030		8,104		1,239,915		919		2		1,248,940		0.80
Construction & land development		4		2,551		—		2,555		65		175,113		—		—		175,178		1.46
Commercial & industrial		130		2,743		—		2,873		1,020		429,310		—		25		430,355		0.67
Lease financing receivables		—		158		—		158		—		15,031		—		—		15,031		1.05
Home equity		286		3,117		74		3,477		1,361		331,101		86		—		332,548		1.05
Consumer:
Credit cards		—		1,140		—		1,140		—		19,095		—		—		19,095		5.97
Overdrafts		—		1,102		—		1,102		—		1,102		—		—		1,102		100.00
Automobile loans		91		633		—		724		91		63,384		—		—		63,475		1.14
Other consumer		421		170		—		591		449		46,190		3		—		46,642		1.27
Total Traditional Banking		3,282		26,601		464		30,347		38,738		3,535,626		2,653		27		3,577,044		0.85
Warehouse lines of credit		—		1,172		—		1,172		—		468,695		—		—		468,695		0.25
Total Core Banking		3,282		27,773		464		31,519		38,738		4,004,321		2,653		27		4,045,739		0.78

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		—		—		—		—		—		—		—		—		—		—
Other TRS loans		—		107		—		107		—		13,744		—		—		13,744		0.78
Republic Credit Solutions		18		13,031		—		13,049		44		88,700		—		—		88,744		14.70
Total Republic Processing Group		18		13,138		—		13,156		44		102,444		—		—		102,488		12.84
Total	$	3,300	$	40,911	$	464	$	44,675	$	38,782	$	4,106,765	$	2,653	$	27	$	4,148,227		1.08	%

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


	As of						Three Months Ended						Six Months Ended
	June 30, 2019						June 30, 2019						June 30, 2019
											Cash Basis						Cash Basis
	Unpaid						Average		Interest		Interest		Average		Interest		Interest
	Principal		Recorded		Allocated		Recorded		Income		Income		Recorded		Income		Income
(in thousands)	Balance		Investment		Allowance		Investment		Recognized		Recognized		Investment		Recognized		Recognized

Impaired loans with no allocated Allowance:
Residential real estate:
Owner occupied	$	13,213	$	12,452	$	—	$	10,913	$	70	$	—	$	10,843	$	139	$	—
Owner occupied - correspondent		848		848		—		855		—		—		697		—		—
Nonowner occupied		1,113		1,046		—		1,424		17		—		1,733		34		—
Commercial real estate		4,866		3,792		—		3,573		23		—		3,917		47		—
Construction & land development		60		60		—		30		1		—		20		1		—
Commercial & industrial		720		612		—		622		—		—		616		—		—
Lease financing receivables		—		—		—		—		—		—		—		—		—
Home equity		1,941		1,898		—		1,591		12		—		1,352		23		—
Consumer		25		25		—		27		1		—		28		1		—
Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied		12,161		12,134		1,624		14,464		121		—		14,910		240		—
Owner occupied - correspondent		—		—		—		—		—		—		—		—		—
Nonowner occupied		622		431		3		216		41		—		162		—		—
Commercial real estate		3,603		3,603		238		3,951		—		—		4,106		83		—
Construction & land development		—		—		—		32		—		—		43		—		—
Commercial & industrial		4,852		4,852		1,204		2,662		7		—		1,913		15		—
Lease financing receivables		—		—		—		—		—		—		—		—		—
Home equity		452		452		241		480		2		—		510		4		—
Consumer		477		475		458		505		4		—		520		10		—
Total impaired loans	$	44,953	$	42,680	$	3,768	$	41,345	$	299	$	—	$	41,370	$	597	$	—


	As of						Three Months Ended						Six Months Ended
	December 31, 2018						June 30, 2018						June 30, 2018
											Cash Basis						Cash Basis
	Unpaid						Average		Interest		Interest		Average		Interest		Interest
	Principal		Recorded		Allocated		Recorded		Income		Income		Recorded		Income		Income
(in thousands)	Balance		Investment		Allowance		Investment		Recognized		Recognized		Investment		Recognized		Recognized

Impaired loans with no allocated Allowance:
Residential real estate:
Owner occupied	$	11,676	$	10,703	$	—	$	11,069	$	67	$	—	$	10,976	$	133	$	—
Owner occupied - correspondent		382		382		—		386		—		—		257		—		—
Nonowner occupied		2,729		2,350		—		2,699		22		—		2,367		45		—
Commercial real estate		5,688		4,607		—		5,119		24		—		4,889		45		—
Construction & land development		—		—		—		238		—		—		356		—		—
Commercial & industrial		712		604		—		694		—		—		469		—		—
Lease financing receivables		—		—		—		—		—		—		—		—		—
Home equity		919		876		—		704		4		—		796		7		—
Consumer		33		33		—		62		1		—		49		3		—
Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied		16,215		15,802		2,433		18,481		153		—		18,538		299		—
Owner occupied - correspondent		—		—		—		—		—		—		—		—		—
Nonowner occupied		78		56		4		195		—		—		249		—		—
Commercial real estate		4,416		4,416		303		6,368		65		—		6,287		129		—
Construction & land development		65		65		4		132		1		—		135		2		—
Commercial & industrial		416		416		130		98		1		—		161		1		—
Lease financing receivables		—		—		—		—		—		—		—		—		—
Home equity		572		571		360		992		10		—		909		19		—
Consumer		554		554		530		668		6		—		700		14		—
Total impaired loans	$	44,455	$	41,435	$	3,764	$	47,905	$	354	$	—	$	47,138	$	697	$	—

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Troubled Debt Restructurings

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

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

Nonaccrual loans modified as TDRs typically remain on nonaccrual status and continue to be reported as nonperforming loans for a minimum of six consecutive months. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. At June 30, 2019 and December 31, 2018, $11 million and $8 million of TDRs were on nonaccrual status.

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


	Troubled Debt			Troubled Debt			Total
	Restructurings on			Restructurings on			Troubled Debt
	Nonaccrual Status			Accrual Status			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
June 30, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate	54	$	4,777	152	$	16,401	206	$	21,178
Commercial real estate	3		1,714	8		4,247	11		5,961
Construction & land development	—		—	1		60	1		60
Commercial & industrial	5		4,913	4		417	9		5,330
Consumer	—		—	210		382	210		382
Total troubled debt restructurings	62	$	11,404	375	$	21,507	437	$	32,911


	Troubled Debt			Troubled Debt			Total
	Restructurings on			Restructurings on			Troubled Debt
	Nonaccrual Status			Accrual Status			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
December 31, 2018 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate	60	$	6,378	156	$	17,232	216	$	23,610
Commercial real estate	3		1,203	14		6,571	17		7,774
Construction & land development	—		—	1		65	1		65
Commercial & industrial	2		571	3		408	5		979
Consumer	—		—	256		435	256		435
Total troubled debt restructurings	65	$	8,152	430	$	24,711	495	$	32,863

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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, 2019 and December 31, 2018 follows:


	Troubled Debt			Troubled Debt
	Restructurings			Restructurings			Total
	Performing to			Not Performing to			Troubled Debt
	Modified Terms			Modified Terms			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
June 30, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate loans (including home equity loans):
Interest only payments	—	$	—	1	$	945	1	$	945
Rate reduction	138		15,535	5		589	143		16,124
Principal deferral	9		873	3		610	12		1,483
Legal modification	43		2,311	7		315	50		2,626
Total residential TDRs	190		18,719	16		2,459	206		21,178

Commercial related and construction/land development loans:
Interest only payments	2		719	—		—	2		719
Rate reduction	4		1,352	—		—	4		1,352
Principal deferral	12		4,257	1		597	13		4,854
Legal modification	—		—	2		4,426	2		4,426
Total commercial TDRs	18		6,328	3		5,023	21		11,351

Consumer loans:
Rate reduction	—		—	—		—	—		—
Principal deferral	210		382	—		—	210		382
Total consumer TDRs	210		382	—		—	210		382

Total troubled debt restructurings	418	$	25,429	19	$	7,482	437	$	32,911

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	Troubled Debt			Troubled Debt
	Restructurings			Restructurings			Total
	Performing to			Not Performing to			Troubled Debt
	Modified Terms			Modified Terms			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
December 31, 2018 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate loans (including home equity loans):
Interest only payments	—	$	—	1	$	970	1	$	970
Rate reduction	145		16,892	12		978	157		17,870
Principal deferral	11		1,171	4		1,871	15		3,042
Legal modification	35		1,500	8		228	43		1,728
Total residential TDRs	191		19,563	25		4,047	216		23,610

Commercial related and construction/land development loans:
Interest only payments	2		752	—		—	2		752
Rate reduction	8		2,962	—		—	8		2,962
Principal deferral	12		5,076	—		—	12		5,076
Legal modification	—		—	1		28	1		28
Total commercial TDRs	22		8,790	1		28	23		8,818

Consumer loans:
Rate reduction	1		16	—		—	1		16
Principal deferral	255		419	—		—	255		419
Legal modification	—		—	—		—	—		—
Total consumer TDRs	256		435	—		—	256		435

Total troubled debt restructurings	469	$	28,788	26	$	4,075	495	$	32,863

As of June 30, 2019 and December 31, 2018, 77% and 88% of the Bank’s TDRs were performing according to their modified terms. The Bank had provided $3 million and $3 million of specific reserve allocations to clients whose loan terms have been modified in TDRs as of June 30, 2019 and December 31, 2018. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships at June 30, 2019 or December 31, 2018.

A summary of the categories of TDR loan modifications by respective performance as of June 30, 2019 and 2018 that were modified during the three months ended June 30, 2019 and 2018 follows:


	Troubled Debt			Troubled Debt
	Restructurings			Restructurings			Total
	Performing to			Not Performing to			Troubled Debt
	Modified Terms			Modified Terms			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
June 30, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate loans (including home equity loans):
Principal deferral	—	$	—	—	$	—	—	$	—
Legal modification	7		804	2		161	9		965
Total residential TDRs	7		804	2		161	9		965

Commercial related and construction/land development loans:
Legal modification	—		—	2		4,426	2		4,426
Total commercial TDRs	—		—	2		4,426	2		4,426

Total troubled debt restructurings	7	$	804	4	$	4,587	11	$	5,391

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	Troubled Debt			Troubled Debt
	Restructurings			Restructurings			Total
	Performing to			Not Performing to			Troubled Debt
	Modified Terms			Modified Terms			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
June 30, 2018 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate loans (including home equity loans):
Rate reduction	1	$	389	—	$	—	1	$	389
Principal deferral	2		1,501	1		169	3		1,670
Legal modification	9		273	1		46	10		319
Total residential TDRs	12		2,163	2		215	14		2,378

Commercial related and construction/land development loans:
Principal deferral	3		859	1		75	4		934
Total commercial TDRs	3		859	1		75	4		934

Consumer loans:
Legal modification	—		—	1		43	1		43
Total consumer TDRs	—		—	1		43	1		43

Total troubled debt restructurings	15	$	3,022	4	$	333	19	$	3,355

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, 2019 and 2018, 15% and 90% of the Bank’s TDRs that occurred during the second quarters of 2019 and 2018 were performing according to their modified terms. The Bank provided approximately $980,000 and $422,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during the second quarters of 2019 and 2018.

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

A summary of the categories of TDR loan modifications by respective performance as of June 30, 2019 and 2018 that were modified during the six months ended June 30, 2019 and 2018 follows:


	Troubled Debt			Troubled Debt
	Restructurings			Restructurings			Total
	Performing to			Not Performing to			Troubled Debt
	Modified Terms			Modified Terms			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
June 30, 2019 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate loans (including home equity loans):
Principal deferral	1	$	6	—	$	—	1	$	6
Legal modification	11		901	3		211	14		1,112
Total residential TDRs	12		907	3		211	15		1,118

Commercial related and construction/land development loans:
Interest only payments	1		566	—		—	1		566
Principal deferral	2		26	—		—	2		26
Legal modification	—		—	2		4,426	2		4,426
Total commercial TDRs	3		592	2		4,426	5		5,018

Total troubled debt restructurings	15	$	1,499	5	$	4,637	20	$	6,136

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	Troubled Debt			Troubled Debt
	Restructurings			Restructurings			Total
	Performing to			Not Performing to			Troubled Debt
	Modified Terms			Modified Terms			Restructurings
	Number of	Recorded		Number of	Recorded		Number of	Recorded
June 30, 2018 (dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment
Residential real estate loans (including home equity loans):
Interest only payments	1	$	1,204	—	$	—	1	$	1,204
Rate reduction	2		474	—		—	2	$	474
Principal deferral	3		2,002	1		170	4		2,172
Legal modification	9		273	1		46	10		319
Total residential TDRs	15		3,953	2		216	17		4,169
Commercial related and construction/land development loans:
Principal deferral	4		870	1		75	5		945
Total commercial TDRs	4		870	1		75	5		945

Consumer loans:
Principal deferral	1		58	—		—	1		58
Legal modification	—		—	1		43	1		43
Total consumer TDRs	1		58	1		43	2		101

Total troubled debt restructurings	20	$	4,881	4	$	334	24	$	5,215

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, 2019 and 2018, 24% and 94% of the Bank’s TDRs that occurred during the first six months of 2019 and 2018 were performing according to their modified terms. The Bank provided approximately $1.0 million and $539,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during the first six months of 2019 and 2018.

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

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
		Recorded		Number of	Recorded		Number of	Recorded		Number of	Recorded
(dollars in thousands)	Loans	Investment		Loans	Investment		Loans	Investment		Loans	Investment

Residential real estate:
Owner occupied	3	$	211	2	$	215	3	$	211	2	$	215
Commercial real estate	—		—	—		—	1		566	—		—
Commercial & industrial	2		4,426	1		75	2		4,426	1		75
Home equity	—		—	—		—	1		6	—		—
Consumer	—		—	1		43	—		—	1		43

Total	5	$	4,637	4	$	333	7	$	5,209	4	$	333

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Foreclosures

The following table presents the carrying amount of foreclosed properties held as a result of the Bank obtaining physical possession of such properties:


(in thousands)	June 30, 2019		December 31, 2018

Residential real estate	$	1,095	$	160

Total other real estate owned	$	1,095	$	160

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


(in thousands)	June 30, 2019		December 31, 2018

Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure*	$	10,081	$	3,293

*Includes $7 million of reverse mortgage loans held for sale as of June 30, 2019 and sold on July 31, 2019.

Easy Advances

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

Information regarding EAs follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019			2018

Easy Advances originated	$	—	$	—	$	388,970		$	430,210
Net charge to the Provision for Easy Advances		39		(881)		13,420			12,396
Provision to total Easy Advances originated		NA		NA		3.45	%		2.88	%
Easy Advances net charge-offs*	$	13,420	$	8,691	$	13,420		$	12,396
Easy Advances net charge-offs to total Easy Advances originated*		NA		NA		3.45	%		2.88	%

*The Company amended its charge-off policy for EAs during the second half of 2018 to charge-off EAs at 111 days past due instead of 60 days past due.

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5. DEPOSITS

The composition of the deposit portfolio follows:


(in thousands)	June 30, 2019		December 31, 2018

Core Bank:
Demand	$	906,179	$	937,402
Money market accounts		727,718		717,954
Savings		177,421		187,868
Individual retirement accounts(1)		50,970		53,524
Time deposits, $250 and over(1)		93,713		84,104
Other certificates of deposit(1)		246,392		239,324
Reciprocal money market and time deposits(1)(2)		192,792		217,153
Brokered deposits(1)		159,615		9,394
Total Core Bank interest-bearing deposits		2,554,800		2,446,723
Total Core Bank noninterest-bearing deposits		937,487		971,422
Total Core Bank deposits		3,492,287		3,418,145

Republic Processing Group:
Money market accounts		2,327		5,453
Total RPG interest-bearing deposits		2,327		5,453

Brokered prepaid card deposits		10,854		4,350
Other noninterest-bearing deposits		55,452		28,197
Total RPG noninterest-bearing deposits		66,306		32,547
Total RPG deposits		68,633		38,000

Deposits held for assumption in connection with sale of banking centers(3)		152,954		—

Total deposits	$	3,713,874	$	3,456,145

(1)

Includes time deposits.

(2)

Prior to June 2018, reciprocal deposits were classified as “brokered deposits.” The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018, provides that most reciprocal deposits are no longer classified as brokered deposits if the Bank meets certain regulatory criteria.

(3)

See Footnote 18 “Subsequent Event” in this section of the filing.

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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, 2019 and December 31, 2018, all securities sold under agreements to repurchase had overnight maturities. Additional information regarding securities sold under agreements to repurchase follows:


(dollars in thousands)	June 30, 2019			December 31, 2018

Outstanding balance at end of period	$	226,002		$	182,990
Weighted average interest rate at end of period		0.50	%		0.83	%

Fair value of securities pledged:
U.S. Treasury securities and U.S. Government agencies	$	109,716		$	110,854
Mortgage backed securities - residential		83,893			84,657
Collateralized mortgage obligations		59,049			10,136
Total securities pledged	$	252,658		$	205,647


	Three Months Ended							Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2019			2018			2019			2018

Average outstanding balance during the period	$	220,189		$	178,063		$	225,864		$	217,532
Average interest rate during the period		0.60	%		0.50	%		0.67	%		0.40	%
Maximum outstanding at any month end during the period	$	226,002		$	175,291		$	226,002		$	215,281

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

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

ASU 2016-02 requires the Company to record on its balance sheet the assets and liabilities that arise from leases. The Company is therefore required to record as operating lease liabilities the present value of its required minimum lease payments plus any amounts probable of being owed under a residual value guarantee. Offsetting these operating lease liabilities, the Company records right-of-use assets for the underlying leased property. Prior to January 1, 2019, operating leases were not recorded on a lessee’s balance sheet in this manner.

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

·

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

·

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

·

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

·

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

·

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

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

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

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

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

Prior to the release of these financial statements, the Company had executed one lease contract that had not commenced for one of its banking centers. The estimated operating lease liability and offsetting right-of-use asset to be recorded for this lease totaled approximately $493,000.

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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, 2019:


	Three Months Ended		Six Months Ended
	June 30,		June 30,
(dollars in thousands)	2019		2019

Operating lease expense:
Related Party:
Variable lease expense	$	1,156	$	2,314
Fixed lease expense		10		18
Third Party:
Variable lease expense		211		435
Fixed lease expense		384		745
Short-term lease expense		12		26
Total operating lease expense	$	1,773	$	3,538

Other information concerning operating leases:
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,794	$	3,577
Short-term lease payments not included in the measurement of lease liabilities		12		26

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, 2019:


	June 30, 2019

Weighted average remaining term in years		8.30
Weighted average discount rate		3.48	%

The following table presents a maturity schedule of the Company’s operating lease liabilities based on undiscounted cash flows, and a reconciliation of those undiscounted cash flows to the operating lease liabilities recognized on the Company’s balance sheet as of June 30, 2019:


Year (in thousands)	Related Party		Third Party		Total

Remainder of 2019	$	2,314	$	1,274	$	3,588
2020		4,585		2,513		7,098
2021		4,171		2,294		6,465
2022		3,310		1,888		5,198
2023		3,310		1,363		4,673
Thereafter		15,910		2,572		18,482
Total undiscounted cash flows	$	33,600	$	11,904	$	45,504
Discount applied to cash flows		(5,029)		(1,623)		(6,652)
Total discounted cash flows reported as operating lease liabilities	$	28,571	$	10,281	$	38,852

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8. FEDERAL HOME LOAN BANK ADVANCES

FHLB advances were as follows:


(dollars in thousands)	June 30, 2019		December 31, 2018

Overnight advances	$	670,000	$	510,000
Variable interest rate advance indexed to 3-Month LIBOR plus 0.14%		10,000		10,000
Fixed interest rate advances		235,000		290,000
Total FHLB advances	$	915,000	$	810,000

Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity. FHLB advances are collateralized by a blanket pledge of eligible real estate loans. At June 30, 2019 and December 31, 2018, Republic had available borrowing capacity of $502 million and $254 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million and $125 million available through various other financial institutions as of June 30, 2019 and December 31, 2018.

Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such advances are detailed below:


			Weighted
			Average
Year (dollars in thousands)	Principal		Rate

Remainder of 2019 (Overnight)	$	670,000	2.46	%
Remainder of 2019 (Term)		55,000	1.97
2020		120,000	1.81
2021		30,000	1.93
2022		20,000	2.12
2023		20,000	2.56
Thereafter		—	—
Total	$	915,000	2.32	%

Due to their nature, the Bank considers average balance information more meaningful than period-end balances for its overnight borrowings from the FHLB. Information regarding overnight FHLB advances follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2019			2018			2019			2018

Average outstanding balance during the period	$	448,077		$	226,264		$	331,768		$	185,801
Average interest rate during the period		2.50	%		1.88	%		2.49	%		1.70	%
Maximum outstanding at any month end during the period	$	785,000		$	500,000		$	785,000		$	560,000

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


(in thousands)	June 30, 2019		December 31, 2018

First lien, single family residential real estate	$	1,161,088	$	1,129,588
Home equity lines of credit		297,862		311,419

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9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES

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

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

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

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


(in thousands)	June 30, 2019		December 31, 2018

Unused warehouse lines of credit	$	393,663	$	591,305
Unused home equity lines of credit		383,772		377,277
Unused loan commitments - other		758,439		720,645
Standby letters of credit		11,766		10,642
FHLB letter of credit		10,000		10,000
Total commitments	$	1,557,640	$	1,709,869

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

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10. FAIR VALUE

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Available-for-sale debt securities: Except for the Bank’s private label mortgage backed security and its TRUP investment, the fair value of available-for-sale debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

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

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

The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value at June 30, 2019. The Company’s TRUP investment is considered highly illiquid and also valued using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.

Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s CRA mutual fund investment and fall within Level 1 of the fair value hierarchy.

The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).

Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.

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

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

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

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Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. Forward contracts and rate-lock loan commitments are classified as Level 2 in the fair value hierarchy.

Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant dealer counterparty and validated against the Company’s calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

Impaired loans: Collateral-dependent impaired loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

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

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


	Fair Value Measurements at
	June 30, 2019 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	—	$	139,335	$	—	$	139,335
Private label mortgage backed security		—		—		3,615		3,615
Mortgage backed securities - residential		—		154,192		—		154,192
Collateralized mortgage obligations		—		69,379		—		69,379
Corporate bonds		—		9,835		—		9,835
Trust preferred security		—		—		4,000		4,000
Total available-for-sale debt securities	$	—	$	372,741	$	7,615	$	380,356

Equity securities with readily determinable fair value:
Freddie Mac preferred stock	$	—	$	787	$	—	$	787
Community Reinvestment Act mutual fund		2,467		—		—		2,467
Total equity securities with readily determinable fair value	$	2,467	$	787	$	—	$	3,254

Mortgage loans held for sale	$	—	$	13,883	$	—	$	13,883
Consumer loans held for investment		—		—		1,369		1,369
Rate lock loan commitments		—		1,222		—		1,222
Interest rate swap agreements		—		4,645		—		4,645

Financial liabilities:
Mandatory forward contracts	$	—	$	467	$	—	$	467
Interest rate swap agreements		—		4,778		—		4,778

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	Fair Value Measurements at
	December 31, 2018 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	—	$	216,873	$	—	$	216,873
Private label mortgage backed security		—		—		3,712		3,712
Mortgage backed securities - residential		—		169,209		—		169,209
Collateralized mortgage obligations		—		72,811		—		72,811
Corporate bonds		—		9,058		—		9,058
Trust preferred security		—		—		4,075		4,075
Total available-for-sale debt securities	$	—	$	467,951	$	7,787	$	475,738

Equity securities with readily determinable fair value:
Freddie Mac preferred stock	$	—	$	410	$	—	$	410
Community Reinvestment Act mutual fund		2,396		—		—		2,396
Total equity securities with readily determinable fair value	$	2,396	$	410	$	—	$	2,806

Mortgage loans held for sale	$	—	$	8,971	$	—	$	8,971
Consumer loans held for investment		—		—		1,922		1,922
Rate lock loan commitments		—		356		—		356
Interest rate swap agreements		—		1,264		—		1,264

Financial liabilities:
Mandatory forward contracts	$	—	$	262	$	—	$	262
Interest rate swap agreements		—		1,149		—		1,149

All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2 or 3 assets during the three and six months ended June 30, 2019 and 2018.

Private Label Mortgage Backed Security

The following table presents a reconciliation of the Bank’s private label mortgage backed security measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Balance, beginning of period	$	3,660	$	4,120	$	3,712	$	4,449
Total gains or losses included in earnings:
Net change in unrealized gain		(2)		(15)		(34)		(17)
Recovery of actual losses previously recorded		38		37		75		75
Principal paydowns		(81)		(216)		(138)		(581)
Balance, end of period	$	3,615	$	3,926	$	3,615	$	3,926

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

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

.

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


	Fair		Valuation
June 30, 2019 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	3,615	Discounted cash flow	(1) Constant prepayment rate	3.9% - 4.5%

				(2) Probability of default	1.8% - 6.1%

				(3) Loss severity	50% - 75%


	Fair		Valuation
December 31, 2018 (dollars in thousands)	Value		Technique	Unobservable Inputs	Range

Private label mortgage backed security	$	3,712	Discounted cash flow	(1) Constant prepayment rate	6.5% - 8.9%

				(2) Probability of default	1.8% - 4.7%

				(3) Loss severity	50% - 75%

Trust Preferred Security

The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Balance, beginning of period	$	4,100	$	3,900	$	4,075	$	3,600
Total gains or losses included in earnings:
Discount accretion		11		10		21		20
Net change in unrealized gain		(111)		240		(96)		530
Balance, end of period	$	4,000	$	4,150	$	4,000	$	4,150

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

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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, 2019 and December 31, 2018.

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


(in thousands)	June 30, 2019		December 31, 2018

Aggregate fair value	$	13,883	$	8,971
Contractual balance		13,542		8,676
Unrealized gain		341		295

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Interest income	$	170	$	103	$	272	$	175
Change in fair value		128		152		46		143
Total included in earnings	$	298	$	255	$	318	$	318

Consumer Loans Held for Investment

RCS carries loans originated through its installment loan program at fair value. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of June 30, 2019 and December 31, 2018.

The significant unobservable inputs in the fair value measurement of the Bank’s consumer loans were the constant prepayment rate, probability of default, and loss severity for these loans under a discounted-cash-flow model. Significant fluctuations in any of these inputs in isolation would result in a significantly lower/higher fair value measurement.

The following table presents quantitative information about recurring Level 3 fair value measurement inputs for installment loans:


	Fair		Valuation
June 30, 2019 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate

Consumer loans held for investment	$	1,369	Discounted Cash Flows	(1) Constant prepayment rate	15.0%

				(2) Probability of default	50.0

				(3) Loss severity	25.0


	Fair		Valuation
December 31, 2018 (dollars in thousands)	Value		Technique	Unobservable Inputs	Rate

Consumer loans held for investment	$	1,922	Discounted Cash Flows	(1) Constant prepayment rate	15.0%

				(2) Probability of default	45.0%

				(3) Loss severity	20.0%

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


(in thousands)	June 30, 2019		December 31, 2018

Aggregate fair value	$	1,369	$	1,922
Contractual balance		1,580		2,170
Unrealized (loss) gain		(211)		(248)

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Interest income	$	90	$	152	$	201	$	328
Change in fair value		19		(414)		37		(427)
Total included in earnings	$	109	$	(262)	$	238	$	(99)

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


	Fair Value Measurements at
	June 30, 2019 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value

Impaired loans:
Residential real estate:
Owner occupied	$	—	$	—	$	3,777	$	3,777
Nonowner occupied		—		—		511		511
Commercial real estate		—		—		1,117		1,117
Commercial & industrial		—		—		512		512
Home equity		—		—		347		347
Total impaired loans*	$	—	$	—	$	6,264	$	6,264

Premises	$	—	$	—	$	1,552	$	1,552


	Fair Value Measurements at
	December 31, 2018 Using:
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Total
	Assets		Inputs		Inputs		Fair
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Value

Consumer loans held for sale	$	—	$	—	$	1,249	$	1,249

Impaired loans:
Residential real estate:
Owner occupied	$	—	$	—	$	4,708	$	4,708
Nonowner occupied		—		—		1,007		1,007
Commercial real estate		—		—		1,255		1,255
Commercial & industrial		—		—		609		609
Home equity		—		—		356		356
Total impaired loans*	$	—	$	—	$	7,935	$	7,935

Premises	$	—	$	—	$	1,694	$	1,694

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

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


					Range
	Fair		Valuation	Unobservable	(Weighted
June 30, 2019 (dollars in thousands)	Value		Technique	Inputs	Average)

Impaired loans - residential real estate owner occupied	$	3,777	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 62% (11%)

Impaired loans - residential real estate nonowner occupied	$	511	Sales comparison approach	Adjustments determined for differences between comparable sales	5% - 12% (12%)

Impaired loans - commercial real estate	$	1,117	Sales comparison approach	Adjustments determined for differences between comparable sales	22% - 25% (22%)

Impaired loans - commercial & industrial	$	512	Sales comparison approach	Adjustments determined for differences between comparable sales	3% (3%)

Impaired loans - home equity	$	347	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 2% (2%)

Premises	$	1,552	Sales comparison approach	Adjustments determined for differences between comparable sales	33% - 75% (45%)


					Range
	Fair		Valuation	Unobservable	(Weighted
December 31, 2018 (dollars in thousands)	Value		Technique	Inputs	Average)

Consumer loans held for sale	$	1,249	Sales comparison approach	Adjustments determined for differences between comparable sales	6% (6%)

Impaired loans - residential real estate owner occupied	$	4,708	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 67% (9%)

Impaired loans - residential real estate nonowner occupied	$	1,007	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 27% (15%)

Impaired loans - commercial real estate	$	123	Sales comparison approach	Adjustments determined for differences between comparable sales	21% (21%)

Impaired loans - commercial real estate	$	1,132	Income approach	Adjustments for differences between net operating income expectations	17% (17%)

Impaired loans - commercial & industrial	$	609	Sales comparison approach	Adjustments determined for differences between comparable sales	3% (3%)

Impaired loans - home equity	$	356	Sales comparison approach	Adjustments determined for differences between comparable sales	0% - 22% (8%)

Premises	$	1,694	Sales comparison approach	Adjustments determined for differences between comparable sales	27% - 72% (40%)

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Impaired Loans

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

Impaired collateral-dependent loans are as follows:


(in thousands)	June 30, 2019		December 31, 2018

Carrying amount of loans measured at fair value	$	5,559	$	7,380
Estimated selling costs considered in carrying amount		724		913
Valuation allowance		(19)		(358)
Total fair value	$	6,264	$	7,935


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Provisions on collateral-dependent, impaired loans	$	5	$	28	$	27	$	457

Premises

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Impairment charges on premises	$	66	$	126	$	132	$	230

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


			Fair Value Measurements at
			June 30, 2019:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	473,779	$	473,779	$	—	$	—	$	473,779
Available-for-sale debt securities		380,356		—		372,741		7,615		380,356
Held-to-maturity debt securities		63,902		—		64,433		—		64,433
Equity securities with readily determinable fair values		3,254		2,467		787		—		3,254
Mortgage loans held for sale, at fair value		13,883		—		13,883		—		13,883
Reverse mortgage loans held for sale, at the lower of cost or fair value		12,457		—		12,457		—		12,457
Consumer loans held for sale, at the lower of cost or fair value		37,609		—		37,609		—		37,609
Loans held for sale in connection with sale of banking centers, at the lower of cost or fair value		111,745		—		111,745		—		111,745
Loans, net		4,364,686		—		—		4,397,565		4,397,565
Federal Home Loan Bank stock		32,242		—		—		—		NA
Accrued interest receivable		14,716		—		14,716		—		14,716
Rate lock loan commitments		1,222		—		1,222		—		1,222
Interest rate swap agreements		4,645		—		4,645		—		4,645

Liabilities:
Noninterest-bearing deposits	$	1,003,793		—	$	1,003,793		—	$	1,003,793
Transaction deposits		1,959,252		—		1,959,252		—		1,959,252
Time deposits		597,875		—		600,352		—		600,352
Deposits held for assumption in connection with sale of banking centers		152,954		—		152,954		—		152,954
Securities sold under agreements to repurchase and other short-term borrowings		226,002		—		226,002		—		226,002
Federal Home Loan Bank advances		915,000		—		913,453		—		913,453
Subordinated note		41,240		—		33,181		—		33,181
Accrued interest payable		1,575		—		1,575		—		1,575
Mandatory forward contracts		467		—		467		—		467
Interest rate swap agreements		4,778		—		4,778		—		4,778

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			Fair Value Measurements at
			December 31, 2018:
									Total
	Carrying								Fair
(in thousands)	Value		Level 1		Level 2		Level 3		Value

Assets:
Cash and cash equivalents	$	351,474	$	351,474	$	—	$	—	$	351,474
Available-for-sale debt securities		475,738		—		467,951		7,787		475,738
Held-to-maturity debt securities		65,227		—		64,858		—		64,858
Equity securities with readily determinable fair values		2,806		2,396		410		—		2,806
Mortgage loans held for sale, at fair value		8,971		—		8,971		—		8,971
Consumer loans held for sale, at the lower of cost or fair value		12,838		—		12,838		—		12,838
Loans, net		4,103,552		—		—		4,062,457		4,062,457
Federal Home Loan Bank stock		32,067		—		—		—		NA
Accrued interest receivable		13,942		—		13,942		—		13,942
Rate lock loan commitments		356		—		356		—		356
Interest rate swap agreements		1,264		—		1,264		—		1,264

Liabilities:
Noninterest-bearing deposits	$	1,003,969		—	$	1,003,969		—	$	1,003,969
Transaction deposits		2,035,701		—		2,035,701		—		2,035,701
Time deposits		416,475		—		412,477		—		412,477
Securities sold under agreements to repurchase and other short-term borrowings		182,990		—		182,990		—		182,990
Federal Home Loan Bank advances		810,000		—		804,251		—		804,251
Subordinated note		41,240		—		33,724		—		33,724
Accrued interest payable		1,084		—		1,084		—		1,084
Mandatory forward contracts		262		—		262		—		262
Interest rate swap agreements		1,149		—		1,149		—		1,149

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11. MORTGAGE BANKING ACTIVITIES

Mortgage Banking activities primarily include residential mortgage originations and servicing.

Activity for mortgage loans held for sale, at fair value, was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Balance, beginning of period	$	11,313	$	4,496	$	8,971	$	5,761
Origination of mortgage loans held for sale		81,982		54,714		122,696		84,124
Proceeds from the sale of mortgage loans held for sale		(81,630)		(47,642)		(121,262)		(79,094)
Net gain on sale of mortgage loans held for sale		2,218		1,085		3,478		1,862
Balance, end of period	$	13,883	$	12,653	$	13,883	$	12,653

The following table presents the components of Mortgage Banking income:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Net gain realized on sale of mortgage loans held for sale	$	1,896	$	1,101	$	2,771	$	1,698
Net change in fair value recognized on loans held for sale		128		152		46		143
Net change in fair value recognized on rate lock loan commitments		379		(11)		866		122
Net change in fair value recognized on forward contracts		(185)		(157)		(205)		(101)
Net gain recognized		2,218		1,085		3,478		1,862

Loan servicing income		609		600		1,210		1,205
Amortization of mortgage servicing rights		(411)		(369)		(733)		(731)
Net servicing income recognized		198		231		477		474
Total Mortgage Banking income	$	2,416	$	1,316	$	3,955	$	2,336

Activity for capitalized mortgage servicing rights was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Balance, beginning of period	$	4,935	$	4,925	$	4,919	$	5,044
Additions		634		359		972		602
Amortized to expense		(411)		(369)		(733)		(731)
Balance, end of period	$	5,158	$	4,915	$	5,158	$	4,915

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

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Other information relating to mortgage servicing rights follows:


(in thousands)	June 30, 2019			December 31, 2018

Fair value of mortgage servicing rights portfolio	$	7,708		$	9,357
Monthly weighted average prepayment rate of unpaid principal balance*		232	%		160	%
Discount rate		10.00	%		10.00	%
Weighted average default (foreclosure) rate		0.07	%		0.14	%
Weighted average life in years		5.69			6.32

* Rates are applied to individual tranches with similar characteristics.

Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.

Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.

The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate loan lock 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:


	June 30, 2019				December 31, 2018
	Notional				Notional
(in thousands)	Amount		Fair Value		Amount		Fair Value

Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value	$	13,542	$	13,883	$	8,676	$	8,971

Included in other assets:
Rate lock loan commitments	$	52,789	$	1,222	$	14,788	$	356

Included in other liabilities:
Mandatory forward contracts	$	55,442	$	467	$	20,063	$	262

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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:


								June 30, 2019				December 31, 2018
										Unrealized				Unrealized
		Notional	Pay		Receive			Assets /		Gain (Loss)		Assets /		Gain (Loss)
(dollars in thousands)		Amount	Rate		Rate	Term		(Liabilities)		AOCI		(Liabilities)		in AOCI

Interest rate swap on money market deposits	$	10,000	2.17	%	1M LIBOR	12/2013 - 12/2020	$	(72)	$	(56)	$	58	$	45
Interest rate swap on FHLB advance		10,000	2.33	%	3M LIBOR	12/2013 - 12/2020		(61)		(48)		57		45
Total	$	20,000					$	(133)	$	(104)	$	115	$	90

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Interest rate swap on money market deposits	$	(8)	$	3	$	(16)	$	20
Interest rate swap on FHLB advance		(5)		6		(16)		15
Total interest (benefit) expense on swap transactions	$	(13)	$	9	$	(32)	$	35

The following table presents the net gains (losses) recorded in OCI and the consolidated statements of income relating to the swaps designated as cash flow hedges:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

(Gains) losses recognized in OCI on derivative (effective portion)	$	(146)	$	77	$	(215)	$	276

Gains (losses) reclassified from OCI on derivative (effective portion)		13		(9)		32		(35)

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

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

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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:


		June 30, 2019				December 31, 2018
		Notional				Notional
(in thousands)	Bank Position	Amount		Fair Value		Amount		Fair Value

Interest rate swaps with Bank clients - Assets	Pay variable/receive fixed	$	81,453	$	4,645	$	26,398	$	1,264
Interest rate swaps with Bank clients - Liabilities	Pay variable/receive fixed		1,174		(6)		54,718		(908)
Interest rate swaps with Bank clients - Total	Pay variable/receive fixed	$	82,627	$	4,639	$	81,116	$	356

Offsetting interest rate swaps with institutional swap dealer	Pay fixed/receive variable		82,627		(4,639)		81,116		(356)
Total		$	165,254	$	—	$	162,232	$	—

The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with dealer counterparties when such net loss positions exceed $250,000. The fair value of cash or investment securities pledged as collateral by the Bank to cover such net loss positions totaled $4.8 million and $0.0 million at June 30, 2019 and December 31, 2018.

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13. EARNINGS PER SHARE

The Company calculates earnings per share under the two-class method. Under the two-class method, earnings available to common shareholders for the period are allocated between Class A Common Stock and Class B Common Stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. The difference in earnings per share between the two classes of common stock results from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on Class B Common Stock.

A reconciliation of the combined Class A and Class B Common Stock numerators and denominators of the earnings per share and diluted earnings per share computations is presented below:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except per share data)	2019		2018		2019		2018

Net income	$	18,007	$	15,666	$	47,523	$	43,135
Dividends declared on Common Stock:
Class A Shares		(4,932)		(4,518)		(9,865)		(9,035)
Class B Shares		(530)		(487)		(1,061)		(981)
Undistributed net income for basic earnings per share		12,545		10,661		36,597		33,119
Weighted average potential dividends on Class A shares upon exercise of dilutive options		(32)		(35)		(68)		(64)
Undistributed net income for diluted earnings per share	$	12,513	$	10,626	$	36,529	$	33,055

Weighted average shares outstanding:
Class A Shares		18,804		18,935		18,785		18,704
Class B Shares		2,212		2,252		2,212		2,235
Effect of dilutive securities on Class A Shares outstanding		122		144		128		133
Weighted average shares outstanding including dilutive securities		21,138		21,331		21,125		21,072

Basic earnings per share:
Class A Common Stock:
Per share dividends distributed	$	0.26	$	0.24	$	0.53	$	0.48
Undistributed earnings per share*		0.60		0.51		1.76		1.60
Total basic earnings per share - Class A Common Stock	$	0.86	$	0.75	$	2.29	$	2.08

Class B Common Stock
Per share dividends distributed	$	0.24	$	0.22	$	0.48	$	0.44
Undistributed earnings per share*		0.55		0.46		1.60		1.45
Total basic earnings per share - Class B Common Stock	$	0.79	$	0.68	$	2.08	$	1.89

Diluted earnings per share:
Class A Common Stock:
Per share dividends distributed	$	0.26	$	0.24	$	0.53	$	0.48
Undistributed earnings per share*		0.60		0.50		1.75		1.58
Total diluted earnings per share - Class A Common Stock	$	0.86	$	0.74	$	2.28	$	2.06

Class B Common Stock:
Per share dividends distributed	$	0.24	$	0.22	$	0.48	$	0.44
Undistributed earnings per share*		0.54		0.46		1.59		1.44
Total diluted earnings per share - Class B Common Stock	$	0.78	$	0.68	$	2.07	$	1.88

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

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


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018

Antidilutive stock options	160,000	3,000	165,000	3,000
Average antidilutive stock options	156,000	400	159,000	200

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14. OTHER COMPREHENSIVE INCOME

OCI components and related tax effects were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Available-for-Sale Debt Securities:
Change in unrealized (loss) gain on AFS debt securities	$	2,014	$	(546)	$	5,673	$	(2,663)
Adjustment for adoption of ASU 2016-01		—		—		—		(428)
Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings		(1)		(15)		(34)		(17)
Net unrealized (losses) gains		2,013		(561)		5,639		(3,108)
Tax effect		(422)		118		(1,186)		652
Net of tax		1,591		(443)		4,453		(2,456)

Cash Flow Hedges:
Change in fair value of derivatives used for cash flow hedges		(146)		77		(215)		276
Reclassification amount for net derivative losses realized in income		(13)		9		(32)		35
Net unrealized gains		(159)		86		(247)		311
Tax effect		33		(19)		53		(64)
Net of tax		(126)		67		(194)		247

Total other comprehensive (loss) income components, net of tax	$	1,465	$	(376)	$	4,259	$	(2,209)

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



		Amounts Reclassified from AOCI
	Affected Line Items	Three Months Ended				Six Months Ended
	in the Consolidated	June 30,				June 30,
(in thousands)	Statements of Income	2019		2018		2019		2018

Cash Flow Hedges:
Interest rate swap on money market deposits	Interest benefit (expense) on deposits	$	8	$	(3)	$	16	$	(20)
Interest rate swap on FHLB advance	Interest benefit (expense) on FHLB advances		5		(6)		16		(15)
Total derivative losses on cash flow hedges	Total interest benefit (expense)		13		(9)		32		(35)
Tax effect	Income tax (benefit) expense		(3)		2		(7)		7
Net of tax	Net income	$	10	$	(7)	$	25	$	(28)

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


			2019
(in thousands)	December 31, 2018		Change		June 30, 2019

Unrealized gain (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		(27)		1,051
Unrealized gain (loss) on cash flow hedges		90		(194)		(104)
Total unrealized (loss) gain	$	(997)	$	4,259	$	3,262


			2018
(in thousands)	December 31, 2017		Change		June 30, 2018

Unrealized loss on AFS debt securities	$	(604)	$	(2,443)	$	(3,047)
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings		1,093		(13)		1,080
Unrealized gain (loss) on cash flow hedges		(73)		247		174
Total unrealized gain (loss)	$	416	$	(2,209)	$	(1,793)

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15. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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


	Three Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	41,877		$	3,957		$	170		$	46,004		$	710		$	7,232		$	7,942		$	53,946

Noninterest income:
Service charges on deposit accounts		3,585			13			—			3,598			—			—			—			3,598
Net refund transfer fees		—			—			—			—			3,629			—			3,629			3,629
Mortgage banking income(1)		—			—			2,416			2,416			—			—			—			2,416
Interchange fee income		3,168			—			—			3,168			89			—			89			3,257
Program fees(1)		—			—			—			—			50			987			1,037			1,037
Increase in cash surrender value of BOLI(1)		377			—			—			377			—			—			—			377
Net gains (losses) on OREO		90			—			—			90			—			—			—			90
Other		633			—			56			689			—			32			32			721
Total noninterest income		7,853			13			2,472			10,338			3,768			1,019			4,787			15,125

Total net revenue	$	49,730		$	3,970		$	2,642		$	56,342		$	4,478		$	8,251		$	12,729		$	69,071

Net-revenue concentration(2)		72	%		6	%		4	%		82	%		6	%		12	%		18	%		100	%


	Three Months Ended June 30, 2018
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	39,348		$	4,164		$	103		$	43,615		$	328		$	7,141		$	7,469		$	51,084

Noninterest income:
Service charges on deposit accounts		3,563			11			—			3,574			—			—			—			3,574
Net refund transfer fees		—			—			—			—			3,473			—			3,473			3,473
Mortgage banking income(1)		—			—			1,316			1,316			—			—			—			1,316
Interchange fee income		2,793			—			—			2,793			79			19			98			2,891
Program fees(1)		—			—			—			—			124			1,199			1,323			1,323
Increase in cash surrender value of BOLI(1)		379			—			—			379			—			—			—			379
Net gains (losses) on OREO		320			—			—			320			—			—			—			320
Other		670			—			49			719			1			300			301			1,020
Total noninterest income		7,725			11			1,365			9,101			3,677			1,518			5,195			14,296

Total net revenue	$	47,073		$	4,175		$	1,468		$	52,716		$	4,005		$	8,659		$	12,664		$	65,380

Net-revenue concentration(2)		73	%		6	%		2	%		81	%		6	%		13	%		19	%		100	%

(1)

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

(2)

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

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	Six Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	83,224		$	6,852		$	272		$	90,348		$	21,148		$	14,749		$	35,897		$	126,245

Noninterest income:
Service charges on deposit accounts		6,878			23			—			6,901			—			—			—			6,901
Net refund transfer fees		—			—			—			—			20,729			—			20,729			20,729
Mortgage banking income(1)		—			—			3,955			3,955			—			—			—			3,955
Interchange fee income		5,794			—			—			5,794			220			—			220			6,014
Program fees(1)		—			—			—			—			196			1,915			2,111			2,111
Increase in cash surrender value of BOLI(1)		759			—			—			759			—			—			—			759
Net gains (losses) on OREO		220			—			—			220			—			—			—			220
Other		1,098			—			96			1,194			—			659			659			1,853
Total noninterest income		14,749			23			4,051			18,823			21,145			2,574			23,719			42,542

Total net revenue	$	97,973		$	6,875		$	4,323		$	109,171		$	42,293		$	17,323		$	59,616		$	168,787

Net-revenue concentration(2)		58	%		4	%		3	%		65	%		25	%		10	%		35	%		100	%


	Six Months Ended June 30, 2018
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income(1)	$	77,536		$	7,755		$	175		$	85,466		$	19,014		$	14,269		$	33,283		$	118,749

Noninterest income:
Service charges on deposit accounts		7,110			19			—			7,129			—			—			—			7,129
Net refund transfer fees		—			—			—			—			19,825			—			19,825			19,825
Mortgage banking income(1)		—			—			2,336			2,336			—			—			—			2,336
Interchange fee income		5,331			—			—			5,331			188			39			227			5,558
Program fees(1)		—			—			—			—			183			2,836			3,019			3,019
Increase in cash surrender value of BOLI(1)		750			—			—			750			—			—			—			750
Net gains (losses) on OREO		452			—			—			452			—			—			—			452
Other		1,084			—			87			1,171			1,002			599			1,601			2,772
Total noninterest income		14,727			19			2,423			17,169			21,198			3,474			24,672			41,841

Total net revenue	$	92,263		$	7,774		$	2,598		$	102,635		$	40,212		$	17,743		$	57,955		$	160,590

Net-revenue concentration(2)		57	%		5	%		2	%		64	%		25	%		11	%		36	%		100	%

(1)

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

(2)

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

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

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

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

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

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

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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.

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

16. SEGMENT INFORMATION

Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.

As of June 30, 2019, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank, are considered part of the Traditional Banking segment.

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


Reportable Segment:	Nature of Operations:	Primary Drivers of Net Revenue:

Core Banking:

Traditional Banking	Provides traditional banking products to clients in its market footprint primarily via its network of banking centers and to clients outside of its market footprint primarily via its Digital and Correspondent Lending delivery channels.	Loans, investments, and deposits.

Warehouse Lending	Provides short-term, revolving credit facilities to mortgage bankers across the United States.	Mortgage warehouse lines of credit.

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

Republic Processing Group:

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

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

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

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Segment information follows:


	Three Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	41,877		$	3,957		$	170		$	46,004		$	710		$	7,232		$	7,942		$	53,946

Provision for loan and lease losses		1,427			417			—			1,844			392			2,224			2,616			4,460

Net refund transfer fees		—			—			—			—			3,629			—			3,629			3,629
Mortgage banking income		—			—			2,416			2,416			—			—			—			2,416
Program fees		—			—			—			—			50			987			1,037			1,037
Other noninterest income		7,853			13			56			7,922			89			32			121			8,043
Total noninterest income		7,853			13			2,472			10,338			3,768			1,019			4,787			15,125

Total noninterest expense		37,764			792			1,354			39,910			2,849			669			3,518			43,428

Income before income tax expense		10,539			2,761			1,288			14,588			1,237			5,358			6,595			21,183
Income tax expense		744			621			270			1,635			288			1,253			1,541			3,176
Net income	$	9,795		$	2,140		$	1,018		$	12,953		$	949		$	4,105		$	5,054		$	18,007

Period-end assets	$	4,805,449		$	738,300		$	20,568		$	5,564,317		$	36,834		$	121,983		$	158,817		$	5,723,134

Net interest margin		3.75	%		2.49	%		NM			3.62	%		NM			NM			NM			4.12	%

Net-revenue concentration*		72	%		6	%		4	%		82	%		6	%		12	%		18	%		100	%


	Three Months Ended June 30, 2018
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	39,348		$	4,164		$	103		$	43,615		$	328		$	7,141		$	7,469		$	51,084

Provision for loan and lease losses		523			250			—			773			(888)			5,047			4,159			4,932

Net refund transfer fees		—			—			—			—			3,473			—			3,473			3,473
Mortgage banking income		—			—			1,316			1,316			—			—			—			1,316
Program fees		—			—			—			—			124			1,199			1,323			1,323
Other noninterest income		7,725			11			49			7,785			80			319			399			8,184
Total noninterest income		7,725			11			1,365			9,101			3,677			1,518			5,195			14,296

Total noninterest expense		35,415			850			1,176			37,441			2,273			918			3,191			40,632

Income before income tax expense		11,135			3,075			292			14,502			2,620			2,694			5,314			19,816
Income tax expense		2,168			702			62			2,932			609			609			1,218			4,150
Net income	$	8,967		$	2,373		$	230		$	11,570		$	2,011		$	2,085		$	4,096		$	15,666

Period-end assets	$	4,501,539		$	634,452		$	17,998		$	5,153,989		$	27,192		$	84,764		$	111,956		$	5,265,945

Net interest margin		3.71	%		3.08	%		NM			3.64	%		NM			NM			NM			4.19	%

Net-revenue concentration*		73	%		6	%		2	%		81	%		6	%		13	%		19	%		100	%

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

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	Six Months Ended June 30, 2019
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	83,224		$	6,852		$	272		$	90,348		$	21,148		$	14,749		$	35,897		$	126,245

Provision for loan and lease losses		1,616			642			—			2,258			13,826			5,607			19,433			21,691

Net refund transfer fees		—			—			—			—			20,729			—			20,729			20,729
Mortgage banking income		—			—			3,955			3,955			—			—			—			3,955
Program fees		—			—			—			—			196			1,915			2,111			2,111
Other noninterest income		14,749			23			96			14,868			220			659			879			15,747
Total noninterest income		14,749			23			4,051			18,823			21,145			2,574			23,719			42,542

Total noninterest expense		73,314			1,550			2,674			77,538			9,963			1,436			11,399			88,937

Income before income tax expense		23,043			4,683			1,649			29,375			18,504			10,280			28,784			58,159
Income tax expense		2,509			1,054			346			3,909			4,318			2,409			6,727			10,636
Net income	$	20,534		$	3,629		$	1,303		$	25,466		$	14,186		$	7,871		$	22,057		$	47,523

Period-end assets	$	4,805,449		$	738,300		$	20,568		$	5,564,317		$	36,834		$	121,983		$	158,817		$	5,723,134

Net interest margin		3.81	%		2.63	%		NM			3.69	%		NM			NM			NM			4.88	%

Net-revenue concentration*		58	%		4	%		3	%		65	%		25	%		10	%		35	%		100	%


	Six Months Ended June 30, 2018
	Core Banking												Republic Processing Group
										Total			Tax			Republic
	Traditional			Warehouse			Mortgage			Core			Refund			Credit			Total			Total
(dollars in thousands)	Banking			Lending			Banking			Banking			Solutions			Solutions			RPG			Company

Net interest income	$	77,536		$	7,755		$	175		$	85,466		$	19,014		$	14,269		$	33,283		$	118,749

Provision for loan and lease losses		1,462			271			—			1,733			12,501			7,953			20,454			22,187

Net refund transfer fees		—			—			—			—			19,825			—			19,825			19,825
Mortgage banking income		—			—			2,336			2,336			—			—			—			2,336
Program fees		—			—			—			—			183			2,836			3,019			3,019
Other noninterest income		14,727			19			87			14,833			1,190			638			1,828			16,661
Total noninterest income		14,727			19			2,423			17,169			21,198			3,474			24,672			41,841

Total noninterest expense		68,807			1,689			2,380			72,876			8,798			2,003			10,801			83,677

Income before income tax expense		21,994			5,814			218			28,026			18,913			7,787			26,700			54,726
Income tax expense		3,940			1,329			46			5,315			4,463			1,813			6,276			11,591
Net income	$	18,054		$	4,485		$	172		$	22,711		$	14,450		$	5,974		$	20,424		$	43,135

Period-end assets	$	4,501,539		$	634,452		$	17,998		$	5,153,989		$	27,192		$	84,764		$	111,956		$	5,265,945

Net interest margin		3.65	%		3.13	%		NM			3.60	%		NM			NM			NM			4.85	%

Net-revenue concentration*		57	%		5	%		2	%		64	%		25	%		11	%		36	%		100	%

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

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17. 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, 2019 and 2018:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018

Federal rate times financial statement income		21.00	%		21.00	%		21.00	%		21.00	%
Effect of:
State taxes, net of federal benefit		(2.47)			0.82			(0.51)			1.54
General business tax credits		(0.55)			(0.63)			(0.68)			(0.31)
Nontaxable income		(1.27)			(1.35)			(0.89)			(0.94)
Other, net		(1.72)			1.10			(0.63)			(0.11)
Effective tax rate		14.99	%		20.94	%		18.29	%		21.18	%

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

·

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

·

In April 2019, Kentucky enacted HB458, which allows for combined filing for Republic Bancorp and the Bank. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021 and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance on the deferred tax asset for these losses is approximately $815,000. This benefit was recorded in the second quarter of 2019, with 100% of this benefit attributed to the Traditional Bank.

·

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

18. SUBSEQUENT EVENT

Sale of Four Banking Centers

In July 2019, the Bank entered into a definitive agreement to sell its four banking centers located in the Kentucky cities of Owensboro, Elizabethtown and Frankfort to Limestone Bank (“Limestone”), a subsidiary of Limestone Bancorp, Inc. The agreement provides that Limestone will acquire loans, including credit cards, with balances of approximately $112 million as of June 30, 2019, and assume deposits with balances of approximately $153 million as of the same date, associated with the four banking centers. In addition, Limestone will acquire substantially all the fixed assets of these locations, which had a book value of $1.3 million as of June 30, 2019. Based on the June 30, 2019 deposits, the all-in blended premium for the transaction is expected to be near 6% of the total deposits transferred. The final calculated premium will be primarily based on the trailing 10-day average amount of the deposits as of the closing date, as well as the branch location for the deposits. The transaction is subject to customary closing conditions, including regulatory approvals, and is anticipated to be completed in the fourth quarter of 2019.

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

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

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

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

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

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

Broadly speaking, forward-looking statements include:

·

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

·

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

·

forecasts of future economic performance; and

·

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

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

·

changes in political and economic conditions;

·

new information concerning the impact of the TCJA;

·

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

·

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

·

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

·

equity and fixed income market fluctuations;

·

client bankruptcies and loan defaults;

·

inflation;

·

recession;

·

natural disasters impacting Company operations;

·

future acquisitions;

·

integrations of acquired businesses;

·

changes in technology;

·

changes in applicable laws and regulations or the interpretation and enforcement thereof;

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·

changes in fiscal, monetary, regulatory and tax policies;

·

changes in accounting standards;

·

monetary fluctuations;

·

changes to the Company’s overall internal control environment;

·

success in gaining regulatory approvals when required;

·

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

·

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

·

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

Issued but Not Yet Effective Accounting Standards Updates

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

RECENT DEVELOPMENTS

Sale of Banking Centers

In July 2019, the Bank entered into a definitive agreement to sell its four banking centers located in the Kentucky cities of Owensboro, Elizabethtown and Frankfort to Limestone Bank (“Limestone”), a subsidiary of Limestone Bancorp, Inc. The agreement provides that Limestone will acquire loans, including credit cards, with balances of approximately $112 million as of June 30, 2019, and assume deposits with balances of approximately $153 million as of the same date, associated with the four banking centers. In addition, Limestone will acquire substantially all the fixed assets of these locations, which had a book value of $1.3 million as of June 30, 2019. Based on the June 30, 2019 deposits, the all-in blended premium for the transaction is expected to be near 6% of the total deposits transferred. The final calculated premium will be primarily based on the trailing 10-day average amount of the deposits as of the closing date, as well as the branch location for the deposits. The transaction is subject to customary closing conditions, including regulatory approvals, and is anticipated to be completed in the fourth quarter of 2019.

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

Sale of Reverse Mortgage Loans Held for Sale

During the second quarter of 2019, the Company reached an agreement with one of its Warehouse clients to take possession of certain first lien, residential reverse mortgage loans as payment for the approximate $12 million outstanding on the client’s Warehouse facility with the Bank. The Bank took possession of these loans as payment on the Warehouse facility after the client informed the Bank of its intent to close its business operations. These loans were sold by the Company in July 2019 at a loss of approximately $200,000.

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BUSINESS SEGMENT COMPOSITION

As of June 30, 2019, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.

(I) Traditional Banking segment

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

Kentucky — 32

Metropolitan Louisville — 18

Central Kentucky — 9

Elizabethtown — 1*

Frankfort — 1*

Georgetown — 1

Lexington — 5

Shelbyville — 1

Western Kentucky — 2

Owensboro — 2*

Northern Kentucky — 3

Covington — 1

Crestview Hills — 1

Florence — 1

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 8**

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3**

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

** Includes an LPO

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

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

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

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

Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial Lending, Business Banking, and Retail Banking channels.

In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. Clients are generally located within the Bank’s market footprint, or in an adjacent area to the market footprint.

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Construction and Land Development Lending — To a lesser extent, the Bank originates business loans for the construction of both single-family residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots.

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

Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank’s markets.

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

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

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

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

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

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.”

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(II) Warehouse Lending segment

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

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

(III) Mortgage Banking segment

Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first lien residential real estate loans that are sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. A fee is received by the Bank for performing these standard servicing functions.

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

(IV) Tax Refund Solutions segment

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

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

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

EA features consistent during 2018 and 2019:

·

Offered only during the first two months of each year;

·

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

·

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

·

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

·

If an insufficient refund to repay the EA occurs:

o

there is no recourse to the taxpayer,

o

no negative credit reporting on the taxpayer, and

o

no collection efforts against the taxpayer.

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EA features modified from 2018 to 2019:

·

During 2019, the taxpayer was given the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250. This compares to a maximum loan amount of $3,500 during 2018; and

·

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

The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer’s tax return is submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with provisions for all probable EA losses made in the first quarter of each year. Unpaid EAs are charged off by June 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged off loans.

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

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

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

(V) Republic Credit Solutions segment

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

·

RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United States with certain services provided by Elevate Credit, Inc., its third-party servicer provider. RCS sells participation interests equal to 90% of the balances generated within three business days to a third-party special purpose entity and retains the remaining 10% interest. The line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale are carried at the lower of cost or fair value.

·

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

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

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

Total Company net income for the second quarter of 2019 was $18.0 million, a $2.3 million, or 15%, increase from the same period in 2018. Diluted EPS increased to $0.86 for the quarter ended June 30, 2019 compared to $0.74 for the same period in 2018.

Other general highlights by reportable segment consisted of the following:

Traditional Banking segment

·

Net income increased $828,000, or 9%, for the second quarter of 2019 compared to the same period in 2018.

·

Net interest income increased $2.5 million, or 6%, for the second quarter of 2019 compared to the same period in 2018.

·

The Traditional Banking Provision was $1.4 million for the second quarter of 2019 compared to $523,000 for the same period in 2018.

·

Total noninterest income increased $128,000, or 2%, for the second quarter of 2019 compared to the same period in 2018.

·

Total noninterest expense increased $2.3 million, or 7%, for the second quarter of 2019 compared to same period in 2018.

Warehouse Lending segment

·

Net income decreased $233,000, or 10%, for the second quarter of 2019 compared to the same period in 2018.

·

Net interest income decreased $207,000, or 5%, for the second quarter of 2019 compared to the same period in 2018.

·

The Warehouse Provision was a net charge of $417,000 for the second quarter of 2019 compared to a net charge of $250,000 for the same period in 2018.

·

Total committed Warehouse lines remained at $1.1 billion from December 31, 2018 to June 30, 2019.

·

Average line usage was 57% during the second quarter of 2019 compared to 51% during the same period in 2018.

Mortgage Banking segment

·

Within the Mortgage Banking segment and as a component of noninterest income, mortgage banking income increased $1.1 million, or 84%, during the second quarter of 2019 compared to the same period in 2018.

·

Overall, Republic’s originations of secondary market loans totaled $82 million during the second quarter of 2019 compared to $55 million during the same period in 2018.

Tax Refund Solutions segment

·

Net income decreased $1.1 million, or 53%, for the second quarter of 2019 compared to the same period in 2018.

·

Net interest income increased $382,000 for the second quarter of 2019 compared to the same period in 2018.

·

Overall, TRS recorded a net charge to the Provision of $392,000 during the second quarter of 2019, compared to a net credit of $888,000 for the same period in 2018.

·

Noninterest income increased $91,000, or 2%, for the second quarter of 2019 compared to the same period in 2018.

·

Net RT revenue increased $156,000, or 4%, for the second quarter of 2019 compared to the same period in 2018.

·

Noninterest expense was $2.8 million for the second quarter of 2019 compared to $2.3 million for the same period in 2018.

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Republic Credit Solutions segment

·

Net income increased $2.0 million for the second quarter of 2019 compared to the same period in 2018.

·

Net interest income increased $91,000, or 1%, for the second quarter of 2019 compared to the same period in 2018.

·

Overall, RCS recorded a net charge to the Provision of $2.2 million during the second quarter of 2019 compared to a net charge of $5.0 million for the same period in 2018.

·

Noninterest income decreased $499,000, or 33%, for the second quarter of 2019 compared to the same period in 2018.

·

Noninterest expense was $669,000 for the second quarter of 2019 compared to $918,000 for the same period in 2018.

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

Net Interest Income

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

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

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

Unknown variables, which may impact the Company’s net interest income and net interest margin in the future, include, but are not limited to, the actual shape and steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.

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

Total Company net interest income increased $2.9 million, or 6%, during the second quarter of 2019 compared to the same period in 2018. Growth in average loans generally drove the Company’s rise in net interest income.

Total Company net interest margin decreased to 4.12% during the second quarter of 2019 compared to 4.19% for the same period in 2018. The Company’s overall net interest margin decreased due mainly to a change in its earning-assets mix, as the average balance of RCS’ substantially-higher-yielding line-of-credit and subprime credit card products as a percent of total interest-earning assets decreased from the second quarter of 2018 to the second quarter of 2019. In addition, the Core Bank’s average outstanding balances of the Company’s Warehouse lines of credit increased as a percent of total interest-earning assets during this same period. Concurrently, while the average outstanding Warehouse balances to total interest-earning assets increased from the second quarter of 2018 to the second quarter of 2019, the Warehouse net interest margin compressed due to higher funding costs combined with competitive pricing

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pressures, which caused the overall Warehouse loan yield to decline during the same period. The margin compression resulting from the change in the Company’s interest-earning asset mix described above, more than offset the margin expansion that occurred within the Traditional Banking segment during the second quarter of 2019 compared the same period in 2018.

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

Traditional Banking segment

The Traditional Banking’s net interest income increased $2.5 million, or 6%, for the second quarter of 2019 compared to the same period in 2018. Traditional Banking’s net interest margin was 3.75% for the second quarter of 2019, an expansion of four basis points over the same period in 2018.

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

·

Average loans increased $196 million, or 6%, during the second quarter of 2019 compared to the same period in 2018. The primary contributors for the increase in the quarter-over-quarter average balances were C&I loans, which grew $80 million, and CRE loans, which grew $56 million.

·

Despite a 31-basis-point increase in the Traditional Banking segment’s cost of interest-bearing liabilities, its net interest margin continued to expand due to the above-mentioned strong loan growth and increased value from its noninterest-bearing funding. The difference between the Traditional Banking segment’s net interest margin and net interest spread was 18 basis points during the second quarter of 2019 compared to 14 basis points during the second quarter of 2018, with the differential representing the increased value to the net interest margin of noninterest-bearing deposits and stockholders’ equity. The increase in this value resulted from a 30-basis-point rise in the yield on the Traditional Banking segment’s interest-earning assets from period to period.

Warehouse Lending segment

Despite a 17% increase in average outstanding Warehouse balances during the second quarter of 2019 compared to the second quarter of 2018, a 59-basis-point compression in the Warehouse segment’s net interest margin during the same period drove a $207,000 decrease in its net interest income. The following factors led to the overall changes in the Warehouse segment’s net interest margin and net interest income:

·

Competitive pricing pressure to the Bank on Warehouse lines of credit resulting from the negative impact of an inverted yield curve on Warehouse clients primarily drove the 59-basis-point compression in the Warehouse segment’s net interest margin. More specifically, Warehouse clients utilize the Bank’s Warehouse lines of credit to fund long-term fixed rate loans on their balance sheets prior to these loans being sold to their end-buyers. The inverted yield curve has caused Warehouse clients to experience a small, and potentially negative, spread on these long-term fixed rate loans while they are held on their balance sheets. As a result, Warehouse clients have continued to consolidate their lines of credit from their various bank providers, including the Bank, in exchange for better pricing.

·

A sharp decline in long-term fixed mortgage rates drove increased client usage of the Bank’s Warehouse lines of credit, driving average outstanding Warehouse balances from $542 million during the second quarter of 2018 to $635 million during the second quarter of 2019. Usage rates on Warehouse lines were 57% of the $1.1 billion of average Warehouse lines outstanding during the second quarter of 2019 compared to 51% of the $1.1 billion of average Warehouse lines outstanding for the same period in 2018.

Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 64% during the third quarter of 2015. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 57% during 2016.

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Republic Credit Solutions segment

RCS’s net interest income increased $91,000, or 1%, from the second quarter of 2018 to the second quarter of 2019. The increase was driven primarily by increases in interest income from RCS’s line-of-credit and hospital receivables products partially offset by a decrease in interest income from RCS’s discontinued credit-card product. The overall net interest margin at RCS declined from 36.6% during the second quarter of 2018 to 26.6% for the second quarter of 2019. The decline in net interest margin at RCS was driven by a change in the mix of interest earning assets, as RCS discontinued its higher-yielding subprime credit card product in January of 2019 and substantially increased the average balances of its lower-yielding hospital receivables over the second quarter of 2018.

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

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Table 1 — Total Company Average Balance Sheets and Interest Rates



	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
	Average				Average		Average				Average
(dollars in thousands)	Balance		Interest		Rate		Balance		Interest		Rate

ASSETS

Interest-earning assets:
Federal funds sold and other interest-earning deposits	$	297,205	$	1,753	2.36	%	$	276,246	$	1,245	1.80	%
Investment securities, including FHLB stock(1)		514,366		3,700	2.88			506,209		3,167	2.50
TRS Easy Advance loans (2)		16,687		195	4.67			10,380		38	1.46
Other RPG loans(3)(6)		109,747		7,659	27.92			78,287		7,281	37.20
Outstanding Warehouse lines of credit(4)(6)		634,688		7,872	4.96			541,537		6,890	5.09
All other Traditional Bank loans(5)(6)		3,663,783		44,485	4.86			3,462,184		39,735	4.59

Total interest-earning assets		5,236,476		65,664	5.02			4,874,843		58,356	4.79

Allowance for loan and lease losses		(58,825)						(52,279)

Noninterest-earning assets:
Noninterest-earning cash and cash equivalents		74,763						74,087
Premises and equipment, net		43,783						46,843
Bank owned life insurance		65,470						63,974
Other assets(1)		118,858						67,313
Total assets	$	5,480,525					$	5,074,781

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:
Transaction accounts	$	1,138,347	$	1,586	0.56	%	$	1,113,097	$	982	0.35	%
Money market accounts		754,207		2,024	1.07			609,693		864	0.57
Time deposits		413,530		2,058	1.99			340,861		1,336	1.57
Reciprocal money market and time deposits		192,486		685	1.42			315,285		601	0.76
Brokered deposits		90,266		550	2.44			31,394		151	1.92

Total interest-bearing deposits		2,588,836		6,903	1.07			2,410,330		3,934	0.65

Securities sold under agreements to repurchase and other short-term borrowings		220,189		330	0.60			178,063		222	0.50
Federal Home Loan Bank advances		710,879		4,062	2.29			593,187		2,723	1.84
Subordinated note		41,240		423	4.10			41,240		393	3.81

Total interest-bearing liabilities		3,561,144		11,718	1.32			3,222,820		7,272	0.90

Noninterest-bearing liabilities and Stockholders’ equity:
Noninterest-bearing deposits		1,098,817						1,146,403
Other liabilities		91,841						42,481
Stockholders’ equity		728,723						663,077
Total liabilities and stockholders’ equity	$	5,480,525					$	5,074,781

Net interest income			$	53,946					$	51,084

Net interest spread					3.70	%					3.89	%

Net interest margin					4.12	%					4.19	%

(1)

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

(2)

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

(3)

Interest income includes loan fees of $6.2 million and $6.1 million for the three months ended June 30, 2019 and 2018.

(4)

Interest income includes loan fees of $786,000 and $833,000 for the three months ended June 30, 2019 and 2018.

(5)

Interest income includes loan fees of $1.3 million and $1.5 million for the three months ended June 30, 2019 and 2018.

(6)

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

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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


		Three Months Ended June 30, 2019
		Compared to
		Three Months Ended June 30, 2018
	Total Net		Increase / (Decrease) Due to
(in thousands)	Change		Volume		Rate

Interest income:

Federal funds sold and other interest-earning deposits	$	508	$	100	$	408
Investment securities, including FHLB stock		533		52		481
TRS Easy Advance loans*		157		(4)		161
Other RPG loans		378		2,476		(2,098)
Outstanding Warehouse lines of credit		982		1,159		(177)
All other Traditional Bank loans		4,750		2,381		2,369
Net change in interest income		7,308		6,164		1,144

Interest expense:

Transaction accounts		604		23		581
Money market accounts		1,160		243		917
Time deposits		722		319		403
Reciprocal money market and time deposits		84		(297)		381
Brokered deposits		399		349		50
Securities sold under agreements to repurchase and other short-term borrowings		108		58		50
Federal Home Loan Bank advances		1,339		599		740
Subordinated note		30		—		30
Net change in interest expense		4,446		1,294		3,152

Net change in net interest income	$	2,862	$	4,870	$	(2,008)

*Volume for Easy Advances is based on total fees earned during the period presented.

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Provision for Loan and Lease Losses

The Company recorded a Provision of $4.5 million for the second quarter of 2019, compared to $4.9 million for the same period in 2018. The significant components comprising the Company’s Provision by reportable segment were as follows:

Traditional Banking segment

The Traditional Banking Provision during the second quarter of 2019 was $1.4 million, compared to $523,000 for the second quarter of 2018. An analysis of the Provision for the second quarter of 2019 compared to the same period in 2018 follows:

·

Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $890,000 and $868,000 to the Provision for the second quarters of 2019 and 2018. Loan growth primarily drove the charge to the Provision in both periods.

·

Related to the Bank’s loans rated Substandard and Special Mention, the Bank recorded a net charge to the Provision of $588,000 for the second quarter of 2019 compared to a net credit to the Provision of $298,000 for the second quarter 2018. The charge during the second quarter of 2019 includes a $1.2 million Provision for one C&I relationship that defaulted during the quarter. Despite personal guarantees associated with this relationship, the Bank recorded a large estimated Provision due to the potential for a protracted legal conflict and the uncertainty associated with these types of legal conflicts, in general.

As a percentage of total loans, the Traditional Banking Allowance was 0.87% at June 30, 2019 compared to 0.85% at December 31, 2018 and 0.86% at June 30, 2018. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at June 30, 2019.

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

Warehouse Lending segment

Warehouse recorded a net charge to the Provision of $417,000 for the second quarter of 2019 compared to a net charge of $250,000 for the same period in 2018. Provision expense for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $167 million during the second quarter of 2019 compared to an increase of $100 million during the second quarter of 2018.

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

Tax Refund Solutions segment

TRS recorded a net charge to the Provision of $392,000 for the second quarter of 2019 compared to a net credit to the Provision of $888,000 during the same period in 2018. The net credit during the second quarter of 2018 resulted from better than expected paydowns from the US Treasury on unpaid EA loans, allowing the Company to reverse a portion of the loan loss provisions it recorded during the first quarter of 2018. Conversely, loan paydowns from the US Treasury during the second quarter of 2019 approximated the Company’s estimate from the first quarter of 2019, causing the Company’s loan loss reserve for EA loans to remain relatively unchanged from the first quarter. Provision expense at TRS during the second quarter of 2019 primarily reflects net charges of $353,000 to the Provision for TRS’s non-EA products, including its receivable assistance program loans and its small-dollar line of credit program. A net credit to the Provision of $7,000 was made during the second quarter of 2018 for similar non-EA loan products.

With the second quarter EA paydowns, the percent of unpaid EAs to total EAs originated dropped to 3.45% at June 30, 2019. This compares to 2.88% at June 30, 2018, a gap of 57 basis points. By comparison, the unpaid EA percentage was 5.84% at March 31, 2019, compared to 4.49% at March 31, 2018, representing a gap of 135 basis points. Management remains optimistic that this gap can continue to shrink through the remainder of 2019. With all unpaid EAs having been charged off as of June 30, 2019, any EA payments received throughout the remainder of 2019 will represent recovery credits directly to income.

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

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Republic Credit Solutions segment

As illustrated in Table 3 below, RCS recorded a Provision of $2.2 million during the second quarter of 2019 compared to a Provision of $5.0 million for the same period in 2018. The $2.8 million decrease in the Provision resulted from lower Provisions of $1.2 million and $1.6 million, respectively, for RCS’s line-of-credit product and its discontinued credit card product. The overall improvement in the Provision for the line-of-credit product was driven by a decline in its annualized historical loss rate combined with a year-to-year decrease in average outstanding balances. The decrease in losses within the RCS credit-card portfolio was due to the discontinuance of the program, effective January of this year.

While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS Allowance was 13.19% at June 30, 2019, 14.70% at December 31, 2018 and 16.13% at June 30, 2018. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at June 30, 2019.

Table 3 — RCS Provision by Product


	Three Months Ended Jun. 30,
(in thousands)	2019			2018	$ Change

Product:
Line of credit	$	2,213	$	3,445	$	(1,232)
Credit card		—		1,556		(1,556)
Hospital receivables		11		46		(35)
Total	$	2,224	$	5,047	$	(2,823)

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Table 4 — Summary of Loan and Lease Loss Experience


	Three Months Ended
	June 30,
(dollars in thousands)	2019			2018

Allowance at beginning of period	$	57,961		$	52,341

Charge-offs:

Traditional Banking:
Residential real estate		(368)			(22)
Commercial & industrial		—			(17)
Home equity		—			(34)
Consumer		(423)			(505)
Total Traditional Banking		(791)			(578)
Warehouse lines of credit		—			—
Total Core Banking		(791)			(578)

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		(13,425)			(8,773)
Other TRS loans		(264)			(55)
Republic Credit Solutions		(2,683)			(3,769)
Total Republic Processing Group		(16,372)			(12,597)
Total charge-offs		(17,163)			(13,175)

Recoveries:

Traditional Banking:
Residential real estate		229			183
Commercial real estate		2			3
Construction & land development		—			25
Commercial & industrial		3			4
Home equity		8			203
Consumer		119			155
Total Traditional Banking		361			573
Warehouse lines of credit		—			—
Total Core Banking		361			573

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		5			82
Other TRS loans		(6)			4
Republic Credit Solutions		365			290
Total Republic Processing Group		364			376

Total recoveries		725			949

Net loan charge-offs		(16,438)			(12,226)

Provision - Core Banking		1,844			773
Provision - RPG		2,616			4,159
Total Provision		4,460			4,932
Allowance at end of period	$	45,983		$	45,047

Credit Quality Ratios - Total Company:

Allowance to total loans		1.04	%		1.07	%
Allowance to nonperforming loans		237			245
Net loan charge-offs to average loans		1.49			1.19

Credit Quality Ratios - Core Banking:

Allowance to total loans		0.76	%		0.76	%
Allowance to nonperforming loans		171			179
Net loan charge-offs to average loans		0.04			—

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Noninterest Income

Total Company noninterest income increased $829,000, or 6%, during the second quarter of 2019 compared to the same period in 2018. The most significant components comprising the total Company’s noninterest income by reportable segment were as follows:

Traditional Banking segment

Traditional Banking’s noninterest income increased $128,000, or 2%, for the second quarter of 2019 compared to the same period in 2018. The most significant categories affecting the change in noninterest income for the quarter were as follows:

·

Service charges on deposit accounts remained at $3.6 million for the second quarter of 2019 compared the same period in 2018. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the quarters ended June 30, 2019 and 2018 was $2.2 million and $2.1 million. The total daily overdraft charges, net of refunds, included in interest income for the quarters ended June 30, 2019 and 2018 were $566,000 and $451,000.

·

Interchange income increased $375,000, or 13%, with debit card interchange fees up $281,000, or 12%, and credit card interchange fees up $94,000, or 24%. Increases of 7% in active debit cards and 4% in active credit cards over the previous 12 months, as well as the corresponding usage on those cards, drove the increase in interchange fees.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income increased $1.1 million, or 84%, during the second quarter of 2019 compared to the same period in 2018, which resulted from a $27 million increase in secondary market loans originated from period to period combined with a $33 million increase in the Bank’s pipeline of secondary market loans in process from June 30, 2018 to June 30, 2019. Over the previous 12 months, the Bank has continued to invest in staffing and other resources for the mortgage banking function. A sharp decline in long-term mortgage rates during the quarter, combined with the Bank’s continued investments in mortgage resources, contributed to the increased quarter-over-quarter mortgage activity.

Republic Credit Solutions segment

RCS’s noninterest income decreased $499,000, or 33%, during the second quarter of 2019 compared to the same period in 2018, resulting primarily from the discontinuation of its credit-card product.

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

Table 5 — RCS Program Fees by Product


	Three Months Ended Jun. 30,
(in thousands)	2019			2018	$ Change

Product:
Line of credit	$	1,121	$	1,158	$	(37)
Credit card		—		464		(464)
Hospital receivables		58		41		17
Installment loans*		(192)		(464)		272
Total	$	987	$	1,199	$	(212)

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

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Noninterest Expenses

Total Company noninterest expenses increased $2.8 million, or 7%, during the second quarter of 2019 compared to the same period in 2018. The most significant components comprising the increase in noninterest expense by reportable segment were as follows:

Traditional Banking segment

Traditional Banking noninterest expenses increased $2.3 million, or 7%, for the second quarter of 2019 compared to the same period in 2018. The most significant categories driving the change in noninterest expense were as follows:

·

Salaries and employee benefits expense increased $2.2 million, or 11%. Annual merit increases and the addition of 79 Traditional Bank FTE employees from June 30, 2018 to June 30, 2019 primarily drove the increase.

·

Interchange related expense increased $266,000, or 25%, primarily driven by a 7% increase in active debit cards from June 30, 2018 to June 30, 2019, along with transactional rate increases for fraud prevention services provided by the Bank’s third-party service provider.

Tax Refund Solutions segment

TRS’s noninterest expenses increased $576,000, or 25%, during the second quarter of 2019 compared to the same period in 2018 resulting primarily from a $374,000 increase in salaries and employee benefits expense.

Republic Credit Solutions segment

RCS’s noninterest expense decreased $249,000, or 27%, during the second quarter of 2019 compared to the same period in 2018. A reduction of $250,000 in RCS’s data processing costs resulting from the discontinuation of RCS’s credit-card portfolio primarily drove the overall decrease from period to period.

Income Tax Expense

The Total Company effective income tax rate was 15% for the second quarter of 2019 compared to 21% for the same period in 2018. The following drove the lower rate in 2019:

·

In April 2019, Kentucky enacted HB458, which allows for combined filing for Republic Bancorp and the Bank. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021 and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance on the deferred tax asset for these losses is approximately $815,000. This benefit was recorded in the second quarter of 2019, with 100% of this benefit attributed to the Traditional Bank.

·

The Company received $388,000 in income tax benefit during the second quarter of 2019 associated with equity compensation. Substantially all of this benefit was attributed to the Traditional Bank.

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OVERVIEW (Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018)

Total Company net income for the first six months of 2019 was $47.5 million, a $4.4 million, or 10%, increase from the same period in 2018. Diluted EPS increased to $2.28 for the six months ended June 30, 2019 compared to $2.06 for the same period in 2018.

The following are general highlights by reportable segment:

Traditional Banking segment

·

Net income increased $2.5 million, or 14%, for the first six months of 2019 compared to the same period in 2018.

·

Net interest income increased $5.7 million, or 7%, for the first six months of 2019 compared to the same period in 2018.

·

The Traditional Banking Provision was $1.6 million for the first six months of 2019 compared to $1.5 million for the same period in 2018.

·

Total noninterest income increased $22,000 for the first six months of 2019 compared to the same period in 2018.

·

Total noninterest expense increased $4.5 million, or 7%, for the first six months of 2019 compared to same period in 2018.

·

Total nonperforming loans to total loans for the Traditional Banking segment was 0.54% at June 30, 2019 compared to 0.45% at December 31, 2018.

·

Delinquent loans to total loans for the Traditional Banking segment was 0.35% at June 30, 2019 compared to 0.25% at December 31, 2018.

Warehouse Lending segment

·

Net income decreased $856,000, or 19%, for the first six months of 2019 compared to the same period in 2018.

·

Net interest income decreased $903,000, or 12%, for the first six months of 2019 compared to the same period in 2018.

·

The Warehouse Provision was a net charge of $642,000 for the first six months of 2019 compared to a net charge of $271,000 for the same period in 2018.

·

Total committed Warehouse lines remained at $1.1 billion from December 31, 2018 to June 30, 2019.

·

Average line usage was 48% during the first six months of 2019 compared to 48% during the same period in 2018.

Mortgage Banking segment

·

Within the Mortgage Banking segment, mortgage banking income increased $1.6 million, or 69%, during the first six months of 2019 compared to the same period in 2018.

·

Overall, Republic’s originations of secondary market loans totaled $123 million during the first six months of 2019 compared to $84 million during the same period in 2018, with the Company’s gain recognized as a percent of total originations increasing to 2.83% during the first six months of 2019 from 2.21% during the same period in 2018.

Tax Refund Solutions segment

·

Net income decreased $264,000, or 2%, for the first six months of 2019 compared to the same period in 2018.

·

Net interest income increased $2.1 million, or 11%, for the first six months of 2019 compared to the same period in 2018.

·

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

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·

Overall, TRS recorded a net charge to the Provision of $13.8 million during the first six months of 2019 compared to a net charge of $12.5 million for the same period in 2018.

·

Noninterest income decreased $53,000 for the first six months of 2019 compared to the same period in 2018.

·

Net RT revenue increased $904,000, or 5%, for the first six months of 2019 compared to the same period in 2018.

·

Noninterest expense was $10.0 million for the first six months of 2019 compared to $8.8 million for the same period in 2018.

Republic Credit Solutions segment

·

Net income increased $1.9 million, or 32%, for the first six months of 2019 compared to the same period in 2018.

·

Net interest income increased $480,000, or 3%, for the first six months of 2019 compared to the same period in 2018.

·

Overall, RCS recorded a net charge to the Provision of $5.6 million during the first six months of 2019 compared to a net charge of $8.0 million for the same period in 2018.

·

Noninterest income decreased $900,000, or 26%, for the first six months of 2019 compared to the same period in 2018.

·

Noninterest expense was $1.4 million for the first six months of 2019 compared to $2.0 million for the same period in 2018.

·

Total nonperforming loans to total loans for the RCS segment was 0.16% at June 30, 2019 compared to 0.14% at December 31, 2018.

·

Delinquent loans to total loans for the RCS segment was 6.95% at June 30, 2019 compared to 7.97% at December 31, 2018.

RESULTS OF OPERATIONS (Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018)

Net Interest Income

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

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

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

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

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Total Company net interest income increased $7.5 million, or 6%, during the first six months of 2019 compared to the same period in 2018. Loan growth and margin expansion both contributed to the Company’s growth in net interest income. Total Company net interest margin increased to 4.88% during the first six months of 2019 compared to 4.85% for the same period in 2018.

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

Traditional Banking segment

The Traditional Banking’s net interest income increased $5.7 million, or 7%, for the first six months of 2019 compared to the same period in 2018. Traditional Banking’s net interest margin was 3.81% for the first six months of 2019, an increase of 16 basis points over the same period in 2018.

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

·

Average loans increased $182 million, or 5%, during the first six months of 2019 compared to the same period in 2018. The primary contributors for the increase in the year-over-year average balances were C&I loans, which grew $81 million, and CRE loans, which grew $48 million.

·

Despite a 31-basis-point increase in the Traditional Banking segment’s cost of interest-bearing liabilities, its net interest margin continued to expand due to the above-mentioned strong loan growth and increased value from its noninterest-bearing funding. The difference between the Traditional Banking segment’s net interest margin and net interest spread was 19 basis points during the first six months of 2019 compared to 13 basis points during the same period in 2018, with the differential representing the increased value to the net interest margin of noninterest-bearing deposits and stockholders’ equity. The increase in this value resulted from a 40-basis-point rise in the yield on the Traditional Banking segment’s interest-earning assets from period to period.

Warehouse Lending segment

Despite a 5% increase in average outstanding Warehouse balances during the first six months of 2019 compared to the same period in 2018, a 50-basis-point compression in the Warehouse segment’s net interest margin during the same period drove a $903,000 decrease in its net interest income. The following factors led to the overall changes in the Warehouse segment’s net interest margin and net interest income:

·

Competitive pricing pressure to the Bank on Warehouse lines of credit resulting from the negative impact of an inverted yield curve on Warehouse clients primarily drove the 50-basis-point compression in the Warehouse segment’s net interest margin. More specifically, Warehouse clients utilize the Bank’s Warehouse lines of credit to fund long-term fixed rate loans on their balance sheets prior to these loans being sold to their end-buyers. The inverted yield curve has caused Warehouse clients to experience a small, and potentially negative, spread on these long-term fixed rate loans while they are held on their balance sheets. As a result, Warehouse clients have continued to consolidate their lines of credit from their various bank providers, including the Bank, in exchange for better pricing.

·

A sharp decline in long-term fixed mortgage rates drove strong client usage of the Bank’s Warehouse lines of credit, particularly during the second quarter of 2019, driving average outstanding Warehouse balances from $495 million during the first six months of 2018 to $522 million during the first six months of 2019. While Warehouse usage rates remained consistent at 48% during the first six months of 2019 and 2018, the average outstanding Warehouse line was $1.1 billion during the first six months of 2019 compared to $1.0 billion during the same period in 2018.

Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 64% during the third quarter of 2015. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 57% during 2016.

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Tax Refund Solutions segment

TRS’s net interest income increased $2.1 million for the first six months of 2019 compared to the same period in 2018, resulting from a $1.2 million increase in interest income from its EA product and a $426,000 increase in interest income from commercial loans to its Tax Providers.

TRS’s EA product earned $19.1 million in interest income during the first six months of 2019, a $1.2 million, or 7%, increase from the same period in 2018. For the first six months 2019 tax season, TRS modified its EA product offering with the following changes:

·

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

·

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

·

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

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

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

Republic Credit Solutions segment

RCS’s net interest income increased $480,000, or 3%, from the first six months of 2018 to the first six months of 2019. The increase was driven primarily by an increase in fee income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income increased to $12.7 million during the first six months of 2019 compared to $12.3 million during the same period in 2018 and accounted for 80% and 83% of all RCS interest income on loans during the periods.

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

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Table 6 — Total Company Average Balance Sheets and Interest Rates


	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
	Average				Average		Average				Average
(dollars in thousands)	Balance		Interest		Rate		Balance		Interest		Rate

ASSETS

Interest-earning assets:
Federal funds sold and other interest-earning deposits	$	293,587	$	3,477	2.37	%	$	279,684	$	2,321	1.66	%
Investment securities, including FHLB stock(1)		538,923		7,781	2.89			529,356		6,297	2.38
TRS Easy Advance loans (2)		68,667		19,052	55.49			62,855		17,830	56.73
Other RPG loans(3)(6)		119,632		16,930	28.30			83,983		15,499	36.91
Outstanding Warehouse lines of credit(4)(6)		521,643		13,314	5.10			495,046		12,300	4.97
All other Traditional Bank loans(5)(6)		3,631,312		87,743	4.83			3,445,363		77,942	4.52

Total interest-earning assets		5,173,764		148,297	5.73			4,896,287		132,189	5.40

Allowance for loan and lease losses		(54,588)						(50,950)

Noninterest-earning assets:
Noninterest-earning cash and cash equivalents		132,931						159,303
Premises and equipment, net		44,051						46,569
Bank owned life insurance		65,283						63,781
Other assets(1)		117,168						60,937
Total assets	$	5,478,609					$	5,175,927

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:
Transaction accounts	$	1,129,824	$	3,104	0.55	%	$	1,109,066	$	1,742	0.31	%
Money market accounts		750,434		3,803	1.01			590,986		1,496	0.51
Time deposits		399,252		3,889	1.95			332,164		2,452	1.48
Reciprocal money market and time deposits		194,971		1,274	1.31			329,031		1,127	0.69
Brokered deposits		134,707		1,581	2.35			51,973		477	1.84

Total interest-bearing deposits		2,609,188		13,651	1.05			2,413,220		7,294	0.60

Securities sold under agreements to repurchase and other short-term borrowings		225,864		751	0.67			217,532		435	0.40
Federal Home Loan Bank advances		611,695		6,792	2.22			569,613		4,997	1.75
Subordinated note		41,240		858	4.16			41,240		714	3.46

Total interest-bearing liabilities		3,487,987		22,052	1.26			3,241,605		13,440	0.83

Noninterest-bearing liabilities and Stockholders’ equity:
Noninterest-bearing deposits		1,178,198						1,232,652
Other liabilities		94,586						49,263
Stockholders’ equity		717,838						652,407
Total liabilities and stock-holders’ equity	$	5,478,609					$	5,175,927

Net interest income			$	126,245					$	118,749

Net interest spread					4.47	%					4.57	%

Net interest margin					4.88	%					4.85	%

(1)

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

(2)

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

(3)

Interest income includes loan fees of $14.2 million and $13.3 million for the six months ended June 30, 2019 and 2018.

(4)

Interest income includes loan fees of $1.3 million and $1.5 million for the six months ended June 30, 2019 and 2018.

(5)

Interest income includes loan fees of $2.4 million and $2.7 million for the six months ended June 30, 2019 and 2018.

(6)

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

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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


		Six Months Ended June 30, 2019
		Compared to
		Six Months Ended June 30, 2018
	Total Net		Increase / (Decrease) Due to
(in thousands)	Change		Volume		Rate

Interest income:

Federal funds sold and other interest-earning deposits	$	1,156	$	120	$	1,036
Investment securities, including FHLB stock		1,484		116		1,368
TRS Easy Advance loans		1,222		(1,816)		3,038
Other RPG loans		1,431		5,589		(4,158)
Outstanding Warehouse lines of credit		1,014		673		341
All other Traditional Bank loans		9,801		4,333		5,468
Net change in interest income		16,108		9,015		7,093

Interest expense:

Transaction accounts		1,362		33		1,329
Money market accounts		2,307		489		1,818
Time deposits		1,437		556		881
Reciprocal money market and time deposits		147		(588)		735
Brokered deposits		1,104		939		165
Securities sold under agreements to repurchase and other short-term borrowings		316		17		299
Federal Home Loan Bank advances		1,795		390		1,405
Subordinated note		144		—		144
Net change in interest expense		8,612		1,836		6,776

Net change in net interest income	$	7,496	$	7,179	$	317

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

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Provision for Loan and Lease Losses

The Company recorded a Provision of $21.7 million for the first six months of 2019 compared to $22.2 million for the same period in 2018. The following were the most significant components comprising the Company’s Provision by reportable segment:

Traditional Banking segment

The Traditional Banking Provision during the first six months of 2019 was $1.6 million, compared to $1.5 million for the first six months of 2018. An analysis of the Provision for the first six months of 2019 compared to the same period in 2018 follows:

·

Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $1.2 million and $1.4 million to the Provision for the first six months of 2019 and 2018. Loan growth primarily drove the net charge to the Provision in both periods.

·

The Bank recorded net charges to the Provision of $616,000 and $109,000 for the first six months of 2019 and 2018 related to loans rated Substandard or Special Mention. The charge during the first six months of 2019 includes a $1.2 million Provision for one C&I relationship that defaulted during the period, with this charge partially offset by payoffs and paydowns of other loans rated Substandard or Special Mention. Despite personal guarantees associated with this relationship, the Bank recorded a large estimated Provision due to the potential for a protracted legal conflict and the uncertainty associated with these types of legal conflicts, in general.

As a percentage of total loans, the Traditional Banking Allowance was 0.87% at June 30, 2019 compared to 0.85% at December 31, 2018 and 0.86% at June 30, 2018. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at June 30, 2019.

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

Warehouse Lending segment

Warehouse recorded a net charge to the Provision of $642,000 for the first six months of 2019 compared to a net charge of $271,000 for the same period in 2018. Provision expense for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $257 million during the first six months of 2019 compared to an increase of $108 million during the first six months of 2018.

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

Tax Refund Solutions segment

TRS recorded a net charge to the Provision of $13.8 million during the first six months of 2019 compared to a net charge of $12.5 million for the same period in 2018. TRS’s Provision for EA loan losses was $13.4 million, or 3.45% of its $389 million in EAs originated during the first six months of 2019, compared to a Provision of $12.4 million, or 2.88% of its $430 million of EAs originated during the first six months of 2018.

The unpaid EA percentage was 5.84% at March 31, 2019, compared to 4.49% at March 31, 2018, representing a gap of 135 basis points. The unpaid EAs to total EAs originated dropped to 3.45% at June 30, 2019. This compares to 2.88% at June 30, 2018, a gap of 57 basis points. Management remains optimistic that this gap can continue to shrink through the remainder of 2019. With all unpaid EAs having been charged off as of June 30, 2019, any EA payments received throughout the remainder of 2019 will represent recovery credits directly to income.

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Provision expense at TRS during the first six months of 2019 also reflects net charges of $406,000 to the Provision for TRS’s non-EA products, including its receivable assistance program loans and its small-dollar line of credit program. A net charge to the Provision of $105,000 was made during the first six months of 2018 for similar non-EA loan products.

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

Republic Credit Solutions segment

As illustrated in Table 8 below, RCS recorded a Provision of $5.6 million during the first six months of 2019 compared to a Provision of $8.0 million for the same period in 2018. The $2.3 million decrease in the Provision from period to period was primarily attributable to a decrease in Provision for RCS’s discontinued credit-card product.

While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS Allowance was 13.19% at June 30, 2019, 14.70% at December 31, 2018 and 16.13% at June 30, 2018. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at June 30, 2019.

The following table presents RCS Provision by product:

Table 8 — RCS Provision by Product


	Six Months Ended Jun. 30,
(in thousands)	2019			2018	$ Change

Product:
Line of credit	$	5,573	$	5,644	$	(71)
Credit card		—		2,268		(2,268)
Hospital receivables		34		41		(7)
Total	$	5,607	$	7,953	$	(2,346)

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Table 9 — Summary of Loan and Lease Loss Experience


	Six Months Ended
	June 30,
(dollars in thousands)	2019			2018

Allowance at beginning of period	$	44,675		$	42,769

Charge-offs:

Traditional Banking:
Residential real estate		(457)			(358)
Commercial & industrial		—			(125)
Home equity		(13)			(34)
Consumer		(933)			(1,007)
Total Traditional Banking		(1,403)			(1,524)
Warehouse lines of credit		—			—
Total Core Banking		(1,403)			(1,524)

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		(13,425)			(12,478)
Commercial & industrial		(281)			(55)
Republic Credit Solutions		(6,507)			(7,465)
Total Republic Processing Group		(20,213)			(19,998)
Total charge-offs		(21,616)			(21,522)

Recoveries:

Traditional Banking:
Residential real estate		267			225
Commercial real estate		4			128
Construction & land development		—			27
Commercial & industrial		5			35
Home equity		38			229
Consumer		295			334
Total Traditional Banking		609			978
Warehouse lines of credit		—			—
Total Core Banking		609			978

Republic Processing Group:
Tax Refund Solutions:
Easy Advances		5			82
Commercial & industrial		—			5
Republic Credit Solutions		619			548
Total Republic Processing Group		624			635
Total recoveries		1,233			1,613

Net loan charge-offs		(20,383)			(19,909)

Provision - Core Banking		2,258			1,733
Provision - RPG		19,433			20,454
Total Provision		21,691			22,187
Allowance at end of period	$	45,983		$	45,047

Credit Quality Ratios - Total Company:

Allowance to total loans		1.04	%		1.07	%
Allowance to nonperforming loans		237			245
Net loan charge-offs to average loans		0.94			0.97

Credit Quality Ratios - Core Banking:

Allowance to total loans		0.76	%		0.76	%
Allowance to nonperforming loans		171			179
Net loan charge-offs to average loans		0.04			0.03

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Noninterest Income

Total Company noninterest income increased $701,000, or 2%, during the first six months of 2019 compared to the same period in 2018. The following were the most significant components comprising the total Company’s noninterest income by reportable segment:

Traditional Banking segment

Traditional Banking’s noninterest income increased $22,000 for the first six months of 2019 compared to the same period in 2018. The following were the most significant categories affecting the change in noninterest income:

·

Service charges on deposit accounts decreased $232,000, or 3%, to $6.9 million for the first six months of 2019 compared the same period in 2018. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the six months ended June 30, 2019 and 2018 were $4.2 million and $4.2 million. The total daily overdraft charges, net of refunds, included in interest income for the six months ended June 30, 2019 and 2018 were $1.1 million and $897,000.

·

Interchange income increased $463,000, or 9%, with debit card interchange fees up $438,000, or 10%. An increase of 11% in active debit cards over the previous 12 months, as well as the corresponding usage on those cards, drove the increase in interchange fees.

Mortgage Banking segment

Within the Mortgage Banking segment, mortgage banking income increased $1.6 million, or 69%, during the first six months of 2019 compared to the same period in 2018, which resulted from a $39 million increase in secondary market loans originated from period to period combined with a $33 million increase in the Bank’s pipeline of secondary market loans in process from June 30, 2018 to June 30, 2019. Over the previous 12 months, the Bank has continued to invest in staffing and other resources for the mortgage banking function. A sharp decline in long-term mortgage rates during the period, combined with the Bank’s continued investments in mortgage resources, contributed to the increased period-to-period mortgage activity.

Tax Refund Solutions segment

TRS’s noninterest income decreased $53,000, during the first six months of 2019 compared to the same period in 2018 resulting from a $904,000, or 5%, increase in net RT revenue that was more than fully offset by the lack of a one-time $1.0 million nonrefundable capital commitment fee recorded during the first six months of 2018. A nominal increase in RT pricing and a shift in the RT mix among the various Tax Providers primarily drove the rise in net RT revenues.

Republic Credit Solutions segment

RCS’s noninterest income decreased $900,000, or 26%, during the first six months of 2019 compared to the same period in 2018. As illustrated in Table 10 below, RCS program fees decreased $921,000, resulting primarily from a reduction in fees associated with the discontinuance of RCS’s credit-card product.

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The following table presents RCS program fees by product:

Table 10 — RCS Program Fees by Product


	Six Months Ended Jun. 30,
(in thousands)	2019			2018	$ Change

Product:
Line of credit	$	2,047	$	2,129	$	(82)
Credit card		—		1,036		(1,036)
Hospital receivables		93		73		20
Installment loans*		(225)		(402)		177
Total	$	1,915	$	2,836	$	(921)

*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 $5.3 million, or 6%, during the first six months of 2019 compared to the same period in 2018. The following were the most significant components comprising the increase in noninterest expense by reportable segment:

Traditional Banking segment

Traditional Banking noninterest expense increased $4.5 million, or 7%, for the first six months of 2019 compared to the same period in 2018. The most significant categories driving the change in noninterest expense were as follows:

·

Salaries and employee benefits expense increased $3.6 million, or 9%. Annual merit increases and the addition of 79 Traditional Bank FTE employees from June 30, 2018 to June 30, 2019 primarily drove the increase.

·

Interchange related expense increased $543,000, or 26%, primarily driven by a 7% increase in active debit cards from June 30, 2018 to June 30, 2019, along with transactional rate increases for fraud prevention services provided by the Bank’s third-party service provider.

Tax Refund Solutions segment

TRS’s noninterest expense increased $1.2 million, or 13%, during the first six months of 2019 compared to the same period in 2018 primarily due to $567,000 in legal reserves recorded during the first six months of 2019.

Republic Credit Solutions segment

RCS’s noninterest expense decreased $567,000, or 28%, during the first six months of 2019 compared to the same period in 2018 due to a $550,000 decrease in data processing expense resulting from the discontinuance of RCS’s credit card product.

Income Tax Expense

The Total Company effective income tax rate was 18% for the first six months of 2019 compared to 21% for the same period in 2018. The following drove the lower rate in 2019:

·

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

·

In April 2019, Kentucky enacted HB458, which allows for combined filing for Republic Bancorp and the Bank. Republic Bancorp had previously filed a separate company income tax return for Kentucky and generated net operating losses, for which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. Republic Bancorp expects to file a combined return beginning in 2021

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and to utilize these previously generated net operating losses. The tax benefit to reverse the valuation allowance on the deferred tax asset for these losses is approximately $815,000. This benefit was recorded in the second quarter of 2019, with 100% of this benefit attributed to the Traditional Bank.

·

The Company received $388,000 in income tax benefit during the second quarter of 2019 associated with equity compensation. Substantially all of this benefit was attributed to the Traditional Bank.

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

Table 11 — Loan Portfolio Composition


(in thousands)	June 30, 2019		December 31, 2018

Traditional Banking:
Residential real estate:
Owner occupied	$	907,826	$	907,005
Owner occupied - correspondent*		78,943		94,827
Nonowner occupied		259,166		242,846
Commercial real estate		1,253,868		1,248,940
Construction & land development		190,984		175,178
Commercial & industrial		447,295		430,355
Lease financing receivables		17,271		15,031
Home equity		296,834		332,548
Consumer:
Credit cards		17,429		19,095
Overdrafts		894		1,102
Automobile loans		63,553		63,475
Other consumer		53,768		46,642
Total Traditional Banking		3,587,831		3,577,044
Warehouse lines of credit*		725,337		468,695
Total Core Banking		4,313,168		4,045,739

Republic Processing Group*:
Tax Refund Solutions:
Easy Advances		—		—
Other TRS loans		711		13,744
Republic Credit Solutions		96,790		88,744
Total Republic Processing Group		97,501		102,488

Total loans**		4,410,669		4,148,227
Allowance for loan and lease losses		(45,983)		(44,675)

Total loans, net	$	4,364,686	$	4,103,552

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

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

Gross loans increased by $262 million, or 6%, during the first six months of 2019 to $4.4 billion at June 30, 2019. The most significant components comprising the change in loans by reportable segment follow:

Traditional Banking segment

Traditional Banking loans increased $11 million during the first six months of 2019, with $123 million of loan growth offset by $112 million of loans held for investment reclassified to held for sale during the second quarter of 2019. The Bank entered into a definitive agreement in July 2019 to sell four of its banking centers, with the loans related to this agreement classified as held for sale as of June 30, 2019.

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

Warehouse Lending segment

Outstanding Warehouse balances increased $257 million from December 31, 2018 to June 30, 2019. A sharp decline in long-term fixed mortgage rates during 2019, along with normal seasonal increases in Warehouse usage rates, 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 64% during the third quarter of 2015. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 57% during 2016.

Allowance for Loan and Lease Losses

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

The Company’s Allowance increased $1 million, or 3%, from December 31, 2018 to $46 million at June 30, 2019, primarily driven by general growth in some Core Bank portfolios. As a percent of total loans, the total Company’s Allowance decreased to 1.04% at June 30, 2019 compared to 1.08% at December 31, 2018. An analysis of the Allowance by reportable segment follows:

Traditional Banking segment

The Traditional Banking Allowance increased $1 million to $31 million, driven primarily by a $1.2 million Provision for one large C&I relationship that defaulted during the second quarter of 2019. The Traditional Bank Allowance to total Traditional Bank loans increased two basis point to 0.87% when comparing June 30, 2019 to December 31, 2018. As historical losses within the Traditional Banking segment have remained relatively stable and low for a sustained period of time, no material changes to its reserve percentages were required for the first six months of 2019.

Warehouse Lending segment

The Warehouse Allowance increased to approximately $2 million, and the Warehouse Allowance to total Warehouse loans remained at 0.25% when comparing June 30, 2019 to December 31, 2018. As of June 30, 2019, Warehouse had not incurred any historical losses, and as a result, its Allowance was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first quarter of 2019.

Republic Credit Solutions segment

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

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Asset Quality

Classified and Special Mention Loans

The Bank applies credit quality indicators, or “ratings,” to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard,” and PCI-Sub are considered “Classified.” Loans rated “Special Mention” or PCI-1 are considered Special Mention. The Bank’s Classified and Special Mention loans increased $4 million during the first six months of 2019 resulting primarily from the downgrade of one C&I relationship to Substandard during the second quarter of 2019. Despite personal guarantees associated with this relationship, the Company recorded a $1.2 million Provision for this C&I relationship due to the potential for a protracted legal conflict and the uncertainty associated with these types of legal conflicts, in general.

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

Table 12 — Classified and Special Mention Loans


(in thousands)	June 30, 2019		December 31, 2018

Loss	$	—	$	—
Doubtful		—		—
Substandard		24,458		19,860
Purchased Credit Impaired - Substandard		1,388		1,559
Total Classified Loans		25,846		21,419

Special Mention		20,826		21,205
Purchased Credit Impaired - Group 1		1,065		1,121
Total Special Mention Loans		21,891		22,326

Total Classified and Special Mention Loans	$	47,737	$	43,745

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Nonperforming Loans

Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. Impaired loans that are not placed on nonaccrual status are not included as nonperforming loans. The nonperforming loan category includes TDRs totaling approximately $11 million and $8 million at June 30, 2019 and December 31, 2018. Generally, all nonperforming loans are considered impaired.

Nonperforming loans to total loans increased to 0.44% at June 30, 2019 from 0.39% at December 31, 2018, as the total balance of nonperforming loans increased by $3 million, or 20%, while total loans increased $262 million, or 6%, during the first six months of 2019. One C&I relationship placed on nonaccrual status during the second quarter of 2019 primarily drove the increase in nonperforming loans.

Table 13 — Nonperforming Loans and Nonperforming Assets Summary


(in thousands)	June 30, 2019			December 31, 2018

Loans on nonaccrual status*	$	19,238		$	15,993
Loans past due 90-days-or-more and still on accrual**		166			145
Total nonperforming loans		19,404			16,138
Other real estate owned		1,095			160
Total nonperforming assets	$	20,499		$	16,298

Credit Quality Ratios - Total Company:
Nonperforming loans to total loans		0.44	%		0.39	%
Nonperforming assets to total loans (including OREO)		0.46			0.39
Nonperforming assets to total assets		0.36			0.31

Credit Quality Ratios - Core Bank:
Nonperforming loans to total loans		0.45	%		0.40	%
Nonperforming assets to total loans (including OREO)		0.47			0.40
Nonperforming assets to total assets		0.37			0.32

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

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

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Table 14 — Nonperforming Loan Composition


	June 30, 2019					December 31, 2018
				Percent of					Percent of
				Total					Total
(in thousands)	Balance			Loan Class		Balance			Loan Class

Traditional Banking:
Residential real estate:
Owner occupied		$	8,879	0.98	%		$	10,800	1.19	%
Owner occupied - correspondent			848	1.07				382	0.40
Nonowner occupied			461	0.18				669	0.28
Commercial real estate			2,361	0.19				2,318	0.19
Construction & land development			134	0.07				—	—
Commercial & industrial			5,046	1.13				630	0.15
Lease financing receivables			—	—				—	—
Home equity			1,444	0.49				1,095	0.33
Consumer:
Credit cards			—	—				—	—
Overdrafts			—	—				—	—
Automobile loans			47	0.07				75	0.12
Other consumer			18	0.03				37	0.08
Total Traditional Banking			19,238	0.54				16,006	0.45
Warehouse lines of credit			—	—				—	—
Total Core Banking			19,238	0.45				16,006	0.40

Republic Processing Group:
Tax Refund Solutions:
Easy Advances			—	—				—	—
Other TRS loans			13	1.83				4	0.03
Republic Credit Solutions			153	0.16				128	0.14
Total Republic Processing Group			166	0.17				132	0.13

Total nonperforming loans		$	19,404	0.44	%		$	16,138	0.39	%

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Table 15 — Stratification of Nonperforming Loans


	Number of Nonperforming Loans and Recorded Investment
					Balance
June 30, 2019		Balance			> $100 &			Balance			Total
(dollars in thousands)	No.	<= $100		No.	<= $500		No.	> $500		No.	Balance

Traditional Banking:
Residential real estate:
Owner occupied	104	$	4,499	12	$	2,146	2	$	2,234	118	$	8,879
Owner occupied - correspondent	—		—	2		848	—		—	2		848
Nonowner occupied	2		30	1		431	—		—	3		461
Commercial real estate	2		46	2		646	1		1,669	5		2,361
Construction & land development	—		—	1		134	—		—	1		134
Commercial & industrial	3		146	2		474	2		4,426	7		5,046
Lease financing receivables	—		—	—		—	—		—	—		—
Home equity	14		360	5		1,084	—		—	19		1,444
Consumer:
Credit cards	—		—	—		—	—		—	—		—
Overdrafts	—		—	—		—	—		—	—		—
Automobile loans	4		47	—		—	—		—	4		47
Other consumer	9		18	—		—	—		—	9		18
Total Traditional Banking	138		5,146	25		5,763	5		8,329	168		19,238
Warehouse lines of credit	—		—	—		—	—		—	—		—
Total Core Banking	138		5,146	25		5,763	5		8,329	168		19,238

Republic Processing Group:
Tax Refund Solutions:
Easy Advances	—		—	—		—	—		—	—		—
Other TRS loans	34		13	—		—	—		—	34		13
Republic Credit Solutions	231		153	—		—	—		—	231		153
Total Republic Processing Group	265		166	—		—	—		—	265		166

Total	403	$	5,312	25	$	5,763	5	$	8,329	433	$	19,404


	Number of Nonperforming Loans and Recorded Investment
					Balance
December 31, 2018		Balance			> $100 &			Balance			Total
(dollars in thousands)	No.	<= $100		No.	<= $500		No.	> $500		No.	Balance

Traditional Banking:
Residential real estate:
Owner occupied	108	$	4,859	11	$	2,401	3	$	3,540	122	$	10,800
Owner occupied - correspondent	—		—	1		382	—		—	1		382
Nonowner occupied	4		169	—		—	1		500	5		669
Commercial real estate	5		201	1		397	2		1,720	8		2,318
Construction & land development	—		—	—		—	—		—	—		—
Commercial & industrial	2		59	2		571	—		—	4		630
Lease financing receivables	—		—	—		—	—		—	—		—
Home equity	19		417	4		678	—		—	23		1,095
Consumer:
Credit cards	—		—	—		—	—		—	—		—
Overdrafts	—		—	—		—	—		—	—		—
Automobile loans	5		75	—		—	—		—	5		75
Other consumer	14		37	—		—	—		—	14		37
Total Traditional Banking	157		5,817	19		4,429	6		5,760	182		16,006
Warehouse lines of credit	—		—	—		—	—		—	—		—
Total Core Banking	157		5,817	19		4,429	6		5,760	182		16,006

Republic Processing Group:
Tax Refund Solutions:
Easy Advances	—		—	—		—	—		—	—		—
Other TRS loans	6		4	—		—	—		—	6		4
Republic Credit Solutions	960		128	—		—	—		—	960		128
Total Republic Processing Group	966		132	—		—	—		—	966		132

Total	1,123	$	5,949	19	$	4,429	6	$	5,760	1,148	$	16,138

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Table 16 — Rollforward of Nonperforming Loans


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Nonperforming loans at the beginning of the period	$	15,560	$	16,128	$	16,138	$	15,074
Loans added to nonperforming status during the period that remained nonperforming at the end of the period		6,575		3,733		7,680		5,922
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)		(2,119)		(639)		(3,478)		(1,944)
Principal balance paydowns of loans nonperforming at both period ends		(578)		(441)		(956)		(594)
Net change in principal balance of other loans nonperforming at both period ends*		(34)		(421)		20		(98)

Nonperforming loans at the end of the period	$	19,404	$	18,360	$	19,404	$	18,360

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

Table 17 — Detail of Loans Removed from Nonperforming Status


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Loans charged off	$	(285)	$	—	$	(298)	$	(10)
Loans transferred to OREO		(980)		—		(1,036)		(184)
Loans refinanced at other institutions		(830)		(639)		(2,060)		(1,520)
Loans returned to accrual status		(24)		—		(84)		(230)

Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period	$	(2,119)	$	(639)	$	(3,478)	$	(1,944)

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

Delinquent Loans

Total Company delinquent loans to total loans increased to 0.44% at June 30, 2019, from 0.38% at December 31, 2018, primarily due to one C&I relationship that defaulted during the second quarter of 2019.

Core Bank delinquent loans to total Core Bank loans increased to 0.29% at June 30, 2019 from 0.22% at December 31, 2018, primarily due to the previously mentioned C&I relationship that defaulted during the second quarter of 2019. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of June 30, 2019 and December 31, 2018 were on nonaccrual status.

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Table 18 — Delinquent Loan Composition*


	June 30, 2019					December 31, 2018
				Percent of					Percent of
				Total					Total
(in thousands)	Balance			Loan Class		Balance			Loan Class

Traditional Banking:
Residential real estate:
Owner occupied		$	4,058	0.45	%		$	5,525	0.61	%
Owner occupied - correspondent			—	—				—	—
Nonowner occupied			671	0.26				1,008	0.42
Commercial real estate			898	0.07				1,099	0.09
Construction & land development			540	0.28				—	—
Commercial & industrial			4,933	1.10				25	0.01
Lease financing receivables			—	—				—	—
Home equity			978	0.33				784	0.24
Consumer:
Credit cards			90	0.52				129	0.68
Overdrafts			278	31.10				230	20.87
Automobile loans			64	0.10				28	0.04
Other consumer			14	0.03				47	0.10
Total Traditional Banking			12,524	0.35				8,875	0.25
Warehouse lines of credit			—	—				—	—
Total Core Banking			12,524	0.29				8,875	0.22

Republic Processing Group:
Tax Refund Solutions:
Easy Advances			—	—				—	—
Other TRS loans			75	10.55				10	0.07
Republic Credit Solutions			6,727	6.95				7,077	7.97
Total Republic Processing Group			6,802	6.98				7,087	6.91

Total delinquent loans		$	19,326	0.44	%		$	15,962	0.38	%

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

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Table 19 — Rollforward of Delinquent Loans


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Delinquent loans at the beginning of the period	$	34,187	$	25,833	$	15,962	$	14,101
Loans added to delinquency status during the period and remained in delinquency status at the end of the period		8,685		3,472		8,519		4,456
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below)		(22,991)		(16,227)		(4,661)		(4,085)
Principal balance paydowns of loans delinquent at both period ends		(84)		(69)		(293)		(106)
Net change in principal balance of other loans delinquent at both period ends**		(471)		123		(201)		(1,234)
Delinquent loans at the end of period	$	19,326	$	13,132	$	19,326	$	13,132

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

Table 20 — Detail of Loans Removed from Delinquent Status


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2019		2018		2019		2018

Loans charged off	$	(306)	$	(136)	$	(316)	$	(33)
Easy Advances* paid-off or charged-off		(19,099)		(13,163)		—		—
Loans transferred to OREO		(1,062)		—		(1,119)		(184)
Loans refinanced at other institutions		(746)		(570)		(1,309)		(1,643)
Loans paid current		(1,778)		(2,358)		(1,917)		(2,225)

Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period	$	(22,991)	$	(16,227)	$	(4,661)	$	(4,085)

Impaired Loans and Troubled Debt Restructurings

The Bank’s policy is to charge-off all or that portion of its recorded investment in a collateral-dependent impaired credit upon a determination that it is probable the full amount of contractual principal and interest will not be collected. Impaired loans totaled $43 million at June 30, 2019 compared to $41 million at December 31, 2018, an increase of $2 million during the first six months of 2019.

A TDR is the situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank’s TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan’s interest rate and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. As of June 30, 2019, the Bank had $33 million in TDRs, of which $11 million were also on nonaccrual status. As of December 31, 2018, the Bank had $33 million in TDRs, of which $8 million were also on nonaccrual status.

Table 21 — Impaired Loan Composition


(in thousands)	June 30, 2019		December 31, 2018

Troubled debt restructurings	$	32,911	$	32,863
Impaired loans (which are not TDRs)		9,769		8,572
Total recorded investment in impaired loans	$	42,680	$	41,435

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

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Deposits

Table 22 — Deposit Composition


(in thousands)	June 30, 2019		December 31, 2018

Core Bank:
Demand	$	906,179	$	937,402
Money market accounts		727,718		717,954
Savings		177,421		187,868
Individual retirement accounts(1)		50,970		53,524
Time deposits, $250 and over(1)		93,713		84,104
Other certificates of deposit(1)		246,392		239,324
Reciprocal money market and time deposits(1)(2)		192,792		217,153
Brokered deposits(1)		159,615		9,394
Total Core Bank interest-bearing deposits		2,554,800		2,446,723
Total Core Bank noninterest-bearing deposits		937,487		971,422
Total Core Bank deposits		3,492,287		3,418,145

Republic Processing Group:
Money market accounts		2,327		5,453
Total RPG interest-bearing deposits		2,327		5,453

Brokered prepaid card deposits		10,854		4,350
Other noninterest-bearing deposits		55,452		28,197
Total RPG noninterest-bearing deposits		66,306		32,547
Total RPG deposits		68,633		38,000

Deposits held for assumption in connection with sale of banking centers(3)		152,954		—

Total deposits	$	3,713,874	$	3,456,145

(1)

Includes time deposits.

(2)

Prior to June 2018, reciprocal deposits were classified as “brokered deposits.” The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018, provides that most reciprocal deposits are no longer classified as brokered deposits if the Bank meets certain regulatory criteria.

(3)

See Footnote 18 “Subsequent Event” of Part I Item 1 “Financial Statements” for additional detail.

Total Company deposits increased $258 million, or 7%, from December 31, 2018 to $3.7 billion at June 30, 2019. Total deposits at June 30, 2019 includes $153 million of deposits held for assumption in connection with the Bank’s agreement to sell four of its banking centers. These deposits held for assumption at June 30, 2019 include $105 million of interest-bearing and $48 million of noninterest-bearing deposits.

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

Total Company interest-bearing deposits increased $210 million, or 4%, during the first six months of 2019 primarily due to the acquisition of $150 million of wholesale-brokered deposits. Promotional rates for time deposits and money market accounts offered through the Company’s MemoryBank digital brand primarily drove the remaining growth in interest-bearing deposits.

Total Company noninterest-bearing deposits increased $48 million, or 5%, resulting primarily from a $34 million increase in RPG short-term deposits.

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

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

SSUARs increased approximately $43 million, or 24%, during the first six months of 2019, with this growth driven by one large corporate client. The substantial majority of SSUARs are indexed to immediately repricing indices such as the FFTR.

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Federal Home Loan Bank Advances

Primarily to fund a seasonal increase in usage rates on its warehouse lines of credit, the Company experienced a $160 million increase in its FHLB overnight advances from December 31, 2018 to June 30, 2019. The Bank held $670 million in overnight advances at a rate of 2.46% as of June 30, 2019, compared to $510 million in overnight advances at a rate of 2.45% at December 31, 2018. Management anticipates its usage of FHLB advances will decrease during the third quarter as usage rates on warehouse lines descend from their seasonal highs.

Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. If a meaningful amount of the Bank’s loan originations in the future have repricing terms longer than five years, management will likely elect to borrow additional funds to mitigate its risk of future increases in market interest rates. Whether the Bank ultimately does so, and how much in advances it extends out, will be dependent upon circumstances at that time. If the Bank does obtain longer-term FHLB advances for interest rate risk mitigation, it will have a negative impact on then current earnings. The amount of the negative impact will be dependent upon the dollar amount, coupon and final maturity of the advances obtained.

Interest Rate Swaps

Interest Rate Swaps Used as Cash Flow Hedges

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

Non-hedge Interest Rate Swaps

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

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

Liquidity

The Bank had a loan to deposit ratio (excluding brokered deposits) of 181% at June 30, 2019 and 120% at December 31, 2018. At June 30, 2019 and December 31, 2018, the Company had cash and cash equivalents on-hand of $474 million and $351 million. The Bank also had available borrowing capacity of $166 million and $254 million from the FHLB at June 30, 2019 and December 31, 2018. In addition, the Bank’s liquidity resources included unencumbered debt securities of $169 million and $300 million as of June 30, 2019 and December 31, 2018 and unsecured lines of credit of $125 million available through various other financial institutions as of the same period-ends.

The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage backed securities and proceeds realized from loans held for sale. The Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. At June 30, 2019 and December 31, 2018, these pledged investment securities had a fair value of $275 million and $241 million. Republic’s banking centers and its websites, www.republicbank.com and www.mymemorybank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.

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At June 30, 2019, the Bank had approximately $974 million in deposits from 154 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $497 million, or 13%, of the Company’s total deposit balances at June 30, 2019. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience, utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.

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 minimum internal policy limits for liquidity management, as set forth by the Bank’s Board of Directors. As of June 30, 2019, the Bank was in compliance with all Board-approved liquidity policies, however, the Bank will likely continue to maintain its liquidity levels near the Bank’s Board-approved minimums for the foreseeable future. It is also likely the Bank, as it manages its liquidity levels in order to maximize its overall earnings, will continue to fall short of these minimums on occasion in the future, particularly during the first quarter of each year when short-term Easy Advance loans are originated.

Capital

Total stockholders’ equity increased from $690 million at December 31, 2018 to $731 million at June 30, 2019. The increase in stockholders’ equity was primarily attributable to net income earned during 2019 reduced by cash dividends declared.

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

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

Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At June 30, 2019, RB&T could, without prior approval, declare dividends of approximately $118 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 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total 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.

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Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based, 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 13.10% at June 30, 2019 compared to 13.02% at December 31, 2018. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

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

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

Table 23 — Capital Ratios


	As of June 30, 2019				As of December 31, 2018
(dollars in thousands)	Amount		Ratio		Amount		Ratio

Total capital to risk-weighted assets
Republic Bancorp, Inc.	$	795,533	16.16	%	$	757,727	16.80	%
Republic Bank & Trust Company		692,049	14.07			654,258	14.52

Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.	$	709,550	14.41	%	$	673,052	14.92	%
Republic Bank & Trust Company		646,066	13.14			609,583	13.53

Tier 1 (core) capital to risk-weighted assets
Republic Bancorp, Inc.	$	749,550	15.23	%	$	713,052	15.81	%
Republic Bank & Trust Company		646,066	13.14			609,583	13.53

Tier 1 leverage capital to average assets
Republic Bancorp, Inc.	$	749,550	13.72	%	$	713,052	14.11	%
Republic Bank & Trust Company		646,066	11.83			609,583	12.06

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Asset/Liability Management and Market Risk

Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards and achieve acceptable net interest income based on the Bank’s risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank’s overall earnings and balance sheet.

The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances and other factors.

The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank’s deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.

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

Table 24 — Bank Interest Rate Sensitivity


	Change in Rates
	-200			-100			+100			+200			+300
	Basis Points			Basis Points			Basis Points			Basis Points			Basis Points

% Change from base net interest income at June 30, 2019		(5.1)	%		(3.8)	%		2.3	%		4.2	%		5.9	%
% Change from base net interest income at December 31, 2018		NA			(2.9)	%		0.9	%		0.3	%		(0.9)	%

The Bank’s dynamic simulation model run for June 2019 projected a decrease in the Bank’s net interest income for the Down 200 and 100 scenarios. The Up 100 through Up 300 scenarios for June 2019 reflected an increase in net interest income, with this increase more favorable than the comparable scenarios at December 2018. June 2019 scenarios were overall more favorable than December 2018. The primary drivers behind this change in the up-rate scenarios are general increases in variable rate assets, along with increases in low-beta deposits and decreases in high-beta deposits. In addition, the second quarter and a 12-month forecast for market interest rates projected intermediate and long-term rates to be much lower than the December 2018 forecast.

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

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

For additional discussion regarding the Bank’s net interest income, see the sections titled “Net Interest Income” in this section of the filing under “RESULTS OF OPERATIONS (Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018)” and RESULTS OF OPERATIONS (Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018).”

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4.Controls and Procedures.

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

There were no changes in Republic’s internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, Republic’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings.

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

Item 1A.Risk Factors.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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There are ongoing efforts to establish an alternative reference rate. The Secured Overnight Financing Rate (“SOFR”) is considered the most likely alternative reference rate suitable for replacing LIBOR, but issues remain with respect to its implementation. As a result, the scope of its ultimate acceptance and the impact on rates, pricing and the ability to manage risk, including through derivatives, remain uncertain. No other alternative rate is currently under wide consideration. If SOFR or another rate does not achieve wide acceptance as the alternative to LIBOR, there likely will be disruption to all of the markets relying on the availability of a broadly accepted reference rate. Even if SOFR or another reference rate ultimately replaces LIBOR, risks will remain for the Company with respect to outstanding loans, derivatives or other instruments referencing LIBOR. Those risks arise in connection with transitioning those instruments to a new reference rate and the corresponding value transfer that may occur in connection with that transition. That is because a new reference rate likely will not exactly imitate LIBOR. As a result, for example, over the life of a transaction that transitions from LIBOR to a new reference rate, the Company’s monetary obligations to its counterparties and its yield from transactions with clients may change, potentially adversely to the Company. For some instruments, the method of transitioning to a new reference rate may be challenging, especially if parties to an instrument cannot agree as to how to perform that transition. If a contract is not transitioned to a new reference rate and LIBOR ceases to exist, the impact on the Company’s obligations is likely to vary by asset class and contract. In addition, prior to LIBOR discontinuance, instruments that continue to refer to LIBOR may be impacted if there is a change in the availability or calculation of LIBOR. Risks related to transitioning instruments to a new reference rate or to how LIBOR is derived, and its availability include impacts on the yield on loans or securities held by the Company, amounts paid on Company debt, or amounts received and paid on derivative instruments it has contracted. The value of loans, securities, or derivative instruments tied to LIBOR and the trading market for LIBOR-based securities could also be impacted upon its discontinuance or if it is limited.

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

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

Details of Republic’s Class A Common Stock purchases during the second quarter of 2019 are included in the following table:


				Total Number of	Maximum Number
				Shares Purchased	of Shares that May
				as Part of Publicly	Yet Be Purchased
	Total Number of	Average Price		Announced Plans	Under the Plan
Period	Shares Purchased	Paid Per Share		or Programs	or Programs

April 1 - April 30	—	$	—	—
May 1 - May 31	—		—	—
June 1 - June 30	—		—	—
Total	—	$	—	—	195,520

The Company repurchased no shares during the second quarter of 2019. There were 42,452 shares exchanged for stock option exercises during the second quarter of 2019. During 2011, the Company’s Board of Directors amended its existing share repurchase program by approving the repurchase of 300,000 additional shares from time to time, as market conditions are deemed attractive to the Company. The repurchase program will remain effective until the total number of shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of June 30, 2019, the Company had 195,520 shares that could be repurchased under its current share repurchase programs.

During the second quarter of 2019, there were 4,861 shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock by stockholders of Republic in accordance with the share-for-share conversion provision option of the Class B Common Stock. The exemption from registration of newly issued Class A Common Stock relies upon Section (3)(a)(9) of the Securities Act of 1933.

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

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Item 6.Exhibits.

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


Exhibit Number		Description of Exhibit

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

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

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

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

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

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SIGNATURES

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


			REPUBLIC BANCORP, INC.
			(Registrant)

			Principal Executive Officer:


Date: August 9, 2019			/s/ Steven E. Trager
			By: Steven E. Trager
			Chairman and Chief Executive Officer


			Principal Financial Officer:


Date: August 9, 2019			/s/ Kevin Sipes
			By: Kevin Sipes
			Executive Vice President, Chief Financial
			Officer and Chief Accounting Officer

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Republic Bank - 10-Q quarterly report FY2019 Q2

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