Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021
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 April 30, 2021, was 18,593,543 and 2,197,634.
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.
63
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
96
Item 4.
Controls and Procedures.
PART II — OTHER INFORMATION
Legal Proceedings.
Item 1A.
Risk Factors.
97
Unregistered Sales of Equity Securities and Use of Proceeds.
98
Item 6.
Exhibits.
99
SIGNATURES
100
2
GLOSSARY OF TERMS
The terms identified in alphabetical order below are used throughout this Form 10-Q. You may find it helpful to refer to this page as you read this report.
Term
Definition
ACH
Automated Clearing House
ACL
Allowance for Credit Losses
ACLC
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
ACLL
Allowance for Credit Losses on Loans
ACLS
Allowance for Credit Losses on Securities
AFS
Available for Sale
AOCI
Accumulated Other Comprehensive Income
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Basic EPS
Basic earnings per Class A Common Share
BOLI
Bank Owned Life Insurance
BPO
Brokered Price Opinion
C&D
Construction and Development
C&I
Commercial and Industrial
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
CECL
Current Expected Credit Loss
CMO
Collateralized Mortgage Obligation
Core Bank
The Traditional Banking, Warehouse Lending, and Mortgage Banking reportable segments
COVID-19
Coronavirus Disease of 2019
CRE
Commercial Real Estate
Diluted EPS
Diluted earnings per Class A Common Share
EA
Easy Advance
Economic Aid Act
The Economic Aid to Hard Hit Small Business, Not for Profits and Venues Act
ESPP
Employee Stock Purchase Plan
EVP
Executive Vice President
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFTR
Federal Funds Target Rate
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FICO
Fair Isaac Corporation
FNMA
Federal National Mortgage Association
FOMC
Federal Open Market Committee
FRB
Federal Reserve Bank
FTE
Full Time Equivalent
FTP
Funds Transfer Pricing
GAAP
Generally Accepted Accounting Principles in the United States
HEAL
Home Equity Amortizing Loan
HELOC
Home Equity Line of Credit
HTM
Held to Maturity
IRS
Internal Revenue Service
ITM
Interactive Teller Machine
LGD
Loss Given Default
LIBOR
London Interbank Offered Rate
LPO
Loan Production Office
LTV
Loan to Value
MBS
Mortgage-backed Securities
MSRs
Mortgage Servicing Rights
NA
Not Applicable
NM
Not Meaningful
OBS
Off-Balance Sheet
OCI
Other Comprehensive Income
OREO
Other Real Estate Owned
OTTI
Other than Temporary Impairment
PCD
Purchased with Credit Deterioration
PCI
Purchased Credit Impaired
PD
Probability of Default
PPP
SBA's Paycheck Protection Program
PPPLF
The FRB's Paycheck Protection Program Liquidity Facility
Prime
The Wall Street Journal Prime Interest Rate
Provision
Provision for Expected Credit Loss Expense
PSU
Performance Stock Unit
QF
Qualitative Factor
R&D
Research and Development
RB&T / the Bank
Republic Bank & Trust Company
RBCT
Republic Bancorp Capital Trust
RCS
Republic Credit Solutions segment
Republic / the Company
Republic Bancorp, Inc.
RPG
Republic Processing Group
RPS
Republic Payment Solutions
RT
Refund Transfer
SBA
U.S. Small Business Administration
SEC
Securities and Exchange Commission
SSUAR
Securities Sold Under Agreements to Repurchase
SVP
Senior Vice President
TDR
Troubled Debt Restructuring
The Captive
Republic Insurance Services, Inc.
TPS
Trust Preferred Securities
TRS
Tax Refund Solutions segment
TRUP
TPS Investment
Warehouse
Warehouse Lending segment
3
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
March 31,
December 31,
2021
2020
ASSETS
Cash and cash equivalents
$
984,857
485,587
Available-for-sale debt securities, at fair value (amortized cost of $468,144 in 2021 and $512,518 in 2020, allowance for credit losses of $0 in 2021 and $0 in 2020)
477,475
523,863
Held-to-maturity debt securities (fair value of $52,909 in 2021 and $54,190 in 2020, allowance for credit losses of $103 in 2021 and $178 in 2020)
52,147
53,324
Equity securities with readily determinable fair value
2,821
3,083
Mortgage loans held for sale, at fair value
63,636
46,867
Consumer loans held for sale, at fair value
3,970
3,298
Consumer loans held for sale, at the lower of cost or fair value
11,701
1,478
Loans (loans carried at fair value of $417 in 2021 and $497 in 2020)
4,666,593
4,813,103
Allowance for credit losses
(75,336)
(61,067)
Loans, net
4,591,257
4,752,036
Federal Home Loan Bank stock, at cost
13,153
17,397
Premises and equipment, net
38,324
39,512
Right-of-use assets
41,911
43,345
Goodwill
16,300
Other real estate owned
2,015
2,499
Bank owned life insurance
68,408
68,018
Other assets and accrued interest receivable
108,565
111,718
TOTAL ASSETS
6,476,540
6,168,325
LIABILITIES
Deposits:
Noninterest-bearing
2,276,348
1,890,416
Interest-bearing
2,995,144
2,842,765
Total deposits
5,271,492
4,733,181
Securities sold under agreements to repurchase and other short-term borrowings
175,580
211,026
Operating lease liabilities
42,854
44,340
Federal Home Loan Bank advances
25,000
235,000
Subordinated note
41,240
Other liabilities and accrued interest payable
82,665
80,215
Total liabilities
5,638,831
5,345,002
Commitments and contingent liabilities (Footnote 9)
—
STOCKHOLDERS’ EQUITY
Preferred stock, no par value
Class A Common Stock and Class B Common Stock, no par value
4,884
4,899
Additional paid in capital
143,563
143,637
Retained earnings
682,264
666,278
Accumulated other comprehensive income
6,998
8,509
Total stockholders’ equity
837,709
823,323
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying footnotes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
INTEREST INCOME:
Loans, including fees
67,386
77,513
Taxable investment securities
1,952
2,783
Federal Home Loan Bank stock and other
219
863
Total interest income
69,557
81,159
INTEREST EXPENSE:
Deposits
1,565
6,302
9
119
31
1,648
172
352
Total interest expense
1,777
8,421
NET INTEREST INCOME
67,780
72,738
Provision for expected credit loss expense
15,262
22,760
NET INTEREST INCOME AFTER PROVISION
52,518
49,978
NONINTEREST INCOME:
Service charges on deposit accounts
2,873
3,136
Net refund transfer fees
12,721
15,823
Mortgage banking income
7,193
4,795
Interchange fee income
3,027
2,552
Program fees
2,225
2,624
Increase in cash surrender value of bank owned life insurance
390
389
Net gains (losses) on other real estate owned
(11)
Other
619
1,247
Total noninterest income
29,037
30,569
NONINTEREST EXPENSE:
Salaries and employee benefits
29,337
26,622
Technology, equipment, and communication
7,043
6,870
Occupancy
3,559
3,217
Marketing and development
773
833
FDIC insurance expense
446
Bank franchise tax expense
328
2,506
Interchange related expense
1,144
1,076
Other real estate owned and other repossession expense
(34)
18
Legal and professional fees
1,214
1,237
4,001
4,590
Total noninterest expense
47,811
46,969
INCOME BEFORE INCOME TAX EXPENSE
33,744
33,578
INCOME TAX EXPENSE
7,691
6,881
NET INCOME
26,053
26,697
BASIC EARNINGS PER SHARE:
Class A Common Stock
1.26
1.29
Class B Common Stock
1.14
1.17
DILUTED EARNINGS PER SHARE:
1.25
1.28
1.16
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Net income
OTHER COMPREHENSIVE INCOME (LOSS)
Change in fair value of derivatives used for cash flow hedges
(161)
Reclassification amount for net derivative losses realized in income
29
Change in unrealized gains and losses on AFS debt securities
(2,029)
7,777
Change in unrealized gain of AFS debt security for which a portion of OTTI has been recognized in earnings
15
1
Total other comprehensive income (loss) before income tax
(2,014)
7,646
Tax effect
503
(1,913)
Total other comprehensive income (loss), net of tax
(1,511)
5,733
COMPREHENSIVE INCOME
24,542
32,430
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended March 31, 2021
Common Stock
Accumulated
Class A
Class B
Additional
Total
Shares
Paid In
Retained
Comprehensive
Stockholders’
Outstanding
Amount
Capital
Earnings
Income
Equity
Balance, January 1, 2021
18,697
2,199
Net change in accumulated other comprehensive income
Dividends declared on Common Stock:
Class A Shares ($0.308 per share)
(5,743)
Class B Shares ($0.280 per share)
(616)
Stock options exercised, net of shares withheld
8
(92)
(84)
Conversion of Class B to Class A Common Shares
(1)
Repurchase of Class A Common Stock
(107)
(24)
(736)
(3,708)
(4,468)
Net change in notes receivable on Class A Common Stock
94
Deferred compensation - Class A Common Stock:
Directors
114
Designated key employees
136
Employee stock purchase plan - Class A Common Stock
154
155
Stock-based awards - Class A Common Stock:
Performance stock units
32
Restricted stock
14
110
Stock options
Balance, March 31, 2021
18,628
2,198
Three Months Ended March 31, 2020
Balance, January 1, 2020
18,737
2,206
4,907
142,068
614,171
3,098
764,244
Adjustment for adoption of ASU 2016-13
(4,291)
Class A Shares ($0.286 per share)
(5,358)
Class B Shares ($0.260 per share)
(572)
(43)
(42)
(6)
(86)
(20)
(582)
(2,250)
(2,852)
30
79
143
(200)
187
188
92
Balance, March 31, 2020
18,687
2,200
4,890
141,928
628,397
8,831
784,046
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Net (accretion) amortization on investment securities
321
330
Net accretion on loans and amortization of core deposit intangible and operating lease components
(6,846)
(799)
Unrealized losses on equity securities with readily determinable fair value
262
381
Depreciation of premises and equipment
2,247
2,549
Amortization of mortgage servicing rights
997
585
Impairment of mortgage servicing rights
(400)
Provision for on-balance sheet exposures
Provision for off-balance sheet exposures
26
102
Net gain on sale of mortgage loans held for sale
(6,997)
(4,805)
Origination of mortgage loans held for sale
(213,587)
(125,273)
Proceeds from sale of mortgage loans held for sale
203,815
109,918
Net gain on sale of consumer loans held for sale
(1,304)
(2,337)
Origination of consumer loans held for sale
(117,274)
(195,121)
Proceeds from sale of consumer loans held for sale
107,683
194,182
Net gain realized on sale of other real estate owned
(41)
(3)
Writedowns of other real estate owned
53
Deferred compensation expense - Class A Common Stock
250
222
Stock-based awards and ESPP expense - Class A Common Stock
288
280
Net gain on sale of bank premises and equipment
(353)
(390)
(389)
Net change in other assets and liabilities:
Accrued interest receivable
1,745
900
Accrued interest payable
(65)
635
Other assets
(4,786)
(7,381)
Other liabilities
7,949
4,998
Net cash provided by operating activities
15,261
28,178
INVESTING ACTIVITIES:
Purchases of available-for-sale debt securities
(35,020)
(138,894)
Proceeds from calls, maturities and paydowns of available-for-sale debt securities
79,077
73,716
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities
690
Net change in outstanding warehouse lines of credit
96,952
(132,996)
Net change in other loans
55,502
50,510
Proceeds from redemption of Federal Home Loan Bank stock
4,244
931
Purchase of Federal Home Loan Bank stock
(9,000)
Proceeds from sales of other real estate owned
536
Proceeds from sale of bank premises and equipment
894
Net purchases of premises and equipment
(1,059)
(1,109)
Net cash provided by (used in) investing activities
201,479
(155,227)
FINANCING ACTIVITIES:
Net change in deposits
538,311
285,449
Net change in securities sold under agreements to repurchase and other short-term borrowings
(35,446)
(41,537)
Payments of Federal Home Loan Bank advances
(235,000)
(602,500)
Proceeds from Federal Home Loan Bank advances
425,000
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
132
Net proceeds from option exercises and equity awards vested - Class A Common Stock
(93)
(242)
Cash dividends paid
(5,906)
(5,464)
Net cash provided by financing activities
282,530
58,009
NET CHANGE IN CASH AND CASH EQUIVALENTS
499,270
(69,040)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
385,303
CASH AND CASH EQUIVALENTS AT END OF PERIOD
316,263
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest
1,842
7,786
Income taxes
441
465
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans
64
Right-of-use assets recorded
626
Allowance for credit losses recorded upon adoption of ASC 326
7,241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –MARCH 31, 2021 and 2020 AND DECEMBER 31, 2020 (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.
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 months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Form 10-K for the year ended December 31, 2020.
As of March 31, 2021, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations.
The Company’s financial condition as of March 31, 2021 and results of operation for the three months ended March 31, 2021 and 2020 were impacted by the COVID-19 pandemic and the public’s response to it.
For additional discussion regarding the COVID-19 pandemic and its impact to the Company, see the following Footnotes in this section of the filing:
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 2021, Republic had 42 full-service banking centers with locations as follows:
●
Kentucky — 28
Metropolitan Louisville — 18
Central Kentucky — 7
Georgetown — 1
Lexington — 5
Shelbyville — 1
Northern Kentucky — 3
Covington — 1
Crestview Hills — 1
Florence — 1
Southern Indiana — 3
Floyds Knobs — 1
Jeffersonville — 1
New Albany — 1
Metropolitan Tampa, Florida — 7
Metropolitan Cincinnati, Ohio — 2
Metropolitan Nashville, Tennessee — 2
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
Traditional Banking results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Traditional Banking assets represent investment securities and commercial and consumer loans primarily secured by real estate and/or personal property. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources. FHLB advances have traditionally been a significant borrowing source for the Bank.
Other sources of Traditional Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, and increases in the cash surrender value of BOLI.
Traditional Banking operating expenses consist primarily of: salaries and employee benefits; technology, equipment, and communication; occupancy; interchange related expense; marketing and development; FDIC insurance expense, and various other general and administrative costs. Traditional Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies, and actions of regulatory agencies.
Warehouse Lending segment — The Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
10
Mortgage Banking segment — Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the next year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2021 and 2020:
The Company reports fees paid for the EA product as interest income on loans. During 2020, EAs were generally repaid within 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considered an EA delinquent if it remained unpaid 21 days in 2020 and 35 days in 2021 after the taxpayer’s tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management’s annual analysis of tax return processing times. Provisions on EAs are estimated when advances are made. Unpaid EAs are charged-off by June 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged-off loans.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year’s tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund payment patterns change materially between years.
In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the EAs product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company’s financial condition and results of operations.
11
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 that are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
The Bank sells participation interests in this product. These participation interests are a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
The Bank sells participation interests in this product. These participation interests are a 95% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 5% participation interest in each advance, it maintains 100% ownership of the underlying LOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
12
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
Recently Adopted Accounting Standards
The following ASUs were adopted by the Company during the three months ended March 31, 2021:
ASU. No.
Topic
Nature of Update
Date Adopted
Method of Adoption
Financial Statement Impact
2020-08
Codification Improvements to Subtopic 310-20,Receivables—Nonrefundable Fees and Other Costs
This ASU clarifies that an entity should re-evaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period.
January 1, 2021
Prospectively
Immaterial
2020-10
Codification Improvements
This ASU affects a wide variety of Topics in the Codification. More specifically, this ASU, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose because the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure Section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). Those amendments are not expected to change current practice.
2021-01
Reference Rate Reform (Topic 848): Scope
This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.
January 7, 2021
There were no ASUs issued prior to March 31, 2021, which were not yet effective, considered relevant to the Company’s financial statements.
13
2. INVESTMENT SECURITIES
Available-for-Sale Debt Securities
The following tables summarize the amortized cost, fair value, and ACLS of AFS debt securities and the corresponding amounts of related gross unrealized gains and losses recognized in AOCI:
Gross
Allowance
Amortized
Unrealized
for
Fair
March 31, 2021 (in thousands)
Cost
Gains
Losses
Credit Losses
Value
U.S. Treasury securities and U.S. Government agencies
204,995
1,200
(816)
205,379
Private label mortgage-backed security
1,598
1,265
2,863
Mortgage-backed securities - residential
203,623
6,725
210,264
Collateralized mortgage obligations
44,284
948
(21)
45,211
Corporate bonds
10,000
108
10,108
Trust preferred security
3,644
3,650
Total available-for-sale debt securities
468,144
10,252
(921)
December 31, 2020 (in thousands)
245,204
1,730
(25)
246,909
1,707
1,250
2,957
203,786
7,419
211,202
48,190
772
(10)
48,952
43
10,043
3,631
169
3,800
512,518
11,383
(38)
Held-to-Maturity Debt Securities
The following tables summarize the amortized cost, fair value, and ACLS of HTM debt securities and the corresponding amounts of related gross unrecognized gains and losses:
Carrying
Unrecognized
87
11,823
210
12,033
39,984
440
40,421
(103)
Obligations of state and political subdivisions
356
363
Total held-to-maturity debt securities
52,250
662
52,909
104
13,061
176
13,237
39,986
499
40,485
(178)
364
53,502
688
54,190
Sales of Available-for-Sale Debt Securities
During the three months ended March 31, 2021 and 2020, there were no material gains or losses on sales or calls of AFS debt securities.
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity as of March 31, 2021 follow. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.
Available-for-Sale
Held-to-Maturity
Debt Securities
Due in one year or less
14,960
15,081
111
Due from one year to five years
200,035
200,406
40,230
40,673
Due from five years to ten years
Due beyond ten years
Total debt securities
Unrealized-Loss Analysis on Debt Securities
The following tables summarize AFS debt securities in an unrealized loss position for which an ACLS had not been recorded as of March 31, 2021 and December 31, 2020, aggregated by investment category and length of time in a continuous unrealized loss position:
Less than 12 months
12 months or more
Fair Value
Available-for-sale debt securities:
118,988
26,044
721
145,753
59,971
1,068
2,788
63,827
As of March 31, 2021, the Bank’s security portfolio consisted of 171 securities, 27 of which were in an unrealized loss position.
As of December 31, 2020, the Bank’s security portfolio consisted of 173 securities, 19 of which were in an unrealized loss position.
As of March 31, 2021 and December 31, 2020, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.
Mortgage-Backed Securities and Collateralized Mortgage Obligations
As of March 31, 2021, with the exception of the $2.9 million private label mortgage-backed security, all other mortgage-backed securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FHLMC and FNMA. As of March 31, 2021 and December 31, 2020, there were gross unrealized losses of $105,000 and $13,000 related to AFS mortgage-backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to have OTTI.
Trust Preferred Security
During 2015, the Parent Company purchased a $3 million floating rate TRUP at a price of 68% of par. The coupon on this security is based on the 3-month LIBOR rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.
Private Label Mortgage-Backed Security
The Bank owns one private label mortgage-backed security with a total carrying value of $2.9 million as of March 31, 2021. This security is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.
See additional discussion regarding the Bank’s private label mortgage-backed security under Footnote 10 “Fair Value” in this section of the filing.
Rollforward of the Allowance for Credit Losses on Debt Securities
The table below presents a rollforward for the three months ended March 31, 2021 and 2020 of the ACLS on AFS and HTM debt securities:
ACLS Rollforward
Three Months Ended March 31,
Beginning
Charge-
Ending
ASC 326
Balance
offs
Recoveries
Adoption
Available-for-Sale Securities:
Corporate Bonds
126
Held-to-Maturity Securities:
178
(75)
103
51
120
171
246
297
The Company decreased the ACLS on its HTM corporate bonds during the three months ended March 31, 2021 based on improved PD and LGD estimates on these bonds. PD and LGD estimates for these bonds were elevated during 2020 due to pandemic-driven economic concerns.
There were no HTM debt securities on nonaccrual or past due over 89 days as of March 31, 2021 and December 31, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of March 31, 2021 and December 31, 2020.
There were no HTM debt securities considered collateral dependent as of March 31, 2021 and December 31, 2020.
Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet and is excluded from the ACLS. Accrued interest on AFS debt securities totaled $1 million and $1 million as of March 31, 2021 and December 31, 2020. Accrued interest receivable on HTM debt securities totaled $104,000 and $110,000 as of March 31, 2021 and December 31, 2020.
16
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:
March 31, 2021
December 31, 2020
Carrying amount
272,430
303,535
Fair value
272,519
303,611
17
Equity Securities
The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:
Freddie Mac preferred stock
338
Community Reinvestment Act mutual fund
2,500
(17)
2,483
Total equity securities with readily determinable fair values
560
23
2,523
583
For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:
Gains (Losses) Recognized on Equity Securities
Realized
(222)
(420)
(40)
39
Total equity securities with readily determinable fair value
(262)
(381)
3. LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 11 “Mortgage Banking Activities” of this section of the filing.
Consumer Loans Held for Sale, at Fair Value
In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.
Activity for consumer loans held for sale and carried at fair value was as follows:
Balance, beginning of period
598
19,090
47,186
Proceeds from the sale of consumer loans held for sale
(18,930)
(45,728)
512
1,375
Balance, end of period
3,431
Consumer Loans Held for Sale, at the Lower of Cost or Fair Value
RCS originates for sale 90% to 95% of the balances from its line-of-credit products and 100% for some of its healthcare receivables products. Ordinary gains or losses on the sale of these RCS products are reported as a component of “Program fees.”
Activity for consumer loans held for sale and carried at the lower of cost or market value was as follows:
11,646
98,184
147,935
(88,753)
(148,454)
792
962
12,089
19
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio follows:
Traditional Banking:
Residential real estate:
Owner occupied
851,869
879,800
Nonowner occupied
271,829
264,780
Commercial real estate
1,344,394
1,349,085
Construction & land development
102,113
98,674
Commercial & industrial
312,537
325,596
Paycheck Protection Program
383,311
392,319
Lease financing receivables
9,930
10,130
Aircraft
106,081
101,375
Home equity
226,280
240,640
Consumer:
Credit cards
14,200
14,196
Overdrafts
474
587
Automobile loans
25,624
30,300
Other consumer
7,325
8,167
Total Traditional Banking
3,655,967
3,715,649
Warehouse lines of credit*
865,844
962,796
Total Core Banking
4,521,811
4,678,445
Republic Processing Group*:
Tax Refund Solutions:
Easy Advances
30,703
Other TRS loans
5,770
23,765
Republic Credit Solutions
108,309
110,893
Total Republic Processing Group
144,782
134,658
Total loans**
Total loans, net
*Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.
The following table reconciles the contractually receivable and carrying amounts of loans:
Contractually receivable
4,677,502
4,821,062
Unearned income
(684)
(708)
Unamortized premiums
216
Unaccreted discounts
(803)
(988)
PPP net unamortized deferred origination fees and costs
(11,059)
(8,564)
Other net unamortized deferred origination fees and costs
1,468
2,085
Carrying value of loans
20
The CARES Act was enacted in March 2020 and provided for the SBA’s PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID-19 pandemic. The Economic Aid Act was enacted in December 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As of March 31, 2021, net PPP loans of $383 million remained on the Core Bank’s balance sheet, including $218 million in loan balances originated during 2020, $176 million in loan balances originated during the first quarter of 2021, and $11 million of unaccreted PPP lender fees reported as a credit offset to these originated balances. Unaccreted PPP lender fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated.
To provide liquidity to banks administering the SBA’s PPP, the FRB created the PPPLF, a lending facility secured by the PPP loans of the participating banks. As of March 31, 2021, the Bank had no outstanding borrowings from the FRB under the PPPLF.
21
Credit Quality Indicators
The following tables include loans by segment, risk category, and, for non-revolving loans, origination year. Loan segments and risk categories as of March 31, 2021 remain unchanged from those defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Regarding origination year, loan extensions and renewals are generally considered originated in the year extended or renewed unless the loan is classified as a TDR. Loan extensions and renewals classified as TDRs generally receive no change in origination date upon extension or renewal.
Revolving Loans
Term Loans Amortized Cost Basis by Origination Year
Converted
As of March 31, 2021
2019
2018
Prior
Cost Basis
to Term
Residential real estate owner occupied:
Risk Rating
Pass or not rated
108,534
260,948
120,205
74,681
261,537
825,905
Special Mention
360
40
9,813
10,213
Substandard
386
1,487
615
13,263
15,751
Doubtful
261,334
122,052
75,336
284,613
Residential real estate nonowner occupied:
21,323
77,611
58,090
39,417
74,623
617
271,681
42
106
74,771
Commercial real estate:
106,492
293,953
219,168
141,907
433,866
63,586
1,258,972
11,370
3,385
30,304
9,153
21,651
75,863
312
2,592
349
4,029
2,277
9,559
118,174
299,930
249,821
151,060
459,546
65,863
Construction and land development:
15,421
48,914
25,299
7,735
2,111
99,480
208
2,384
41
49,122
27,724
Commercial and industrial:
27,257
83,148
78,484
30,028
67,856
1,006
287,779
16,368
5,184
800
61
2,305
24,718
43,625
88,372
79,284
30,089
70,161
Paycheck Protection Program:
167,552
215,759
Lease financing receivables:
893
958
3,008
2,037
3,034
Aircraft:
11,188
52,990
28,447
11,608
1,848
Home equity:
223,561
2,593
22
Term Loans Amortized Cost Basis by Origination Year (Continued)
1,196
12,379
7,426
11,524
14,317
47,154
45
464
12,409
7,471
11,918
47,623
Warehouse:
TRS:
36,473
RCS:
7,880
22,063
4,484
2,060
17,851
53,150
107,488
821
53,971
Grand Total:
497,555
1,057,540
549,564
316,899
874,250
1,162,642
65,209
4,523,659
27,738
8,777
33,848
9,254
33,816
113,559
3,018
1,907
660
17,787
3,414
29,375
Grand Total
525,605
1,069,335
585,319
326,813
925,853
1,166,182
67,486
As of December 31, 2020
2017
268,313
132,018
82,754
67,430
301,366
851,881
1,610
8,730
10,746
394
1,423
1,331
614
13,411
17,173
268,707
133,805
84,127
69,654
323,507
73,291
63,102
43,610
45,759
38,316
621
264,699
81
38,397
315,550
258,251
166,542
171,207
315,336
55,949
1,282,835
3,397
30,969
236
11,355
9,659
55,616
2,596
987
3,899
2,803
10,634
321,543
289,569
166,778
183,549
328,894
58,752
53,972
31,756
7,840
701
1,964
96,233
2,397
44
34,197
105,985
84,575
33,391
32,303
46,697
1,040
303,991
18,195
2,215
21,210
383
395
124,563
85,387
48,912
1,117
3,663
1,814
2,847
689
55,823
30,529
13,804
1,219
237,633
127
2,880
425
13,636
8,563
7,125
8,648
14,321
52,718
49
229
212
527
13,668
8,612
7,354
8,865
14,326
53,250
27,683
5,704
2,485
1,232
19,095
54,348
110,547
346
54,694
1,294,478
623,234
360,803
329,823
732,111
1,292,863
57,610
4,690,922
21,592
34,530
278
12,965
20,609
90,101
3,373
1,860
1,380
1,830
17,603
3,231
32,080
1,319,443
659,624
362,461
344,618
770,323
1,296,221
60,413
24
The following table presents the activity in the ACLL by portfolio class:
ACLL Rollforward
9,715
(253)
27
9,489
4,729
4,199
447
(27)
9,387
2,466
66
2,532
1,737
148
2,165
23,606
555
(428)
68
23,801
10,486
273
2,151
471
13,381
3,274
319
3,593
2,152
1,447
937
4,536
2,797
2,718
2,882
(1,318)
974
2,541
(2)
147
(14)
133
253
265
200
4,990
(382)
4,615
2,721
1,652
842
75
5,290
929
(57)
930
1,020
33
(106)
978
(73)
(138)
473
1,169
(122)
(344)
55
758
399
(78)
334
612
(7)
(79)
(8)
28
546
577
(52)
533
374
307
(117)
(37)
112
639
49,699
70
(637)
255
49,387
28,205
6,734
5,343
(522)
794
40,554
Warehouse lines of credit
2,407
1,794
332
2,126
52,106
(172)
51,552
29,999
5,675
42,680
Republic Processing Group:
16,019
15,228
15,270
158
(135)
(22)
234
(95)
(44)
95
8,803
(375)
(766)
93
7,755
13,118
1,706
(2,709)
271
12,386
8,961
15,509
(788)
23,784
13,352
16,839
(2,753)
313
27,751
61,067
15,337
(1,425)
357
43,351
22,514
(3,275)
1,107
70,431
The cumulative loss rate used as the basis for the estimate of the Company’s ACLL as of March 31, 2021 was primarily based on a static pool analysis of each of the Company’s loan pools using the Company’s loss experience from 2013 through 2020, supplemented by qualitative factor adjustments for current and forecasted conditions. The Company employs one-year forecasts of unemployment and CRE vacancy within its ACLL model, with reversion to long-term averages following the forecasted period. The cumulative loss rate within the Company’s ACLL also includes estimated losses based on an individual evaluation of loans which are either collateral dependent or which do not share risk characteristics with pooled loans, e.g., TDRs.
25
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans, nonperforming assets, and select credit quality ratios follows:
(dollars in thousands)
Loans on nonaccrual status*
22,004
23,548
Loans past due 90-days-or-more and still on accrual**
517
47
Total nonperforming loans
22,521
23,595
Total nonperforming assets
24,536
26,094
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans
0.48
%
0.49
Nonperforming assets to total loans (including OREO)
0.53
0.54
Nonperforming assets to total assets
0.38
0.42
Credit Quality Ratios - Core Bank:
0.50
0.56
0.45
*
Loans on nonaccrual status include collateral-dependent loans.
**
Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
The following tables present the recorded investment in nonaccrual loans and loans past due 90-days-or-more and still on accrual by class of loans:
Past Due 90-Days-or-More
Nonaccrual
and Still Accruing Interest*
13,194
14,328
6,669
6,762
1,855
2,141
170
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Interest Income
Loans with
Loans without
Recognized
Loans
on Nonaccrual Loans*
1,940
11,254
191
36
6,114
Consumer
72
140
2,599
19,405
241
* Includes interest income for loans on nonaccrual as of the beginning of the period that were paid off during the period.
March 31, 2020
1,995
12,333
73
576
6,186
727
91
2,050
69
181
2,739
20,809
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous loans. Nonaccrual loans are typically returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future contractual payments are reasonably assured. TDRs on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.
Delinquent Loans
The following tables present the aging of the recorded investment in loans by class of loans:
30 - 59
60 - 89
90 or More
Days
Delinquent
Delinquent*
Delinquent**
Current
1,054
1,238
2,526
849,343
5,402
1,338,992
445
484
225,796
14,173
86
380
25,599
7,323
1,154
295
7,111
8,560
3,647,407
4,513,251
5,666
4,211
1,594
6,322
101,987
4,315
6,426
138,356
5,469
1,889
7,628
14,986
4,651,607
Delinquency ratio***
0.12
0.04
0.16
0.32
* All loans past due 90-days-or-more, excluding small balance consumer loans, were on nonaccrual status.
** Delinquent status may be determined by either the number of days past due or number of payments past due.
*** Represents total loans 30-days-or-more past due by aging category divided by total loans.
1,038
668
1,554
3,260
876,540
348
5,109
5,457
1,343,628
325,584
595
702
239,938
35
14,123
56
30,244
8,161
1,352
1,070
7,291
9,713
3,705,936
4,668,732
6,572
3,620
10,234
100,659
124,424
7,924
4,690
7,333
19,947
4,793,156
0.10
0.15
0.41
* All loans past due 90-days-or-more, excluding smaller balance consumer loans, were on nonaccrual status.
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by class of loans:
Secured
Real
by Real
by Personal
Estate
Personal
Property
Collateral
17,338
17,212
9,866
10,205
2,719
2,899
193
237
30,029
30,397
249
Collateral-dependent loans are generally secured by real estate or personal property. If there is insufficient collateral value to secure the Company’s recorded investment in these loans, they are charged down to collateral value less estimated selling cost, when selling costs are applicable. Selling costs range from 10%-13%, with those percentages based on annual studies performed by the Company.
Troubled Debt Restructurings
A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of their debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Bank’s internal underwriting policy.
The majority of the Bank’s commercial-related and construction TDRs involve a restructuring of financing terms, such as a reduction in the payment amount to require only interest and escrow (if required) and/or extending the maturity date of the debt. The substantial majority of the Bank’s residential real estate TDR concessions involve reducing the client’s loan payment through a rate reduction for a set period based on the borrower’s ability to service the modified loan payment. Retail loans may also be classified as TDRs due to legal modifications, such as bankruptcies.
Nonaccrual loans modified as TDRs typically remain on nonaccrual status and continue to be reported as nonperforming loans for a minimum of six consecutive months. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. As of March 31, 2021 and December 31, 2020, $7 million and $7 million of TDRs were on nonaccrual status.
Detail of TDRs differentiated by loan type and accrual status follows:
Troubled Debt
Restructurings on
Nonaccrual Status
Accrual Status
Restructurings
Number of
Recorded
March 31, 2021 (dollars in thousands)
Investment
Residential real estate
65
4,755
117
10,499
182
15,254
2,464
1,914
4,378
2,347
575
2,349
601
Total troubled debt restructurings
7,245
2,470
13,030
2,538
20,275
December 31, 2020 (dollars in thousands)
4,189
123
11,041
184
15,230
2,509
2,395
4,904
2,194
2,195
599
6,712
2,324
14,066
2,388
20,778
The Bank considers a TDR to be performing to its modified terms if the loan is in accrual status and not past due 30-days-or-more as of the reporting date. A summary of the categories of TDR loan modifications outstanding and respective performance under modified terms as of March 31, 2021 and December 31, 2020 follows:
Performing to
Not Performing to
Modified Terms
Residential real estate loans (including home equity loans):
Interest only payments
796
Rate reduction
8,957
310
101
9,267
Principal deferral
993
165
1,158
Legal modification
59
3,400
633
4,033
Total residential TDRs
166
14,146
1,108
Commercial related and construction/land development loans:
475
1,014
467
2,931
Total commercial TDRs
1,956
4,420
Consumer loans:
2,345
566
Total consumer TDRs
2,348
589
2,520
16,691
3,584
826
9,526
370
107
9,896
858
1,024
58
3,068
416
3,484
14,278
952
488
1,046
1,091
906
3,370
2,440
4,949
2,193
578
2,371
17,317
3,461
As of March 31, 2021 and December 31, 2020, 82% and 83% of the Bank’s TDR balances were performing according to their modified terms. The Bank had provided $1 million and $1 million of specific ACLL allocations to clients whose loan terms have been modified in TDRs as of March 31, 2021 and December 31, 2020. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships as of March 31, 2021 or December 31, 2020.
A summary of the categories of TDR loan modifications by respective performance as of March 31, 2021 and 2020 that were modified during the three months ended March 31, 2021 and 2020 follows:
163
174
272
261
435
385
387
57
391
306
186
492
March 31, 2020 (dollars in thousands)
128
2,116
462
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 March 31, 2021 and 2020, 62% and 100% of the Bank’s TDR balances that occurred during the first quarter of 2021 and 2020 were performing according to their modified terms. The Bank provided approximately $29,000 and $93,000 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the first quarter of 2021 and 2020.
There was no significant change between the pre and post modification loan balances for the three months ending March 31, 2021 and 2020.
The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of March 31, 2021 and 2020 and for which there was a payment default during the three months ended March 31, 2021 and 2020.
285
317
134
COVID-19 Loan Accommodations
The CARES Act provided several forms of economic relief designed to defray the impact of COVID-19. In April 2020, through its own independent relief efforts and CARES Act provisions, the Company began offering loan accommodations through deferrals and forbearances. These accommodations were generally under three-month terms for commercial clients, with residential and consumer accommodations in line with prevailing regulatory and legal parameters. Loans that received an accommodation were generally not considered troubled debt restructurings by the Company if such loans were not greater than 30 days past due as of December 31, 2019.
As of March 31, 2021, $33 million, or 1% of the Company’s Traditional Bank portfolio remained under a COVID-19 hardship accommodations.
Foreclosures
The following table presents the carrying amount of foreclosed properties held as a result of the Bank obtaining physical possession of such properties:
496
1,951
2,003
Total other real estate owned
The following table presents the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction:
Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure
726
981
34
The Company’s TRS segment offered its EA product during the first two months of 2021 and 2020. During the first quarter of each year, the Company bases its estimated Provision for EAs on the current year’s EA delinquency information and the prior year’s tax refund payment patterns subsequent to the first quarter. Each year, all unpaid EAs are charged off by June 30th, and each quarter thereafter, any credits to the Provision for EAs matches the recovery of previously charged-off accounts.
Information regarding EAs follows:
Easy Advances originated
250,045
387,762
Net charge to the Provision for Easy Advances
Provision to total Easy Advances originated
6.41
3.93
Easy Advances net (recoveries) charge-offs
Easy Advances net charge-offs to total Easy Advances originated
(0.01)
5. DEPOSITS
The composition of the deposit portfolio follows:
Core Bank:
Demand
1,312,103
1,217,263
Money market accounts
742,823
712,824
Savings
273,117
236,335
Individual retirement accounts (1)
47,113
47,889
Time deposits, $250 and over (1)
77,014
83,448
Other certificates of deposit (1)
182,333
199,214
Reciprocal money market and time deposits (1)
317,173
314,109
Brokered deposits (1)
40,504
25,010
Total Core Bank interest-bearing deposits
2,992,180
2,836,092
Total Core Bank noninterest-bearing deposits
1,588,647
1,503,662
Total Core Bank deposits
4,580,827
4,339,754
2,964
6,673
Total RPG interest-bearing deposits
Brokered prepaid card deposits
504,224
257,856
Other noninterest-bearing deposits
183,477
128,898
Total RPG noninterest-bearing deposits
687,701
386,754
Total RPG deposits
690,665
393,427
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit clients arising from the Bank’s treasury management program. While comparable to deposits in their transactional nature, these overnight liabilities to clients are in the form of repurchase agreements. Repurchase agreements collateralized by securities are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. Should the fair value of currently pledged securities fall below the associated repurchase agreements, the Bank would be required to pledge additional securities. To mitigate the risk of under collateralization, the Bank typically pledges at least two percent more in securities than the associated repurchase agreements. All such securities are under the Bank’s control.
As of March 31, 2021 and December 31, 2020, all securities sold under agreements to repurchase had overnight maturities. Additional information regarding securities sold under agreements to repurchase follows:
Outstanding balance at end of period
Weighted average interest rate at end of period
0.02
Fair value of securities pledged:
44,744
60,059
131,835
140,554
27,210
29,656
Total securities pledged
203,789
230,269
Average outstanding balance during the period
192,669
208,969
Average interest rate during the period
0.23
Maximum outstanding at any month end during the period
200,704
143,801
7. RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
The Company records as operating lease liabilities the present value of its required minimum lease payments plus any amounts probable of being owed under a residual value guarantee. Offsetting these operating lease liabilities, the Company records right-of-use assets for the underlying leased property.
As of March 31, 2021, the Company was under 45 separate and distinct operating lease contracts to lease the land and/or buildings for 36 of its offices, with 14 such operating leases contracted with a related party of the Company. As of March 31, 2021, payments on 24 of the Company’s operating leases were considered variable because such payments were adjustable based on periodic changes in the Consumer Price Index.
The Company executed no new operating leases during 2021. The Company renewed a related-party lease on one of its Louisville, Kentucky banking centers during the fourth quarter of 2020 that commenced in January 2021 with a right-of-use asset value of $392,000.
The following table presents information concerning the Company’s operating lease expense recorded as a noninterest expense within the “Occupancy” category for the three months ended March 31, 2021 and 2020:
Operating lease expense:
Related Party:
Variable lease expense
1,220
1,182
Fixed lease expense
Third Party:
197
180
341
368
Short-term lease expense
Total operating lease expense
1,792
1,753
Other information concerning operating leases:
Cash paid for amounts included in the measurement of operating lease liabilities
1,798
1,838
Short-term lease payments not included in the measurement of lease liabilities
The following table presents the weighted average remaining term and weighted average discount rate for the Company’s non-short-term operating leases as of March 31, 2021 and December 31, 2020:
Weighted average remaining term in years
8.18
8.37
Weighted average discount rate
3.10
37
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 March 31, 2021:
Year (in thousands)
Related Party
Third Party
3,479
1,867
5,346
2022
4,639
2,418
7,057
2023
6,634
2024
4,512
1,463
5,975
2025
4,344
925
5,269
Thereafter
15,800
2,707
18,507
Total undiscounted cash flows
37,413
11,375
48,788
Discount applied to cash flows
(4,536)
(1,398)
(5,934)
Total discounted cash flows reported as operating lease liabilities
32,877
9,977
8. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances were as follows:
Overnight advances
225,000
Fixed interest rate advances
Total FHLB advances
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity. FHLB advances are collateralized by a blanket pledge of eligible real estate loans. As of March 31, 2021 and December 31, 2020, Republic had available borrowing capacity of $871 million and $683 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million and $125 million available through various other financial institutions as of March 31, 2021 and December 31, 2020.
Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such advances are detailed below:
Weighted
Average
Year (dollars in thousands)
Principal
Rate
2021 (Overnight)
0.14
2021 (Term)
38
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:
40,278
45,165
0.17
1.56
250,000
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
First lien, single family residential real estate
1,026,521
1,048,236
Home equity lines of credit
198,613
208,944
9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
COVID-19 Pandemic
COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. Since March 2020, to slow the spread of COVID-19, jurisdictions within the U.S. have imposed economic and social restrictions on the population in general and non-essential businesses in particular. These restrictions in combination with the public’s response to them effectively suspended or curtailed economic activity for many industries across the U.S., with industries in the Company’s market footprint impacted.
While vaccines for the virus began rolling out during the first quarter of 2021, the future potential financial impact of the COVID-19 pandemic is still unknown at this time. This pandemic and the public’s response to it could cause the Company to experience a material adverse impact on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, MSRs, deferred tax assets, or counterparty risk derivatives.
Commitments to Extend Credit
The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. These financial instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.
The Company also extends binding commitments to clients and prospective clients. Such commitments assure a borrower of financing for a specified period of time at a specified rate. The risk to the Company under such loan commitments is limited by the terms of the contracts. For example, the Company may not be obligated to advance funds if the client’s financial condition deteriorates or if the client fails to meet specific covenants.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding.
The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments, for each period ended:
Unused warehouse lines of credit
562,956
456,004
Unused home equity lines of credit
355,477
353,322
Unused loan commitments - other
780,048
775,128
Standby letters of credit
12,805
10,949
FHLB letter of credit
643
Total commitments
1,711,929
1,596,046
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third-party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material.
The following table presents a rollforward of the ACLC for the three months ended March 31, 2021 and 2020:
ACLC Rollforward
Loan Commitments
116
173
194
89
737
(32)
705
989
1,015
456
558
The Company increased its ACLC during the three months ended March 31, 2021 based on an increase in its overall unused commitments.
10. FAIR VALUE
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Available-for-sale debt securities: Except for the Bank’s private label mortgage-backed security and its TRUP investment, the fair value of AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
The Bank’s private label mortgage-backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (present value model) approach in determining the fair value of this security.
See in this section of the filing under Footnote 2 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage-backed security.
For its TRUP investment, the Company considered the most recent bid price for the same instrument to approximate market value as of March 31, 2021. The Company’s TRUP investment is considered highly illiquid and also valued using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.
Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s Community Reinvestment Act mutual fund investment and fall within Level 1 of the fair value hierarchy.
The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).
Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.
Consumer loans held for sale, at fair value: In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. Fair value for these loans is based on contractual sales terms, Level 3 inputs.
Consumer loans held for investment, at fair value: The Bank held an immaterial amount of consumer loans at fair value through a consumer loan program the Company is currently unwinding. The fair value of these loans was based on the discounted cash flows of the underlying loans, Level 3 inputs. Further disclosure of these loans is considered immaterial and thus omitted.
Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. Forward contracts and rate lock loan commitments are classified as Level 2 in the fair value hierarchy.
Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant dealer counterparty and validated against the Company’s calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.
Collateral-dependent loans: Collateral-dependent loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Mortgage servicing rights: On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded, and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and can generally be validated against available market data (Level 2).
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below. Information as of March 31, 2021 is presented net of any applicable ACL.
Fair Value Measurements at
March 31, 2021 Using:
Quoted Prices in
Significant
Active Markets
for Identical
Observable
Unobservable
Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial assets:
470,962
6,513
Equity securities with readily determinable fair value:
Mortgage loans held for sale
Consumer loans held for sale
Consumer loans held for investment
417
Rate lock loan commitments
1,903
Mandatory forward contracts
1,624
Interest rate swap agreements
6,713
Financial liabilities:
December 31, 2020 Using:
517,106
6,757
497
4,540
12,545
976
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 months ended March 31, 2021 and 2020.
The following table presents a reconciliation of the Bank’s private label mortgage-backed security measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
3,495
Total gains or losses included in earnings:
Net change in unrealized gain
Principal paydowns
(109)
(247)
3,249
The fair value of the Bank’s single private label mortgage-backed security is supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying mortgages, including consideration of geographic location, original loan-to-value and the weighted average FICO score of the borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of default, and prepayment probabilities) and 3) discounted cash flow modeling.
The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage-backed security are prepayment rates, probability of default and loss severity in the event of default. Significant fluctuations in any of those inputs in isolation would result in a significantly different fair value measurement.
Quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage-backed security follows:
Valuation
Technique
Unobservable Inputs
Range
Discounted cash flow
(1) Constant prepayment rate
4.5% - 15.0%
(2) Probability of default
1.8% - 9.0%
(3) Loss severity
50% - 75%
4.5% - 18.0%
The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
4,000
Discount accretion
(163)
4,100
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.
46
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 March 31, 2021 and December 31, 2020.
The aggregate fair value, contractual balance, and unrealized gain were as follows:
Aggregate fair value
Contractual balance
62,561
44,781
Unrealized gain
1,075
2,086
The total amount of gains and losses from changes in fair value included in earnings for the three months ended March 31, 2021 and 2020 for mortgage loans held for sale are presented in the following table:
Interest income
409
214
Change in fair value
(1,011)
642
Total included in earnings
(602)
856
Consumer Loans Held for Sale
RCS carries loans originated through its installment loan program at fair value. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of March 31, 2021 and December 31, 2020.
The significant unobservable inputs in the fair value measurement of the Bank’s short-term installment loans are the net contractual premiums and level of loans sold at a discount price. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.
The following table presents quantitative information about recurring Level 3 fair value measurement inputs for installment loans:
Contract Terms
(1) Net Premium
1.4%
(2) Discounted Sales
5.00%
The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, were as follows:
3,940
3,284
The total amount of net gains from changes in fair value included in earnings for consumer loans held for sale, at fair value, are presented in the following table:
571
1,476
1,494
48
Assets measured at fair value on a non-recurring basis are summarized below:
Collateral-dependent loans:
3,054
3,999
388
Total collateral-dependent loans*
7,441
Other real estate owned:
3,860
4,107
8,362
Mortgage servicing rights
3,233
The difference between the carrying value and the fair value of collateral-dependent loans measured at fair value is reconciled in a subsequent table of this Footnote.
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:
(Weighted
Average)
Collateral-dependent loans - residential real estate owner occupied
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 51% (8%)
Collateral-dependent loans - commercial real estate
15% - 31% (27%)
Collateral-dependent loans - home equity
2%-6% (5%)
Other real estate owned - commercial real estate
28% (28%)
7% - 31% (26%)
26% (26%)
50
Collateral Dependent Loans
Collateral-dependent loans are generally measured for loss using the fair value for reasonable disposition of the underlying collateral. The Bank’s practice is to obtain new or updated appraisals or BPOs on the loans subject to the initial review and then to evaluate the need for an update to this value on an as-necessary or possibly annual basis thereafter (depending on the market conditions impacting the value of the collateral). The Bank may discount the valuation amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal or BPO is not available at the time of a loan’s loss review, the Bank may apply a discount to the existing value of an old valuation to reflect the property’s current estimated value if it is believed to have deteriorated in either: (i) the physical or economic aspects of the subject property or (ii) material changes in market conditions. The review generally results in a partial charge-off of the loan if fair value, less selling costs, are below the loan’s carrying value. Collateral-dependent loans are valued within Level 3 of the fair value hierarchy.
Collateral-dependent loans are as follows:
Carrying amount of loans measured at fair value
6,315
7,110
Estimated selling costs considered in carrying amount
1,126
1,252
Valuation allowance
Total fair value
Provision on collateral-dependent
The carrying amounts and estimated exit price fair values of all financial instruments follow:
March 31, 2021:
Level 1
Level 2
Level 3
Assets:
Available-for-sale debt securities
Held-to-maturity debt securities
Equity securities with readily determinable fair values
4,578,953
Federal Home Loan Bank stock
11,180
7,711
10,379
Liabilities:
Noninterest-bearing deposits
Transaction deposits
2,638,910
Time deposits
356,234
361,577
30,464
277
52
December 31, 2020:
4,749,831
12,925
7,095
8,318
2,444,361
398,404
404,773
235,009
31,071
342
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:
19,224
213,587
125,273
Proceeds from the sale of mortgage loans held for sale
(203,815)
(109,918)
6,997
4,805
39,384
The following table presents the components of Mortgage Banking income:
Net gain realized on sale of mortgage loans held for sale
8,045
3,078
Net change in fair value recognized on loans held for sale
Net change in fair value recognized on rate lock loan commitments
(2,637)
3,779
Net change in fair value recognized on forward contracts
2,600
(2,694)
Net gain recognized
Loan servicing income
793
675
(997)
(585)
Change in mortgage servicing rights valuation allowance
400
(100)
Net servicing income recognized
196
Total Mortgage Banking income
Activity for capitalized mortgage servicing rights was as follows:
5,888
Additions
1,213
791
Amortized to expense
Change in valuation allowance
5,994
Activity in the valuation allowance for capitalized mortgage servicing rights follows:
Beginning valuation allowance
500
Charge during the period
Ending valuation allowance
54
Other information relating to mortgage servicing rights follows:
Fair value of mortgage servicing rights portfolio
Monthly weighted average prepayment rate of unpaid principal balance*
207
308
Discount rate
10.00
Weighted average foreclosure rate
0.39
0.44
Weighted average life in years
6.02
4.85
Rates are applied to individual tranches with similar characteristics.
Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.
Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.
The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.
The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives as of the period ends presented:
Notional
Included in Mortgage loans held for sale:
Included in other assets:
74,187
105,395
134,953
Included in other liabilities:
136,236
12. INTEREST RATE SWAPS
Interest Rate Swaps Used as Cash Flow Hedges
The Bank entered into two interest rate swap agreements (“swaps”) during 2013 as part of its interest rate risk management strategy. The Bank designated these swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to the 1-month LIBOR. Both swaps matured in December 2020.
The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income:
Interest rate swap on money market deposits
Interest rate swap on FHLB advance
Total interest (benefit) expense on swap transactions
The following table presents the net gains (losses) recorded in OCI and the consolidated statements of income relating to the swaps designated as cash flow hedges:
Gains (losses) recognized in OCI on derivative (effective portion)
Gains (losses) reclassified from OCI on derivative (effective portion)
(29)
Gains (losses) recognized in income on derivative (ineffective portion)
Non-hedge Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Bank, and results in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty, and therefore, has no credit risk.
A summary of the Bank’s interest rate swaps related to clients is included in the following table:
Bank Position
Interest rate swaps with Bank clients - Assets
Pay variable/receive fixed
108,250
138,277
Interest rate swaps with Bank clients - Liabilities
25,657
(277)
Interest rate swaps with Bank clients - Total
133,907
6,436
Offsetting interest rate swaps with institutional swap dealer
Pay fixed/receive variable
(6,436)
(12,545)
267,814
276,554
The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with dealer counterparties when such net loss positions exceed $250,000. The fair value of cash or investment securities pledged as collateral by the Bank to cover such net loss positions totaled $7.6 million and $13.3 million as of March 31, 2021 and December 31, 2020.
13. EARNINGS PER SHARE
The Company calculates earnings per share under the two-class method. Under the two-class method, earnings available to common shareholders for the period are allocated between Class A Common Stock and Class B Common Stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. The difference in earnings per share between the two classes of common stock results from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on Class B Common Stock.
A reconciliation of the combined Class A and Class B Common Stock numerators and denominators of the earnings per share and diluted earnings per share computations is presented below:
Class A Shares
Class B Shares
Undistributed net income for basic earnings per share
19,694
20,767
Weighted average potential dividends on Class A shares upon exercise of dilutive options
Undistributed net income for diluted earnings per share
19,674
20,750
Weighted average shares outstanding:
18,798
18,831
2,204
Effect of dilutive securities on Class A Shares outstanding
Weighted average shares outstanding including dilutive securities
21,062
21,094
Basic earnings per share:
Class A Common Stock:
Per share dividends distributed
0.31
0.29
Undistributed earnings per share*
0.95
1.00
Total basic earnings per share - Class A Common Stock
Class B Common Stock:
0.28
0.26
0.86
0.91
Total basic earnings per share - Class B Common Stock
Diluted earnings per share:
0.94
0.99
Total diluted earnings per share - Class A Common Stock
0.90
Total diluted earnings per share - Class B Common Stock
*To arrive at undistributed earnings per share, undistributed net income is first prorated between Class A and Class B Common Shares, with Class A Common Shares receiving a 10% premium. The resulting pro-rated, undistributed net income for each class is then divided by the weighted average shares for each class.
Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:
Antidilutive stock options
154,000
175,000
Average antidilutive stock options
159,000
14. OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
Available-for-Sale Debt Securities:
Net unrealized (losses) gains
7,778
(1,945)
Net of tax
5,833
Cash Flow Hedges:
Net losses
(132)
Total other comprehensive (loss) income components, net of tax
The table below presents the significant amounts reclassified out of each component of AOCI:
Amounts Reclassified from AOCI
Affected Line Items
in the Consolidated
Statements of Income
Interest expense on deposits
(12)
Interest expense on FHLB advances
Total derivative losses on cash flow hedges
Income tax expense
The following is a summary of the AOCI balances, net of tax:
Change
Unrealized gain (loss) on AFS debt securities
7,571
(1,522)
6,049
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
938
949
Total unrealized gain (loss)
December 31, 2019
Unrealized gain on AFS debt securities
2,211
5,832
8,043
964
965
Unrealized loss on cash flow hedges
(77)
(177)
Total unrealized gain
15. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company’s net revenue by reportable segment:
Core Banking
Tax
Republic
Traditional
Mortgage
Core
Refund
Credit
Banking
Lending
Solutions
Company
Net interest income(1)
41,102
6,772
48,283
14,676
4,821
19,497
Noninterest income:
2,865
2,879
Mortgage banking income(1)
2,969
Program fees(1)
896
1,329
Increase in cash surrender value of BOLI(1)
Net gains (losses) on OREO
6,784
7,221
14,019
13,689
15,018
Total net revenue
47,886
6,786
7,630
62,302
28,365
6,150
34,515
96,817
Net-revenue concentration(2)
40,620
4,307
45,141
20,525
7,072
27,597
3,138
3,149
(13)
2,493
2,312
Net gain on branch divestiture(1)
1,212
1,236
7,235
4,819
12,065
16,192
18,504
47,855
4,318
5,033
57,206
36,717
9,384
46,101
103,307
The following represents information for significant revenue streams subject to ASC 606:
Service charges on deposit accounts – The Company earns revenue for account-based and event-driven services on its retail and commercial deposit accounts. Contracts for these services are generally in the form of deposit agreements, which disclose fees for deposit services. Revenue for event-driven services is recognized in close proximity or simultaneously with service performance. Revenue for certain account-based services may be recognized at a point in time or over the period the service is rendered, typically no longer than a month. Examples of account-based and event-driven service charges on deposits include per item fees, paper-statement fees, check-cashing fees, and analysis fees.
Net refund transfer fees – An RT is a fee-based product offered by the Bank through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”), with the Bank acting as an independent contractor of the Tax Providers. An RT allows a taxpayer to pay any applicable tax preparation and filing related fees directly from his federal or state government tax refund, with the remainder of the tax refund disbursed directly to the taxpayer. RT fees and all applicable tax preparation, transmitter, audit, and any other taxpayer authorized amounts are deducted from the tax refund by either the Bank or the Bank’s service provider and automatically forwarded to the appropriate party as authorized by the taxpayer. RT fees generally receive first priority when applying fees against the taxpayer’s refund, with the Bank’s share of RT fees generally superior to the claims of other third-party service providers, including the Tax Providers. The remainder of the refund is disbursed to the taxpayer by a Bank check printed at a tax office, direct deposited to the taxpayer’s personal bank account, loaded to a Prepaid Card or Walmart Direct2Cash®.
The Company executes contracts with individual Tax Providers to offer RTs to their taxpayers. RT revenue is recognized by the Bank immediately after the taxpayer’s refund is disbursed in accordance with the RT contract with the taxpayer. The fee paid by the taxpayer for the RT is shared between the Bank and the Tax Providers based on contracts executed between the parties.
The Company presents RT revenue net of any amounts shared with the Tax Providers. The Bank’s share of RT revenue is generally based on the obligations undertaken by the Tax Provider for each individual RT program with more obligations generally corresponding to higher RT revenue share. The significant majority of net RT revenue is recognized and obligations under RT contracts fulfilled by the Bank during the first half of each year. Incremental expenses associated with the fulfillment of RT contracts are generally expensed during the first half of the year.
Interchange fee income – As an “issuing bank” for card transactions, the Company earns interchange fee income on transactions executed by its cardholders with various third-party merchants. Through third-party intermediaries, merchants compensate the Company for each transaction for the ability to efficiently settle the transaction and for the Company’s willingness to accept certain risks inherent in the transaction. There is no written contract between the merchant and the Company, but a contract is implied between the two parties by customary business practices. Interchange fee income is recognized almost simultaneously by the Company upon the completion of a related card transaction.
The Company compensates its cardholders by way of cash or other “rewards” for generating card transactions. These rewards are disclosed in cardholder agreements between the Company and its cardholders. Reward costs are accrued over time based on card transactions generated by the cardholder. Interchange fee income is presented net of reward costs within noninterest income.
Net gains/(losses) on other real estate – The Company routinely sells OREO it has acquired through loan foreclosure. Net gains/(losses) on OREO reflect both 1) the gain or loss recognized upon an executed deed and 2) mark-to-market writedowns the Company takes on its OREO inventory.
The Company generally recognizes gains or losses on OREO at the time of an executed deed, although gains may be recognized over a financing period if the Company finances the sale. For financed OREO sales, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.
Mark-to-market writedowns taken by the Company during the property’s holding period are generally at least 10% per year, but may be higher based on updated real estate appraisals or BPOs. Incremental expenditures to bring OREO to salable condition are generally expensed as-incurred.
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16. SEGMENT INFORMATION
Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.
As of March 31, 2021, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations.
The nature of segment operations and the primary drivers of net revenue by reportable segment are provided below:
Reportable Segment:
Nature of Operations:
Primary Drivers of Net Revenue:
Core Banking:
Traditional Banking
Provides traditional banking products to clients in its market footprint primarily via its network of banking centers and to clients outside of its market footprint primarily via its digital delivery channels.
Loans, investments, and deposits.
Warehouse Lending
Provides short-term, revolving credit facilities to mortgage bankers across the United States.
Mortgage warehouse lines of credit.
Mortgage Banking
Primarily originates, sells and services long-term, single-family, first-lien residential real estate loans primarily to clients in the Bank's market footprint.
Loan sales and servicing.
Tax Refund Solutions
TRS offers tax-related credit products and facilitates the receipt and payment of federal and state tax refunds through Refund Transfer products. The RPS division of TRS offers general-purpose reloadable cards. TRS and RPS products are primarily provided to clients outside of the Bank’s market footprint.
Loans, refund transfers, and prepaid cards.
Offers consumer credit products. RCS products are primarily provided to clients outside of the Bank’s market footprint, with a substantial portion of RCS clients considered subprime or near-prime borrowers.
Unsecured, consumer loans.
The accounting policies used for Republic’s reportable segments are generally the same as those described in the summary of significant accounting policies in the Company’s 2020 Annual Report on Form 10-K. Republic evaluates segment performance using operating income. The Company allocates goodwill to the Traditional Banking segment. Republic generally allocates income taxes based on income before income tax expense unless reasonable and specific segment allocations can be made. The Company makes transactions among reportable segments at carrying value.
Segment information follows:
Net interest income
(5)
15,884
Other noninterest income
6,826
6,898
37,328
1,028
3,121
41,477
5,302
1,032
6,334
Income before income tax expense
10,563
6,000
4,509
21,072
7,179
5,493
12,672
2,125
1,434
992
4,551
1,770
1,370
3,140
8,438
4,566
3,517
16,521
5,409
4,123
9,532
Period-end assets
4,789,840
865,655
78,760
5,734,255
625,690
116,595
742,285
Net interest margin
3.47
3.43
3.46
4.66
Net-revenue concentration*
5,589
5,921
15,133
7,270
7,327
36,647
803
1,996
39,446
6,629
7,523
5,619
3,183
3,037
11,839
14,955
21,739
460
716
638
3,497
1,570
5,067
5,159
2,467
2,399
10,025
11,458
5,214
16,672
4,471,235
851,405
53,298
5,375,938
240,898
105,197
346,095
5,722,033
3.80
2.68
3.65
5.57
* 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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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank as well, as a group of third-party insurance captives for which insurance may not be available or economically feasible.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I Item 1 “Financial Statements.”
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements, except as required by applicable law.
Broadly speaking, forward-looking statements include:
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:
For disclosure regarding the impact to the Company’s financial statements of ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods.
A summary of the Company's significant accounting policies is set forth in Part II “Item 8. Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.
Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.
Republic believes its critical accounting policies and estimates relate to its ACLL and Provision.
ACLL and Provision — At March 31, 2021, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.
Effective January 1, 2020, the Company adopted ASC 326 Financial Instruments – Credit Losses, which replaced the pre-January 1, 2020 “probable-incurred” method for calculating the Company’s ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures.
When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower “expected” threshold for loss recognition versus a higher “probable” threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts. The Company’s CECL method is a “static-pool” method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable, supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use the U.S. national unemployment rate as its primary forecasting tool. For its CRE loan pool, the Company also uses one-year forecasts of vacancy rates for CRE in the Company’s market footprint.
Management’s evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast.
Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix or term, delinquency level, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on the U.S. national unemployment rate and vacancy rates for CRE in the Company’s market footprint. Subsequent to the one-year forecasts, loss rates are assumed to immediately revert back to long-term historical averages.
The impact of utilizing the CECL approach to calculate the ACLL is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company’s reported earnings.
See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 1“Summary of Significant Accounting Policies” of Part II Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
BUSINESS SEGMENT COMPOSITION
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of March 31, 2021, Republic had 42 full-service banking centers with locations as follows:
The Bank’s principal lending activities consist of the following:
Retail Mortgage Lending — Through its retail banking centers and its online Consumer Direct channel, the Bank originates single-family, residential real estate loans. In addition, the Bank originates HEALs and HELOCs through its retail banking centers. Such loans are generally collateralized by owner-occupied, residential real estate properties. For those loans originated through the Bank’s retail banking centers, the collateral is predominately located in the Bank’s market footprint, while loans originated through the Consumer Direct channel are generally secured by owner occupied-collateral located outside of the Bank’s market footprint.
Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial Banking, Business Banking, and Retail Banking channels.
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. Clients are generally located within the Bank’s market footprint or in areas nearby the market footprint.
Construction and Land Development Lending — The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots.
Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank’s markets.
Aircraft Lending — In October 2017, the Bank created an Aircraft Lending division. Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. The aircraft loan program is open to all states, except for Alaska and Hawaii.
The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank’s other Traditional Banking activities generally consist of the following:
Private Banking — The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank’s Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele.
Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank’s Treasury Management department.
Internet Banking — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services — The Bank also provides title insurance and other financial institution related products and services.
Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(II) Warehouse Lending segment
The Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
See additional detail regarding the Warehouse Lending segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(III) Mortgage Banking segment
Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
See additional detail regarding the Mortgage Banking segment under Footnote 11 “Mortgage Banking Activities” and Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”
67
(IV) Tax Refund Solutions segment
Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the next year’s tax season.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Republic Payment Solutions division — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
(V) Republic Credit Solutions segment
Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans that are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
OVERVIEW (Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020)
Total Company net income for the first quarter of 2021 was $26.1 million, a $644,000, or 2%, decrease from the same period in 2020. Diluted EPS decreased to $1.25 for the three months ended March 31, 2021 compared to $1.28 for the same period in 2020. The Company’s TRS segment, which traditionally provides a first quarter lift to net income with its seasonal tax business, drove the year-over-year decline, contributing a $6.0 million decrease in net income as a result of an unusual and delayed tax season.
Net income from Core Banking was $16.5 million for the first quarter of 2021, an increase of $6.5 million, or 65%, over the first quarter of 2020. Primarily driving the rise in net income within Core Banking was a solid increase in net interest income, strong growth in Mortgage Banking income, and a meaningful, positive reduction in the Provision, as the Core Bank made a substantial Provision during the first quarter of 2020 after the onset of the COVID-19 pandemic.
The following are general highlights by reportable segment:
Traditional Banking segment
Mortgage Banking segment
RESULTS OF OPERATIONS (Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020)
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
71
See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.
A large amount of the Company’s financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended lower since the onset of COVID-19 pandemic, as the FOMC reduced the FFTR to approximately 25 basis points during 2020. The FOMC has provided on-going guidance that it is more likely than not that the FFTR will not be increased in the near term.
Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Bank’s net interest income and net interest margin in the near term, while additional decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Bank’s net interest income and net interest margin in the near term. Increases in short-term interest rates, however, could have a negative impact on net interest income and net interest margin if the Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Company’s net interest income and net interest margin. Unknown variables, which may impact the Company’s net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank’s financial products and the Bank’s overall future liquidity needs.
Total Company net interest income decreased 7% during the first quarter of 2021 compared to the same period in 2020. Total Company net interest margin decreased to 4.66% during the first quarter of 2021 compared to 5.57% for the same period in 2020.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
The Traditional Banking’s net interest income increased $482,000, or 1%, for the first quarter of 2021 compared to the same period in 2020. Traditional Banking’s net interest margin was 3.47% for the first quarter of 2021, a decrease of 33 basis points from the same period in 2020.
The increase in the Traditional Bank’s net interest income and decrease in net interest margin during the first quarter of 2021 was primarily attributable to the following factors:
Net interest income increased $2.5 million, or 57%, for the first quarter of 2021 compared to the same period in 2020.
Average committed Warehouse lines increased to $1.5 billion during the first quarter of 2021 from $1.1 billion during the same period in 2020, while overall usage rates on Warehouse lines of credit were 54% and 56%, respectively for the same periods. In addition, the Warehouse net interest margin increased to 3.43% for the first quarter of 2021 compared to 2.68% for the first quarter of 2020, as many of the Bank’s Warehouse client reached contractual interest rate floors on their lines-of-credit during the second quarter of 2020 preventing further declines in the segment’s loan yields, while the segment’s cost of funds continued to decline.
TRS’s net interest income decreased $5.8 million for the first quarter of 2021 compared to the same period in 2020. TRS’s EA product earned $12.8 million in interest income during the first quarter of 2021, a $6.5 million decrease resulting primarily from a $138 million decrease in EA originations from period to period. Management believes that economic impact (stimulus) payments, pandemic health risks, and a two-week delay in the start to the 2021 tax season, all, in varying degrees, negatively impacted demand for its EA product during the first quarter of 2021.
RCS’s net interest income decreased $2.3 million, or 32%, from the first quarter of 2020 to the first quarter of 2021. The decrease was driven primarily by a decline in fee income from RCS’s LOC I product. Loan fees on this product, recorded as interest income on loans, decreased to $3.8 million during the first quarter of 2021 compared to $6.0 million during the same period in 2020 and accounted for 76% and 80% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances following a reduction of marketing for this product during the first quarter of 2020. In addition, while marketing for the product was reinstated during the third quarter of 2020, management believes that economic impact (stimulus) payments during the first quarter of 2021 further reduced demand for its line-of-credit products during the current period.
Future loan fee income from RCS’s LOC I product will likely continue to be negatively impacted by the on-going COVID-19 pandemic.
Table 1 — Total Company Average Balance Sheets and Interest Rates
Interest-earning assets:
Federal funds sold and other interest-earning deposits
510,433
207,335
637
1.23
Investment securities, including FHLB stock (1)
563,985
2,017
1.43
519,726
3,009
2.32
TRS Easy Advance loans (2)
89,732
12,789
57.01
135,307
19,261
56.94
RCS LOC I product (2)
16,284
3,770
92.61
26,603
6,050
90.97
Other RPG loans (3) (7)
139,729
2,789
7.98
119,190
2,713
9.10
Outstanding Warehouse lines of credit(4) (7)
790,244
7,370
3.73
643,182
7,045
4.38
Paycheck Protection Program loans (5) (7)
288,115
6,698
9.30
All other Core Bank loans (6) (7)
3,421,552
33,970
3.97
3,568,855
42,444
4.76
Total interest-earning assets
5,820,074
4.78
5,220,198
6.22
Allowance for credit loss
(66,561)
(53,818)
Noninterest-earning assets:
Noninterest-earning cash and cash equivalents
249,842
199,511
39,185
45,628
68,257
66,654
Other assets (1)
191,497
148,773
Total assets
6,302,294
5,626,946
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts
1,485,015
82
1,128,781
682
0.24
732,328
0.06
761,975
1,242
0.65
314,904
1,105
1.40
418,323
2,156
2.06
Reciprocal money market and time deposits
313,445
0.33
207,970
618
1.19
Brokered deposits
63,325
0.13
338,283
1,604
1.90
Total interest-bearing deposits
2,909,017
0.22
2,855,332
0.88
43,167
371,319
1.78
1.67
3.41
Total interest-bearing liabilities
3,186,093
3,476,860
0.97
Noninterest-bearing liabilities and Stockholders’ equity:
2,146,036
1,249,025
133,953
122,161
Stockholders’ equity
836,212
778,900
Total liabilities and stock-holders’ equity
Net interest spread
4.56
5.25
74
Table 2 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 2 — Total Company Volume/Rate Variance Analysis
Compared to
Total Net
Increase / (Decrease) Due to
Volume
Interest income:
(483)
412
(895)
Investment securities, including FHLB stock
(992)
239
(1,231)
TRS Easy Advance loans*
(6,472)
(8,923)
2,451
RCS LOC I product
(2,280)
(2,388)
Other RPG loans
76
434
(358)
Outstanding Warehouse lines of credit
325
1,466
(1,141)
Paycheck Protection Program loans
All other Core Bank loans
(8,474)
(1,694)
(6,780)
Net change in interest income
(11,602)
(3,756)
(7,846)
Interest expense:
(600)
(765)
(1,139)
(46)
(1,093)
(1,051)
(459)
(592)
(363)
220
(583)
(1,584)
(737)
(847)
(110)
(102)
(1,617)
(830)
(787)
(180)
Net change in interest expense
(6,644)
(1,695)
(4,949)
Net change in net interest income
(4,958)
(2,061)
(2,897)
Volume for Easy Advances is based on total loans originated during the period presented.
Total Company Provision was $15.3 million for the first quarter of 2021 compared to $22.8 million for the same period in 2020.
The following were the most significant components comprising the Company’s Provision by reportable segment:
The Traditional Banking Provision during the first quarter of 2021 was a credit of $5,000, compared to a charge of $5.6 million for the first quarter of 2020. An analysis of the Provision for the first quarter of 2021 compared to the same period in 2020 follows:
As a percentage of total loans, the Traditional Banking ACLL was 1.35% as of March 31, 2021 compared to 1.34% as of December 31, 2020 and 1.15% as of March 31, 2020. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of March 31, 2021.
See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.
Warehouse recorded a net credit to the Provision of $242,000 for the first quarter of 2021 compared to a net charge of $332,000 for the same period in 2020. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $97 million during the first quarter of 2021 compared to an increase of $133 million during the first quarter of 2020.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of March 31, 2021, December 31, 2020 and March 31, 2020. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of March 31, 2021.
TRS recorded a net charge to the Provision of $15.9 million during the first quarter of 2021 compared to a net charge of $15.1 million for the same period in 2020. Substantially all TRS Provision in both periods was related to its EA product.
TRS’s Provision for EA loan losses was $16.0 million, or 6.4% of its $250 million in EAs originated during the first quarter of 2021, compared to a Provision of $15.2 million, or 3.9% of its $388 million in EAs originated during the first quarter of 2020. The increased Provision for the first quarter of 2021 was due to a significantly lower amount of refund payments received from the U.S. Treasury as a percentage of total EAs originated for the first quarter of 2021 as compared to the first quarter of 2020. While the Company is uncertain how much the COVID-19 pandemic and the U.S. government’s stimulus program may have contributed to the
slower refund payments for 2021, management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this release.
EAs are only originated during the first two months of each year, with all uncollected EAs charged off by June 30th of each year. EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans. TRS’s EA loss rate as of June 30, 2020 was 5.04% of total 2020 EA originations and it finished 2020 with an EA loss rate of 3.36% of total EAs originated.
As illustrated in Table 3 below, RCS recorded a credit to the Provision of $375,000 during the first quarter of 2021 compared to a charge to the Provision of $1.7 million for the same period in 2020. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS’s LOC I product, as the Company reduced marketing for this product in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2021.
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 7.16% as of March 31, 2021, 7.94% as of December 31, 2020 and 12.18% as of March 31, 2020. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of March 31, 2021.
The following table presents net charges to the RCS Provision by product:
Table 3 — RCS Provision by Product
Three Months Ended Mar. 31,
$ Change
% Change
Product:
Lines of credit
(374)
(2,081)
Hospital receivables
77
Table 4 — Summary of Loan and Lease Loss Experience
ACLL at beginning of period
Adoption of ASC 326
Charge-offs:
(209)
(495)
Total charge-offs
Recoveries:
146
204
Total recoveries
Net loan charge-offs
(1,068)
(2,168)
Provision - Core Banking
Provision - RPG
Total Provision
ACLL at end of period
ACLL to total loans
1.61
ACLL to nonperforming loans
335
Net loan charge-offs to average loans
0.09
0.19
Credit Quality Ratios - Core Banking:
0.03
(0.03)
78
Noninterest Income
Total Company noninterest income decreased $1.5 million, or 5%, during the first quarter of 2021 compared to the same period in 2020. The following were the most significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking’s noninterest income decreased $451,000, or 6%, for the first quarter of 2021 compared to the same period in 2020. Interchange Fee Income increased $476,000 from the first quarter of 2020 to the same period in 2021, while Service Charges on Deposit Accounts decreased $273,000 comparing the same periods. Service Charges on Deposit Accounts remained below normal levels as consumer savings rates rose meaningfully over the last year, resulting in a reduction in the Bank’s overdraft-related fees. Management believes that two rounds of government stimulus payments and a reduction in pandemic-related economic restrictions during the first quarter of 2021 were the significant drivers of the increase in the Traditional Bank’s debit card interchange income.
The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months ended March 31, 2021 and 2020 were $1.2 million and $1.9 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended March 31, 2021 and 2020 were $249,000 and $426,000. The Bank suspended its daily overdraft charges during the first quarter of 2020 to soften the economic hardship of the COVID-19 pandemic on its clients. The Bank reinstituted the charging of its daily overdraft fee on September 1, 2020.
Within the Mortgage Banking segment, mortgage banking income increased $2.4 million, or 50%, during the first quarter of 2021 compared to the same period in 2020. For the first quarter of 2021, the Core Bank originated $214 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 3.95%, with comparable originations of $125 million and comparable gains of 2.80% during the first quarter of 2020. Favorable market conditions drove a higher gain percentage for the Core Bank during the last nine months of 2020 and for a portion of the first quarter of 2021, with these favorable conditions normalizing moderately during February 2021 and through the end of the quarter. Management believes these favorable conditions could continue to normalize during the remainder of 2021 potentially bringing the Core Bank’s gain-as-a-percent-of-loans-sold closer to normal historical levels near 2.50%.
TRS’s noninterest income decreased $2.5 million during the first quarter of 2021 compared to the same period in 2020. This decrease reflected a $3.1 million decrease in net RT fees partially offset by a $584,000 increase in program fees. RTs processed decreased 20% from 2020 to 2021 due to a two-week delay to the start of the current tax season and pandemic-related restrictions that have decreased foot traffic for brick-and-mortar tax preparers. The increase in program fees resulted from the Company’s May 1, 2020 acquisition of $250 million in prepaid card balances.
RCS’s noninterest income decreased $983,000, or 43%, during the first quarter of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS’s noninterest income. Management believes the reduced fee income was directly related to economic impact (stimulus) payments made during the first quarter of 2021, which reduced demand for its line-of-credit products during the period.
The following table presents RCS program fees by product:
Table 5 — RCS Program Fees by Product
768
919
(151)
(16)
167
Installment loans*
513
(862)
(983)
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 $842,000, or 2%, during the first quarter of 2021 compared to the same period in 2020. The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking noninterest expense increased $681,000 for the first quarter of 2021 compared to the same period in 2020. The following primarily drove the change in noninterest expense:
Noninterest expense at the Mortgage Banking segment increased $1.1 million, or 56%, during the first quarter of 2021 compared to the same period in 2020, primarily due to higher mortgage commissions recorded during 2021.
80
COMPARISON OF FINANCIAL CONDITION AS OF MARCH 31, 2021 AND DECEMBER 31, 2020
Cash and Cash Equivalents
Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days and federal funds sold. Republic had $985 million in cash and cash equivalents as of March 31, 2021 compared to $486 million as of December 31, 2020. The Company continues to maintain a relatively high cash balance on its balance sheet as deposit balances have continued to grow and loan balances have continued to generally decline.
For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This yield was 0.10% for the first quarter of 2021. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.
Table 6 — Loan Portfolio Composition
(27,931)
7,049
(4,691)
(0)
3,439
(13,059)
(4)
(9,008)
4,706
(14,360)
0
(113)
(19)
(4,676)
(15)
(842)
(59,682)
(96,952)
(156,634)
(17,995)
(76)
(2,584)
10,124
(146,510)
(14,269)
(160,779)
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans decreased by $147 million, or 3%, during the first quarter of 2021 to $4.7 billion as of March 31, 2021. The most significant components comprising the change in loans by reportable segment follow:
Period-end balances for Traditional Banking loans decreased $60 million, or 2%, from December 31, 2020 to March 31, 2021. The following primarily drove the change in loan balances during the first quarter of 2021:
The CARES Act was enacted in March 2020 and provided for the SBA’s PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID-19 pandemic. The Economic Aid Act was enacted in December 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As of March 31, 2021, net PPP loans of $383 million remained on the Core Bank’s balance sheet, including $218 million in loan balances originated during 2020, $176 million in loan balances originated during the first quarter of 2021, and $11 million of unaccreted PPP lender fees reported as a credit offset to these originated balances. Unaccreted PPP lender fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated. While no guarantee can be made as to the overall remaining life of these loans, management believes the loans are likely to remain on the Company’s balance sheet less than one year, as it expects the substantial majority of its clients to request forgiveness for their loans at the earliest possible time, presuming these clients achieve the required program metrics.
PPP loans have a stated maturity of two to five years, an annualized fixed coupon rate of 1.0% to the client, are 100% guaranteed by the SBA, and 100% forgivable to the client if certain program metrics are met. The Bank earns an origination fee of 1%, 3%, or 5% based on the size of the loan.
Outstanding Warehouse period end balances decreased $97 million from December 31, 2020 to March 31, 2021. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of 66% during 2020.
Outstanding TRS loans increased $13 million from December 31, 2020 to March 31, 2021 primarily reflecting $31 million of unpaid EAs partially offset by a $18 million reduction in other TRS loans. EAs are only made during the first two months of each year, with all unpaid EAs charged off by June 30th of each year. Other TRS loans as of December 31, 2020 were primarily commercial loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first quarter of the following year.
Outstanding RCS loans decreased $3 million from December 31, 2020 to March 31, 2021 primarily reflecting a $2 million decrease in outstanding balances for RCS’s LOC I product. As previously mentioned, the decrease in balances for RCS’s LOC I product during the first quarter of 2021 was attributable to economic impact (stimulus) payments during the period which further reduced demand for its line-of-credit products.
As of March 31, 2021, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.
The Company’s ACLL increased $14 million from $61 million as of December 31, 2020 to $75 million as of March 31, 2021. As a percent of total loans, the total Company’s ACLL increased to 1.61% as of March 31, 2021 compared to 1.27% as of December 31, 2020. An analysis of the ACL by reportable segment follows:
The Warehouse ACLL decreased to approximately $2.2 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing March 31, 2021 to December 31, 2020. As of March 31, 2021, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first quarter of 2021.
The TRS ACLL increased to $16 million as of March 31, 2021 from $158,000 as of December 31, 2020, driven primarily by estimated losses on TRS’s EA product. Due to the seasonal nature of the EA, estimated reserves are generally made during the first two months of the year when the product is offered, with losses charged against those reserves in the second quarter of each year. Based on the timing of EA reserves versus charge-offs, the ACLL for EAs to total remaining outstanding EAs is relatively substantial at the end of the first quarter, or 52% and 58% as of March 31, 2021 and March 31, 2020. The Company provided an ACLL for expected losses equal to 6.4% of total originations during the first quarter of 2021 as compared to 3.9% during the first quarter of 2020 because a higher percentage of EAs remained outstanding as of March 31, 2021 compared to March 31, 2020. Management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this filing.
The RCS ACLL decreased $1 million to $8 million as of March 31, 2021 from $9 million as of December 31, 2020. The decrease in ACLL was driven by a $2 million decrease in outstanding balances for RCS’s LOC I product.
RCS maintained an ACLL for two distinct credit products offered as of March 31, 2021, including its line-of-credit products and its healthcare-receivables products. As of March 31, 2021, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 49% for its line-of-credit products. The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.
83
Asset Quality
As of March 31, 2021, $33 million, or 1% of the Company’s Traditional Bank portfolio remained under a COVID-19 hardship accommodation.
The ultimate impact of the above accommodated loan balances on the Company’s Classified, Special Mention, nonperforming, and delinquent loans is currently uncertain. When evaluating its borrowers for further accommodation, the Bank considers prudent options based on the borrower’s credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by applicable federal, state, and local laws; and the Bank’s ability to ease cash flow pressures on the affected borrowers while improving the Bank’s likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank’s Classified, Special Mention, nonperforming, and delinquent loans would increase and negatively impact the Company’s overall operating performance.
Classified and Special Mention Loans
The Bank applies credit quality indicators, or “ratings,” to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard,” and PCI/PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCI/PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans increased approximately $21 million during the first quarter of 2021, driven primarily by commercial-purpose loans within the hospitality and leisure industry downgraded to Special Mention during the first quarter of 2021. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company’s Classified and Special Mention loans is currently uncertain.
See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.
Table 7 — Classified and Special Mention Loans
Loss
27,540
30,193
(2,653)
(9)
PCD - Substandard
1,835
1,887
Total Classified Loans
(2,705)
112,685
89,206
23,479
PCD - Special Mention
874
895
Total Special Mention Loans
23,458
Total Classified and Special Mention Loans
142,934
122,181
20,753
84
Nonperforming Loans
Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately $7 million and $7 million as of March 31, 2021 and December 31, 2020.
Nonperforming loans to total loans decreased to 0.48% as of March 31, 2021 from 0.49% as of December 31, 2020, as the total balance of nonperforming loans decreased by $1 million, or 5%, while total loans decreased $147 million, or 3%, during the first quarter of 2021. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company’s nonperforming loans is currently uncertain.
Table 8 — Nonperforming Loans and Nonperforming Assets Summary
Loans on nonaccrual status include collateral-dependent loans. See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans.
85
Table 9 — Nonperforming Loan Composition
Percent of
Loan Class
1.55
1.63
0.01
0.82
0.89
0.52
0.11
0.60
23,553
0.63
0.36
Table 10 — Stratification of Nonperforming Loans
Number of Nonperforming Loans and Recorded Investment
> $100 &
No.
<= $100
<= $500
> $500
4,905
4,648
3,641
903
5,766
739
1,116
5,930
6,667
9,407
242
9,924
5,110
4,966
4,252
5,792
867
1,274
6,344
7,165
10,044
244
6,386
Table 11 — Rollforward of Nonperforming Loans
Nonperforming loans at the beginning of the period
23,489
Loans added to nonperforming status during the period that remained nonperforming at the end of the period
846
2,629
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)
(1,891)
(4,975)
Principal balance paydowns of loans nonperforming at both period ends
(499)
(628)
Net change in principal balance of other loans nonperforming at both period ends*
470
Nonperforming loans at the end of the period
20,853
Includes relatively small consumer portfolios, e.g., RCS loans.
Table 12 — Detail of Loans Removed from Nonperforming Status
Loans charged off
Loans transferred to OREO
Loans refinanced at other institutions
(4,907)
Loans returned to accrual status
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period
Based on the Bank’s review as of March 31, 2021, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.
Total Company delinquent loans to total loans decreased to 0.32% as of March 31, 2021, from 0.41% as of December 31, 2020, primarily due to a $5 million, or 25%, decrease in delinquent loans and a $147 million, or 3%, decrease in total loans during the first quarter of 2021.
Core Bank delinquent loans to total Core Bank loans decreased to 0.19% as of March 31, 2021 from 0.21% as of December 31, 2020. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of March 31, 2021 and December 31, 2020 were on nonaccrual status. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company’s delinquent loans is currently uncertain.
88
Table 13 — Delinquent Loan Composition*
0.30
0.37
0.40
0.00
0.21
0.51
19.83
25.04
0.18
0.07
1.80
5.84
9.23
4.44
7.60
Total delinquent loans
* Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due. EAs do not have a contractual due date but during 2021 the Company considered an EA delinquent if it remained unpaid 35 days after the taxpayer’s tax return is submitted to the applicable taxing authority.
Table 14 — Rollforward of Delinquent Loans
Delinquent loans at the beginning of the period
20,804
Loans that became delinquent during the period - Easy Advances*
23,467
Loans added to delinquency status during the period and remained in delinquency status at the end of the period
3,950
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below)
(2,017)
(4,702)
Principal balance paydowns of loans delinquent at both period ends
Net change in principal balance of other loans delinquent at both period ends*
(3,907)
(797)
Delinquent loans at the end of period
42,627
Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 15 — Detail of Loans Removed from Delinquent Status
Easy Advances paid-off or charged-off
(1,270)
(2,442)
Loans paid current
(747)
(2,260)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period
Collateral Dependent Loans and Troubled Debt Restructurings
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. The Bank’s policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected.
A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank’s TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan’s interest rate and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt.
Table 16 — Collateral-Dependent Loans and Troubled Debt Restructurings
Cashflow-dependent TDRs
10,754
10,938
(184)
Collateral-dependent TDRs
9,521
9,840
(319)
Total TDRs
(503)
Collateral dependent loans (which are not TDRs)
20,701
20,806
(105)
Total recorded investment in TDRs and collateral-dependent loans
40,976
41,584
(608)
See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans and TDRs.
90
Table 17 — Deposit Composition
94,840
36,782
(776)
(6,434)
(16,881)
3,064
15,494
156,088
84,985
241,073
(3,709)
(56)
246,368
54,579
300,947
297,238
Total Company deposits increased $538 million, or 11%, from December 31, 2020 to $5.3 billion as of March 31, 2021.
Total Core Bank deposits increased $241 million, or 6%, with the following primarily driving growth:
Total RPG deposits increased $297 million, or 76%, for the first quarter of 2021, with the following primarily driving growth:
Federal Home Loan Bank Advances
FHLB advances declined by $210 million from December 31, 2020 to March 31, 2021, as the Bank continued to maintain sufficient deposit balances to meet its current liquidity needs. The Bank held $25 million in overnight advances at a rate of 0.14% as of March 31, 2021, compared to $225 million in overnight advances at a rate of 0.16% as of December 31, 2020. Given the overall amount of liquidity on the Company’s balance sheet as of March 31, 2021, management does not anticipate that FHLB term or overnight advances will likely be utilized to any material extent over the near term.
Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.
Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 “Interest Rate Swaps” of Part I Item 1 “Financial Statements” for additional discussion regarding the Bank’s interest rate swaps.
Liquidity
The Company had a loan to deposit ratio (excluding brokered deposits) of 99% as of March 31, 2021 and 108% as of December 31, 2020. As of March 31, 2021 and December 31, 2020, the Company had cash and cash equivalents on-hand of $985 million and $486 million. The Bank also had available borrowing capacity of $871 million and $683 million from the FHLB as of March 31, 2021 and December 31, 2020. In addition, the Bank’s liquidity resources included unencumbered debt securities of $257 million and $274 million as of March 31, 2021 and December 31, 2020 and unsecured lines of credit of $125 million available through various other financial institutions as of the same period-ends.
The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage-backed securities and proceeds realized from loans held for sale. The Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. As of March 31, 2021 and December 31, 2020, these pledged investment securities had a fair value of $273 million and $304 million. Republic’s banking centers and its website, www.republicbank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.
As of March 31, 2021, the Bank had approximately $1.6 billion in deposits from 239 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $666 million, or 13%, of the Company’s total deposit balances as of March 31, 2021. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.
Due to its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached and, periodically during each quarter, has fallen short of its Board-approved minimum internal policy limits for liquidity management. Most recently, the Bank has experienced a significant increase in its outstanding Warehouse line-of-credit balances. Because management deems this increase in Warehouse balances to not be long-term in nature and the Bank is asset sensitive for its interest rate risk position, it has elected to utilize overnight sources in order to fund these outstanding balances.
In addition to its typical operations which impacts liquidity, the COVID-19 pandemic could create both substantially positive and negative impacts to the Bank’s liquidity over the short-term and long-term. The overall impact to Bank’s liquidity over the long-term will likely depend heavily on the length and breadth of the COVID-19 effect on the economy.
A near-term positive to the Bank’s liquidity is the apparent flight to safety by its clients and the increase in the Bank’s deposit balances. Management is uncertain as to how long these deposit balances might stay in the Bank, however, a protracted negative impact to the economy could put a financial strain on the Banks’ clients requiring them to drawdown their deposit funds in order to meet their own liquidity demands.
Total stockholders’ equity increased from $823 million as of December 31, 2020 to $838 million as of March 31, 2021. The increase in stockholders’ equity was primarily attributable to net income earned during 2021 reduced primarily by cash dividends declared and Class A common stock repurchased.
See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” for additional detail regarding stock repurchases and stock buyback programs.
Common Stock — The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.
Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. As of March 31, 2021, RB&T could, without prior approval, declare dividends of approximately $146 million. Any payment of dividends in the future will depend, in large part, on the Company’s earnings, capital requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors.
Regulatory Capital Requirements — The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.
Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 10.0% Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, the Company and Bank must hold a capital conservation buffer of 2.5% composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements.
Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based Capital, Tier I Risk Based Capital and Tier I Leverage Capital. Republic and the Bank intend to maintain a capital position that meets or 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 13.27% as of March 31, 2021 compared to 13.35% as of December 31, 2020. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
In 2005, 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 April 1, 2021 and is currently carrying the note at a cost of LIBOR plus 1.42%.
Table 18 — Capital Ratios (1)
Ratio
Total capital to risk-weighted assets
924,665
19.15
896,053
18.52
827,393
17.16
796,114
16.46
Common equity tier 1 capital to risk-weighted assets
824,280
17.07
803,682
16.61
767,079
15.91
743,743
15.38
Tier 1 (core) capital to risk-weighted assets
864,280
17.90
843,682
17.43
Tier 1 leverage capital to average assets
13.73
13.70
12.20
12.11
Asset/Liability Management and Market Risk
Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards and achieve acceptable net interest income based on the Bank’s risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank’s overall earnings and balance sheet.
The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances and other factors.
The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank’s deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.
As of March 31, 2021, a dynamic simulation model was run for interest rate changes from “Down 100” basis points to “Up 400” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning April 1, 2021 and ending March 31, 2022 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.
Table 19 — Bank Interest Rate Sensitivity
Change in Rates
-100
+100
+200
+300
+400
Basis Points
% Change from base net interest income as of March 31, 2021
(1.1)
(2.0)
(0.6)
3.6
8.4
% Change from base net interest income as of December 31, 2020
0.4
(4.5)
(7.0)
(5.7)
(4.2)
The Bank’s dynamic simulation model run for March 2021 projected a decrease in the Bank’s net interest income plus secondary market loan fees for the “Down-100”, “Up-100” and “Up-200” scenarios, while the “Up-300” and “Up-400” rate scenarios projected increases. The projections as of December 2020 reflected a modest increase in the Down-100 scenario and decreases in all Up-rate scenarios.
As compared to December 2020, the deterioration in the Down-100 rate scenario for March 2021 was generally because the Bank had less ability in March 2021 than December to reprice its liabilities downward. The improvement in the Up scenarios was due partially to growth in interest-earning assets and partially to a smaller projected falloff in secondary market fees for the March 2021 simulation than previously projected for the December 2020 simulation.
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 March 31, 2021 Compared to Three Months Ended March 31, 2020).”
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
Information required by this item is included under Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4.Controls and Procedures.
As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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
There have been no material changes in the Company’s risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2020. You should carefully consider the risk factors discussed in Republic’s 2020 Form 10-K, which could materially affect its business, financial condition or future results.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Details of Republic’s Class A Common Stock purchases during the first quarter of 2021 are included in the following table:
Total Number of
Maximum Number
Shares Purchased
of Shares that May
as Part of Publicly
Yet Be Purchased
Average Price
Announced Plans
Under the Plan
Period
Paid Per Share
or Programs
January 1 - January 31
1,000,000
February 1 - February 28
96,860
41.84
903,140
March 1 - March 31
9,800
42.77
893,340
106,660
41.92
The Company repurchased 106,660 shares during the first quarter of 2021. In connection with employee stock awards, there were 28,874 shares withheld upon exercise of stock options to cover withholding taxes and the exercise price. On January 27, 2021, the Board of Directors of Republic Bancorp, Inc. increased the Company’s existing authorization to purchase shares of its Class A Common Stock to 1,000,000 shares, an increase of 941,577 shares from the buyback program that was previously in place. The repurchase program will remain effective until the total number of shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of March 31, 2021, the Company had 893,340 remaining shares that could be repurchased under its current share repurchase program.
During the first quarter of 2021, there were approximately 1,000 shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock by stockholders of Republic in accordance with the share-for-share conversion option of the Class B Common Stock. The exemption from registration of newly issued Class A Common Stock relies upon Section (3)(a)(9) of the Securities Act of 1933.
There were no equity securities of the registrant sold without registration during the quarter covered by this report.
Item 6.Exhibits.
The following exhibits are filed or furnished as a part of this report:
Exhibit Number
Description of Exhibit
3.1
Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed April 26, 2021 (Commission File Number: 0-24649))
31.1
Certification of Principal Executive Officer pursuant to the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002
32*
Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following financial statements from the Company’s quarterly report on Form 10-Q were formatted in iXBRL(Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, (ii) Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2021 and 2020, (iii) Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 and (v) Notes to Consolidated Financial Statements
Cover Page Interactive Data File formatted in iXBRL and contained in Exhibit 101.
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Principal Executive Officer:
Date: May 6, 2021
/s/ Steven E. Trager
By: Steven E. Trager
Chair and Chief Executive Officer
Principal Financial Officer:
/s/ Kevin Sipes
By: Kevin Sipes
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer