1 min
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the quarterly period ended June 30, 2021
or
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◻ 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)
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Kentucky |
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61-0862051 |
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(State of other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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601 West Market Street, Louisville, Kentucky |
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40202 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (502) 584-3600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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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.
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Large accelerated filer ◻ |
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Accelerated filer ⌧ |
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Non-accelerated filer ◻ |
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Smaller reporting company ◻ |
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Emerging growth company ◻ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ◻ Yes ☒ No
The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of July 31, 2021, was 18,232,767 and 2,166,093.
TABLE OF CONTENTS
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4 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
71 |
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115 |
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115 |
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115 |
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116 |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
116 |
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117 |
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118 |
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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.
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Term |
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Definition |
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ACH |
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Automated Clearing House |
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ACL |
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Allowance for Credit Losses |
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ACLC |
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Allowance for Credit Losses on Off-Balance Sheet Credit Exposures |
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ACLL |
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Allowance for Credit Losses on Loans |
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ACLS |
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Allowance for Credit Losses on Securities |
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AFS |
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Available for Sale |
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AOCI |
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Accumulated Other Comprehensive Income |
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ASC |
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Accounting Standards Codification |
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ASU |
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Accounting Standards Update |
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Basic EPS |
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Basic earnings per Class A Common Share |
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BOLI |
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Bank Owned Life Insurance |
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BPO |
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Brokered Price Opinion |
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C&D |
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Construction and Development |
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C&I |
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Commercial and Industrial |
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CARES Act |
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Coronavirus Aid, Relief, and Economic Security Act |
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CECL |
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Current Expected Credit Loss |
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CMO |
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Collateralized Mortgage Obligation |
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Core Bank |
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The Traditional Banking, Warehouse Lending, and Mortgage Banking reportable segments |
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COVID-19 |
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Coronavirus Disease of 2019 |
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CRE |
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Commercial Real Estate |
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Diluted EPS |
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Diluted earnings per Class A Common Share |
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EA |
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Easy Advance |
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Economic Aid Act |
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The Economic Aid to Hard Hit Small Business, Not for Profits and Venues Act |
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ESPP |
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Employee Stock Purchase Plan |
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EVP |
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Executive Vice President |
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FASB |
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Financial Accounting Standards Board |
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FDIC |
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Federal Deposit Insurance Corporation |
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FFTR |
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Federal Funds Target Rate |
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FHLB |
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Federal Home Loan Bank |
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FHLMC |
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Federal Home Loan Mortgage Corporation |
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FICO |
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Fair Isaac Corporation |
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FNMA |
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Federal National Mortgage Association |
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FOMC |
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Federal Open Market Committee |
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FRB |
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Federal Reserve Bank |
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FTE |
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Full Time Equivalent |
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FTP |
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Funds Transfer Pricing |
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GAAP |
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Generally Accepted Accounting Principles in the United States |
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Green Dot |
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Green Dot Corporation |
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HEAL |
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Home Equity Amortizing Loan |
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HELOC |
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Home Equity Line of Credit |
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HTM |
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Held to Maturity |
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IRS |
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Internal Revenue Service |
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ITM |
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Interactive Teller Machine |
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LGD |
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Loss Given Default |
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LIBOR |
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London Interbank Offered Rate |
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LTV |
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Loan to Value |
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MBS |
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Mortgage Backed Securities |
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MSRs |
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Mortgage Servicing Rights |
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NA |
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Not Applicable |
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NM |
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Not Meaningful |
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OBS |
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Off-Balance Sheet |
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OCI |
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Other Comprehensive Income |
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OREO |
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Other Real Estate Owned |
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OTTI |
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Other than Temporary Impairment |
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PCD |
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Purchased with Credit Deterioration |
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PD |
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Probability of Default |
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PPP |
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SBA's Paycheck Protection Program |
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PPPLF |
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The FRB's Paycheck Protection Program Liquidity Facility |
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Prime |
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The Wall Street Journal Prime Interest Rate |
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Provision |
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Provision for Expected Credit Loss Expense |
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PSU |
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Performance Stock Unit |
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QF |
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Qualitative Factor |
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R&D |
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Research and Development |
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RB&T / the Bank |
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Republic Bank & Trust Company |
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RBCT |
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Republic Bancorp Capital Trust |
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RCS |
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Republic Credit Solutions segment |
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Republic / the Company |
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Republic Bancorp, Inc. |
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RPG |
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Republic Processing Group |
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RPS |
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Republic Payment Solutions |
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RT |
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Refund Transfer |
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SBA |
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U.S. Small Business Administration |
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SEC |
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Securities and Exchange Commission |
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SSUAR |
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Securities Sold Under Agreements to Repurchase |
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SVP |
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Senior Vice President |
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TDR |
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Troubled Debt Restructuring |
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The Captive |
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Republic Insurance Services, Inc. |
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TPS |
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Trust Preferred Securities |
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TRS |
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Tax Refund Solutions segment |
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TRUP |
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TPS Investment |
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Warehouse |
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Warehouse Lending segment |
3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands)
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June 30, |
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December 31, |
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2021 |
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2020 |
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ASSETS |
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Cash and cash equivalents |
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$ |
747,007 |
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$ |
485,587 |
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Available-for-sale debt securities, at fair value (amortized cost of $515,401 in 2021 and $512,518 in 2020, allowance for credit losses of $0 in 2021 and $0 in 2020) |
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524,152 |
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523,863 |
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Held-to-maturity debt securities (fair value of $46,968 in 2021 and $54,190 in 2020, allowance for credit losses of $56 in 2021 and $178 in 2020) |
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46,274 |
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53,324 |
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Equity securities with readily determinable fair value |
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2,601 |
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3,083 |
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Mortgage loans held for sale, at fair value |
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32,401 |
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46,867 |
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Consumer loans held for sale, at fair value |
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13,020 |
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3,298 |
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Consumer loans held for sale, at the lower of cost or fair value |
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11,412 |
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1,478 |
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Loans for discontinued operations, at the lower of cost or fair value |
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23 |
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23,765 |
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Loans (loans carried at fair value of $338 in 2021 and $497 in 2020) |
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4,554,198 |
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4,789,338 |
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Allowance for credit losses |
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(60,291) |
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(61,067) |
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Loans, net |
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4,493,907 |
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4,728,271 |
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Federal Home Loan Bank stock, at cost |
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11,670 |
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17,397 |
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Premises and equipment, net |
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38,682 |
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39,512 |
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Right-of-use assets |
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40,698 |
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43,345 |
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Goodwill |
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16,300 |
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16,300 |
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Other real estate owned |
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1,898 |
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2,499 |
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Bank owned life insurance |
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99,008 |
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68,018 |
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Other assets and accrued interest receivable |
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104,257 |
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111,718 |
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TOTAL ASSETS |
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$ |
6,183,310 |
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$ |
6,168,325 |
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LIABILITIES |
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Deposits: |
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Noninterest-bearing |
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$ |
2,015,449 |
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$ |
1,871,539 |
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Interest-bearing |
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2,955,145 |
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2,842,765 |
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Deposits of discontinued operations |
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46,984 |
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18,877 |
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Total deposits |
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5,017,578 |
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4,733,181 |
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Securities sold under agreements to repurchase and other short-term borrowings |
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142,895 |
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211,026 |
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Operating lease liabilities |
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41,621 |
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44,340 |
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Federal Home Loan Bank advances |
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25,000 |
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235,000 |
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Subordinated note |
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41,240 |
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41,240 |
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Other liabilities and accrued interest payable |
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69,886 |
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80,215 |
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Total liabilities |
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5,338,220 |
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5,345,002 |
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Commitments and contingent liabilities (Footnote 9) |
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— |
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— |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, no par value |
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— |
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— |
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Class A Common Stock and Class B Common Stock, no par value |
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4,841 |
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4,899 |
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Additional paid in capital |
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142,884 |
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143,637 |
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Retained earnings |
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690,802 |
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666,278 |
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Accumulated other comprehensive income |
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6,563 |
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8,509 |
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Total stockholders’ equity |
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845,090 |
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823,323 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
6,183,310 |
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$ |
6,168,325 |
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See accompanying footnotes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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INTEREST INCOME: |
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Loans, including fees |
$ |
49,079 |
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$ |
53,978 |
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$ |
102,024 |
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$ |
110,855 |
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Taxable investment securities |
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1,858 |
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2,712 |
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3,810 |
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5,495 |
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Federal Home Loan Bank stock and other |
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347 |
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214 |
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732 |
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2,187 |
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Total interest income |
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51,284 |
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56,904 |
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106,566 |
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118,537 |
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INTEREST EXPENSE: |
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Deposits |
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1,324 |
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3,410 |
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2,889 |
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9,422 |
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Securities sold under agreements to repurchase and other short-term borrowings |
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143 |
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460 |
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279 |
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1,609 |
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Federal Reserve Payment Protection Plan Liquidity Facility |
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— |
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105 |
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— |
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105 |
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Federal Home Loan Bank advances |
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10 |
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822 |
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41 |
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2,470 |
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Subordinated note |
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169 |
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295 |
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341 |
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647 |
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Total interest expense |
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1,646 |
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5,092 |
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3,550 |
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14,253 |
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NET INTEREST INCOME |
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49,638 |
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51,812 |
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103,016 |
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104,284 |
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Provision for expected credit loss expense |
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1,450 |
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2,086 |
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828 |
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9,713 |
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NET INTEREST INCOME AFTER PROVISION |
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48,188 |
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49,726 |
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102,188 |
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94,571 |
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NONINTEREST INCOME: |
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Service charges on deposit accounts |
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3,071 |
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2,451 |
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5,944 |
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5,587 |
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Mortgage banking income |
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4,182 |
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8,398 |
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11,375 |
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13,193 |
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Interchange fee income |
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3,368 |
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2,725 |
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6,339 |
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5,219 |
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Program fees |
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3,549 |
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1,138 |
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5,774 |
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3,762 |
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Increase in cash surrender value of bank owned life insurance |
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600 |
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395 |
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990 |
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784 |
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Net gains (losses) on other real estate owned |
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(44) |
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1 |
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(55) |
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4 |
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Other |
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1,035 |
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575 |
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1,635 |
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1,812 |
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Total noninterest income |
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15,761 |
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15,683 |
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32,002 |
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30,361 |
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NONINTEREST EXPENSE: |
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Salaries and employee benefits |
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26,106 |
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25,106 |
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53,522 |
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50,198 |
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Technology, equipment, and communication |
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7,321 |
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6,804 |
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14,253 |
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13,564 |
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Occupancy |
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3,250 |
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3,302 |
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6,809 |
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6,518 |
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Marketing and development |
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1,120 |
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|
969 |
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1,851 |
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1,710 |
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FDIC insurance expense |
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418 |
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299 |
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|
714 |
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299 |
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Bank franchise tax expense |
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452 |
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|
911 |
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|
777 |
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1,693 |
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Interchange related expense |
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1,288 |
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1,173 |
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2,432 |
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2,249 |
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Other real estate owned and other repossession expense |
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2 |
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21 |
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(32) |
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39 |
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Legal and professional fees |
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448 |
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1,003 |
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1,601 |
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2,097 |
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Other |
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2,885 |
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3,613 |
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5,472 |
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6,943 |
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Total noninterest expense |
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43,290 |
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43,201 |
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87,399 |
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85,310 |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE |
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20,659 |
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22,208 |
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46,791 |
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39,622 |
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INCOME TAX EXPENSE |
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4,157 |
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4,453 |
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9,963 |
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7,553 |
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INCOME FROM CONTINUING OPERATIONS |
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16,502 |
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17,755 |
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36,828 |
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32,069 |
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DISCONTINUED OPERATIONS: |
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Income (loss) from discontinued operations before income taxes |
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9,902 |
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(2,611) |
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17,514 |
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13,553 |
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Income tax expense (benefit) |
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2,482 |
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(660) |
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4,367 |
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|
3,121 |
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Income (loss) from discontinued operations, net of tax |
|
7,420 |
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(1,951) |
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|
13,147 |
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|
10,432 |
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NET INCOME |
$ |
23,922 |
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$ |
15,804 |
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$ |
49,975 |
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$ |
42,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock - continuing operations |
$ |
0.80 |
|
$ |
0.86 |
|
$ |
1.79 |
|
$ |
1.54 |
|
|
Class A Common Stock - discontinued operations |
|
0.36 |
|
|
(0.09) |
|
|
0.63 |
|
|
0.50 |
|
|
Class A Common Stock |
$ |
1.16 |
|
$ |
0.77 |
|
$ |
2.42 |
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock - continuing operations |
$ |
0.73 |
|
$ |
0.78 |
|
$ |
1.62 |
|
$ |
1.40 |
|
|
Class B Common Stock - discontinued operations |
|
0.32 |
|
|
(0.09) |
|
|
0.58 |
|
|
0.46 |
|
|
Class B Common Stock |
$ |
1.05 |
|
$ |
0.69 |
|
$ |
2.20 |
|
$ |
1.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock - continuing operations |
$ |
0.80 |
|
$ |
0.86 |
|
$ |
1.78 |
|
$ |
1.54 |
|
|
Class A Common Stock - discontinued operations |
|
0.36 |
|
|
(0.10) |
|
|
0.63 |
|
|
0.50 |
|
|
Class A Common Stock |
$ |
1.16 |
|
$ |
0.76 |
|
$ |
2.41 |
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock - continuing operations |
$ |
0.73 |
|
$ |
0.78 |
|
$ |
1.61 |
|
$ |
1.40 |
|
|
Class B Common Stock - discontinued operations |
|
0.32 |
|
|
(0.09) |
|
|
0.58 |
|
|
0.45 |
|
|
Class B Common Stock |
$ |
1.05 |
|
$ |
0.69 |
|
$ |
2.19 |
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying footnotes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
||||||||
|
|
June 30, |
|
|
June 30, |
|
|
||||||||
|
|
2021 |
|
2020 |
|
|
2021 |
|
2020 |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
23,922 |
|
$ |
15,804 |
|
|
$ |
49,975 |
|
$ |
42,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives used for cash flow hedges |
|
— |
|
|
(10) |
|
|
|
— |
|
|
(171) |
|
|
|
Reclassification amount for net derivative losses realized in income |
|
— |
|
|
79 |
|
|
|
— |
|
|
108 |
|
|
|
Change in unrealized gains and losses on AFS debt securities |
|
(614) |
|
|
1,099 |
|
|
|
(2,643) |
|
|
8,876 |
|
|
|
Change in unrealized gain of AFS debt security for which a portion of OTTI has been recognized in earnings |
|
34 |
|
|
(108) |
|
|
|
49 |
|
|
(107) |
|
|
|
Total other comprehensive income (loss) before income tax |
|
(580) |
|
|
1,060 |
|
|
|
(2,594) |
|
|
8,706 |
|
|
|
Tax effect |
|
145 |
|
|
(265) |
|
|
|
648 |
|
|
(2,178) |
|
|
|
Total other comprehensive income (loss), net of tax |
|
(435) |
|
|
795 |
|
|
|
(1,946) |
|
|
6,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
$ |
23,487 |
|
$ |
16,599 |
|
|
$ |
48,029 |
|
$ |
49,029 |
|
|
See accompanying footnotes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
||||||
|
|
|
Class A |
|
Class B |
|
|
|
|
Additional |
|
|
|
|
Other |
|
Total |
|
|||
|
|
|
Shares |
|
Shares |
|
|
|
|
Paid In |
|
Retained |
|
Comprehensive |
|
Stockholders’ |
|
||||
|
(in thousands, except per share data) |
|
Outstanding |
|
Outstanding |
|
Amount |
|
Capital |
|
Earnings |
|
Income |
|
Equity |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 1, 2021 |
|
18,628 |
|
2,198 |
|
$ |
4,884 |
|
$ |
143,563 |
|
$ |
682,264 |
|
$ |
6,998 |
|
$ |
837,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
23,922 |
|
|
— |
|
|
23,922 |
|
|
Net change in accumulated other comprehensive income |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(435) |
|
|
(435) |
|
|
Dividends declared on Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Shares ($0.308 per share) |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(5,680) |
|
|
— |
|
|
(5,680) |
|
|
Class B Shares ($0.280 per share) |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(608) |
|
|
— |
|
|
(608) |
|
|
Stock options exercised, net of shares withheld |
|
12 |
|
— |
|
|
5 |
|
|
(54) |
|
|
— |
|
|
— |
|
|
(49) |
|
|
Conversion of Class B to Class A Common Shares |
|
32 |
|
(32) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Repurchase of Class A Common Stock |
|
(255) |
|
— |
|
|
(51) |
|
|
(1,614) |
|
|
(9,096) |
|
|
— |
|
|
(10,761) |
|
|
Net change in notes receivable on Class A Common Stock |
|
— |
|
— |
|
|
— |
|
|
(44) |
|
|
— |
|
|
— |
|
|
(44) |
|
|
Deferred compensation - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors |
|
— |
|
— |
|
|
— |
|
|
95 |
|
|
— |
|
|
— |
|
|
95 |
|
|
Designated key employees |
|
— |
|
— |
|
|
— |
|
|
167 |
|
|
— |
|
|
— |
|
|
167 |
|
|
Employee stock purchase plan - Class A Common Stock |
|
4 |
|
— |
|
|
1 |
|
|
162 |
|
|
— |
|
|
— |
|
|
163 |
|
|
Stock-based awards - Class A Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance stock units |
|
— |
|
— |
|
|
— |
|
|
33 |
|
|
— |
|
|
— |
|
|
33 |
|
|
Restricted stock |
|
— |
|
— |
|
|
2 |
|
|
409 |
|
|
— |
|
|
— |
|
|
411 |
|
|
Stock options |
|
— |
|
— |
|
|
— |
|
|
167 |
|
|
— |
|
|
— |
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
|
18,421 |
|
2,166 |
|
$ |
4,841 |
|
$ |
142,884 |
|
$ |
690,802 |
|
$ |
6,563 |
|
$ |
845,090 |
|
7
See accompanying footnotes to consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
||||
|
|
|
June 30, |
|
||||
|
|
|
2021 |
|
2020 |
|
||
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,975 |
|
$ |
42,501 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Net amortization on investment securities |
|
|
589 |
|
|
732 |
|
|
Net accretion on loans and amortization of core deposit intangible and operating lease components |
|
|
(10,894) |
|
|
(2,383) |
|
|
Unrealized losses on equity securities with readily determinable fair value |
|
|
482 |
|
|
173 |
|
|
Depreciation of premises and equipment |
|
|
4,515 |
|
|
5,041 |
|
|
Amortization of mortgage servicing rights |
|
|
1,735 |
|
|
1,593 |
|
|
Impairment of mortgage servicing rights |
|
|
(500) |
|
|
100 |
|
|
Provision for on-balance sheet exposures for continuing operations |
|
|
828 |
|
|
9,713 |
|
|
Provision for on-balance sheet exposures for discontinued operations |
|
|
10,111 |
|
|
19,581 |
|
|
Provision for off-balance sheet exposures |
|
|
(55) |
|
|
180 |
|
|
Net gain on sale of mortgage loans held for sale |
|
|
(11,009) |
|
|
(13,504) |
|
|
Origination of mortgage loans held for sale |
|
|
(354,764) |
|
|
(343,941) |
|
|
Proceeds from sale of mortgage loans held for sale |
|
|
380,239 |
|
|
336,641 |
|
|
Net gain on sale of consumer loans held for sale |
|
|
(4,121) |
|
|
(3,006) |
|
|
Origination of consumer loans held for sale |
|
|
(304,045) |
|
|
(282,612) |
|
|
Proceeds from sale of consumer loans held for sale |
|
|
288,510 |
|
|
284,898 |
|
|
Net gain realized on sale of other real estate owned |
|
|
(51) |
|
|
(4) |
|
|
Writedowns of other real estate owned |
|
|
105 |
|
|
— |
|
|
Deferred compensation expense - Class A Common Stock |
|
|
512 |
|
|
427 |
|
|
Stock-based awards and ESPP expense - Class A Common Stock |
|
|
923 |
|
|
250 |
|
|
Net gain on sale of bank premises and equipment |
|
|
(399) |
|
|
(353) |
|
|
Increase in cash surrender value of bank owned life insurance |
|
|
(990) |
|
|
(784) |
|
|
Net change in other assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
2,450 |
|
|
1,765 |
|
|
Accrued interest payable |
|
|
(131) |
|
|
(1,685) |
|
|
Other assets |
|
|
(1,372) |
|
|
(4,465) |
|
|
Other liabilities |
|
|
(5,036) |
|
|
(9,486) |
|
|
Net cash provided by operating activities |
|
|
47,607 |
|
|
41,372 |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of available-for-sale debt securities |
|
|
(111,664) |
|
|
(138,894) |
|
|
Proceeds from calls, maturities and paydowns of available-for-sale debt securities |
|
|
108,201 |
|
|
131,323 |
|
|
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities |
|
|
7,162 |
|
|
6,628 |
|
|
Net change in outstanding warehouse lines of credit |
|
|
122,641 |
|
|
(312,321) |
|
|
Net change in other loans from continuing operations |
|
|
111,754 |
|
|
(356,159) |
|
|
Net change in loans from discontinued operations |
|
|
23,719 |
|
|
14,076 |
|
|
Proceeds from redemption of Federal Home Loan Bank stock |
|
|
5,727 |
|
|
14,202 |
|
|
Purchase of Federal Home Loan Bank stock |
|
|
— |
|
|
(9,000) |
|
|
Proceeds from sales of other real estate owned |
|
|
611 |
|
|
32 |
|
|
Proceeds from sale of bank premises and equipment |
|
|
637 |
|
|
894 |
|
|
Purchase of bank owned life insurance |
|
|
(30,000) |
|
|
— |
|
|
Net purchases of premises and equipment |
|
|
(3,923) |
|
|
(2,139) |
|
|
Net cash provided by (used in) investing activities |
|
|
234,865 |
|
|
(651,358) |
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net change in deposits from continuing operations |
|
|
256,290 |
|
|
1,199,967 |
|
|
Net change in deposits from discontinued operations |
|
|
28,107 |
|
|
32,110 |
|
|
Net change in securities sold under agreements to repurchase and other short-term borrowings |
|
|
(68,131) |
|
|
9,780 |
|
|
Net change in Federal Reserve Payment Protection Plan Lending Facility borrowings |
|
|
— |
|
|
169,209 |
|
|
Payments of Federal Home Loan Bank advances |
|
|
(235,000) |
|
|
(1,037,500) |
|
|
Proceeds from Federal Home Loan Bank advances |
|
|
25,000 |
|
|
425,000 |
|
|
Repurchase of Class A Common Stock |
|
|
(15,229) |
|
|
(2,852) |
|
|
Net proceeds from Class A Common Stock purchased through employee stock purchase plan |
|
|
272 |
|
|
291 |
|
|
Net proceeds from option exercises and equity awards vested - Class A Common Stock |
|
|
(142) |
|
|
256 |
|
|
Cash dividends paid |
|
|
(12,219) |
|
|
(11,383) |
|
|
Net cash (used in) provided by financing activities |
|
|
(21,052) |
|
|
784,878 |
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
261,420 |
|
|
174,892 |
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
485,587 |
|
|
385,303 |
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
747,007 |
|
$ |
560,195 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,419 |
|
$ |
14,992 |
|
|
Income taxes |
|
|
13,466 |
|
|
10,008 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL NONCASH DISCLOSURES: |
|
|
|
|
|
|
|
|
Transfers from loans to real estate acquired in settlement of loans |
|
$ |
64 |
|
$ |
2,109 |
|
|
Transfers from loans held for investment to held for sale |
|
|
23 |
|
|
23,765 |
|
|
Unfunded commitments in low-income-housing investments |
|
|
— |
|
|
10,000 |
|
|
Right-of-use assets recorded |
|
|
— |
|
|
2,151 |
|
|
Allowance for credit losses recorded upon adoption of ASC 326 |
|
|
— |
|
|
7,241 |
|
See accompanying footnotes to consolidated financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –JUNE 30, 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 and six months ended June 30, 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 June 30, 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.
See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.
The Company’s financial condition as of June 30, 2021 and results of operations for the three and six months ended June 30, 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:
| ● | Footnote 4 “Loans and Allowance for Credit Losses” |
| ● | Footnote 9 “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” |
10
Core Bank
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2021, Republic had 42 full-service banking centers with locations as follows:
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Kentucky — 28 |
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Metropolitan Louisville — 18 |
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Central Kentucky — 7 |
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Georgetown — 1 |
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Lexington — 5 |
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Shelbyville — 1 |
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Northern Kentucky — 3 |
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Covington — 1 |
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Crestview Hills — 1 |
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Florence — 1 |
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Southern Indiana — 3 |
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Floyds Knobs — 1 |
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Jeffersonville — 1 |
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New Albany — 1 |
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Metropolitan Tampa, Florida — 7 |
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Metropolitan Cincinnati, Ohio — 2 |
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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.
11
Mortgage Banking segment — Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market for loans generated in states within its footprint and generally sells servicing for loans generated in states outside of its footprint. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
Republic Processing Group
Tax Refund Solutions segment — On May 13, 2021, the Bank entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Green Dot to sell substantially all of the assets and operations of the Bank’s Tax Refund Solutions business (the “Sale Transaction”).
As a result of the Purchase Agreement, the results of operations for the Company and its TRS segment are presented within this filing to reflect continuing versus discontinued operations. TRS’s continuing operations include its immaterial RPS division and certain overhead costs previously allocated to TRS that will remain with the Bank. Discontinued operations are those sold to Green Dot.
See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.
Republic Payment Solutions division — RPS is currently managed and operated within the TRS segment’s continuing operations. The RPS division offers general-purpose reloadable prepaid cards as an issuing bank 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’s continuing operations. 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:
| ● | RCS line-of-credit products – Using separate third-party service providers, the Bank originates two line-of-credit products to generally subprime borrowers in multiple states. The first of these two products (the “LOC I”) has been originated by the Bank since 2014. The second (the “LOC II”) was introduced in January 2021. |
| o | RCS’s LOC I represents the substantial majority of RCS activity. Elastic Marketing, LLC and Elevate Decision Sciences, LLC, are third-party service providers for the product and are both subject to the Bank’s oversight and supervision. Together, these companies provide the Bank with certain marketing, servicing, technology, and support services, while a separate third party provides customer support, servicing, and other services on the Bank’s behalf. The Bank is the lender for this product and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of the product. |
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.
| o | In January 2021, RCS began originating balances through its LOC II. One of RCS’s existing third-party service providers, subject to the Bank’s oversight and supervision, provides the Bank with marketing services and loan servicing for the LOC II product. The Bank is the lender for this product and is marketed as such. Furthermore, the |
12
| Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this product. |
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.
| ● | RCS installment loan product – In December 2019, through RCS, the Bank began offering installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. The same third-party service provider for RCS’s LOC II is the third-party service provider for the installment loans. This third-party service provider is subject to the Bank’s oversight and supervision and provides the Bank with marketing services and loan servicing for these RCS installment loans. The Bank is the lender for these RCS installment loans and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intention to sell these loans to its third-party service provider generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. |
| ● | RCS healthcare receivables products – The Bank originates healthcare-receivables products across the U.S. through two different third-party service providers. In one program, the Bank retains 100% of the receivables originated. In the other program, the Bank retains 100% of the receivables originated in some instances, and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale through this program are carried at the lower of cost or fair value. |
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 six months ended June 30, 2021:
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ASU. No. |
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Topic |
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Nature of Update |
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Date Adopted |
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Method of Adoption |
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Financial Statement Impact |
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2020-08 |
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Codification Improvements to Subtopic 310-20,
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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. |
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January 1, 2021 |
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Prospectively |
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Immaterial |
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2020-10 |
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Codification Improvements |
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This ASU affects a wide variety of Topics in the Codification.
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January 1, 2021 |
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Prospectively |
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Immaterial |
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2021-01 |
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Reference Rate Reform (Topic 848): Scope |
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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. |
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January 7, 2021 |
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Prospectively |
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Immaterial |
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13
Accounting Standards Update
There following ASU was issued prior to June 30, 2021 and is not yet effective for the Company’s financial statements.
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Date Adoption |
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Adoption |
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Expected |
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ASU. No. |
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Topic |
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Nature of Update |
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Required |
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Method |
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Financial Impact |
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2021-04 |
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Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options |
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This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) How an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) How an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) How an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. |
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January 1, 2022 |
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Prospectively |
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Immaterial |
14
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:
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:
Sales of Available-for-Sale Debt Securities
During the three and six months ended June 30, 2021 and 2020, there were no material gains or losses on sales or calls of AFS debt securities.
15
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity as of June 30, 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.
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 June 30, 2021 and December 31, 2020, aggregated by investment category and length of time in a continuous unrealized loss position:
As of June 30, 2021, the Bank’s security portfolio consisted of 173 securities, 25 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 June 30, 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 June 30, 2021, with the exception of the $2.8 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 June 30, 2021 and December 31, 2020, there were gross unrealized losses of $31,000 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.
16
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 $2.8 million as of June 30, 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 tables below present a rollforward for the three and six months ended June 30, 2021 and 2020 of the ACLS on AFS and HTM debt securities:
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ACLS Rollforward |
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Three Months Ended June 30, |
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2021 |
2020 |
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Beginning |
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Charge- |
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Ending |
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Beginning |
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Charge- |
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Ending |
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(in thousands) |
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Balance |
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Provision |
|
offs |
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Recoveries |
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Balance |
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Balance |
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Provision |
|
offs |
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Recoveries |
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Balance |
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Available-for-Sale Securities: |
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Corporate Bonds |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
126 |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
126 |
|
Held-to-Maturity Securities: |
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Corporate Bonds |
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|
|
103 |
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|
(47) |
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|
— |
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|
— |
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|
56 |
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|
171 |
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|
(24) |
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|
— |
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|
— |
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|
147 |
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Total |
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|
$ |
103 |
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$ |
(47) |
|
$ |
— |
|
$ |
— |
|
$ |
56 |
|
$ |
297 |
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$ |
(24) |
|
$ |
— |
|
$ |
— |
|
$ |
273 |
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The Company decreased the ACLS on its HTM corporate bonds during the three months ended June 30, 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.
The Company decreased the ACLS on its HTM corporate bonds during the six months ended June 30, 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.
17
There were no HTM debt securities on nonaccrual or past due over 89 days as of June 30, 2021 and December 31, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of June 30, 2021 and December 31, 2020.
There were no HTM debt securities considered collateral dependent as of June 30, 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 June 30, 2021 and December 31, 2020. Accrued interest receivable on HTM debt securities totaled $93,000 and $110,000 as of June 30, 2021 and December 31, 2020.
Pledged Debt Securities
Debt securities pledged to secure public deposits, securities sold under agreements to repurchase and debt securities held for other purposes, as required or permitted by law are as follows:
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(in thousands) |
|
June 30, 2021 |
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December 31, 2020 |
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||
|
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Carrying amount |
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$ |
290,473 |
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$ |
303,535 |
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Fair value |
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|
290,556 |
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|
303,611 |
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18
Equity Securities
The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:
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Gross |
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Gross |
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|||
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Amortized |
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Unrealized |
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Unrealized |
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Fair |
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||||
|
June 30, 2021 (in thousands) |
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Cost |
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Gains |
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Losses |
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Value |
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||||
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|
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Freddie Mac preferred stock |
|
$ |
— |
|
$ |
116 |
|
$ |
— |
|
$ |
116 |
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|
Community Reinvestment Act mutual fund |
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|
2,500 |
|
|
— |
|
|
(15) |
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|
2,485 |
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|
Total equity securities with readily determinable fair values |
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$ |
2,500 |
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$ |
116 |
|
$ |
(15) |
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$ |
2,601 |
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For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:
19
3. LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 11 “Mortgage Banking Activities” of this section of the filing.
Consumer Loans Held for Sale, at 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:
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:
20
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio follows:
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(in thousands) |
|
June 30, 2021 |
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December 31, 2020 |
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||
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Traditional Banking: |
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Residential real estate: |
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Owner occupied |
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$ |
852,947 |
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$ |
879,800 |
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Nonowner occupied |
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289,290 |
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|
264,780 |
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Commercial real estate |
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|
1,389,003 |
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|
1,349,085 |
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Construction & land development |
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|
95,180 |
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|
98,674 |
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|
Commercial & industrial |
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|
330,302 |
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|
325,596 |
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|
Paycheck Protection Program |
|
|
250,933 |
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|
392,319 |
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|
Lease financing receivables |
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|
9,249 |
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|
10,130 |
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|
Aircraft |
|
|
121,112 |
|
|
101,375 |
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|
Home equity |
|
|
217,621 |
|
|
240,640 |
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|
Consumer: |
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|
|
|
|
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|
|
Credit cards |
|
|
14,754 |
|
|
14,196 |
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|
Overdrafts |
|
|
717 |
|
|
587 |
|
|
Automobile loans |
|
|
21,190 |
|
|
30,300 |
|
|
Other consumer |
|
|
6,796 |
|
|
8,167 |
|
|
Total Traditional Banking |
|
|
3,599,094 |
|
|
3,715,649 |
|
|
Warehouse lines of credit* |
|
|
840,155 |
|
|
962,796 |
|
|
Total Core Banking |
|
|
4,439,249 |
|
|
4,678,445 |
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group*: |
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
Easy Advances |
|
|
— |
|
|
— |
|
|
Other TRS loans |
|
|
— |
|
|
— |
|
|
Republic Credit Solutions |
|
|
114,949 |
|
|
110,893 |
|
|
Total Republic Processing Group |
|
|
114,949 |
|
|
110,893 |
|
|
|
|
|
|
|
|
|
|
|
Total loans** |
|
|
4,554,198 |
|
|
4,789,338 |
|
|
Allowance for credit losses |
|
|
(60,291) |
|
|
(61,067) |
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
4,493,907 |
|
$ |
4,728,271 |
|
*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:
21
Paycheck Protection Program
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 June 30, 2021, net PPP loans of $251 million remained on the Bank’s balance sheet, including $53 million in loan balances originated during 2020, $207 million in loan balances originated during 2021, and $9 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 June 30, 2021, the Bank had no outstanding borrowings from the FRB under the PPPLF.
22
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 June 30, 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.
23
24
25
Allowance for Credit Losses on Loans
The following table presents the activity in the ACLL by portfolio class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACLL Rollforward |
|||||||||||||||||||||||||||||
|
|
|
|
Three Months Ended June 30, |
|||||||||||||||||||||||||||||
|
|
|
|
2021 |
|
2020 |
|||||||||||||||||||||||||||
|
|
|
|
Beginning |
|
|
|
Charge- |
|
|
|
Ending |
|
Beginning |
|
|
|
|
Charge- |
|
|
|
Ending |
||||||||||
|
(in thousands) |
|
|
Balance |
|
Provision |
|
offs |
|
Recoveries |
|
Balance |
|
Balance |
|
|
Provision |
|
offs |
|
Recoveries |
|
Balance |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
|
$ |
9,489 |
|
$ |
(530) |
|
$ |
— |
|
$ |
18 |
|
$ |
8,977 |
|
$ |
9,387 |
|
|
$ |
(127) |
|
$ |
— |
|
$ |
43 |
|
$ |
9,303 |
|
Nonowner occupied |
|
|
|
2,532 |
|
|
18 |
|
|
— |
|
|
1 |
|
|
2,551 |
|
|
2,165 |
|
|
|
107 |
|
|
— |
|
|
2 |
|
|
2,274 |
|
Commercial real estate |
|
|
|
23,801 |
|
|
(506) |
|
|
— |
|
|
12 |
|
|
23,307 |
|
|
13,381 |
|
|
|
3,187 |
|
|
(270) |
|
|
2 |
|
|
16,300 |
|
Construction & land development |
|
|
|
3,593 |
|
|
(294) |
|
|
— |
|
|
— |
|
|
3,299 |
|
|
4,536 |
|
|
|
404 |
|
|
— |
|
|
— |
|
|
4,940 |
|
Commercial & industrial |
|
|
|
2,718 |
|
|
1,395 |
|
|
— |
|
|
4 |
|
|
4,117 |
|
|
2,541 |
|
|
|
15 |
|
|
(192) |
|
|
41 |
|
|
2,405 |
|
Paycheck Protection Program |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Lease financing receivables |
|
|
|
104 |
|
|
(7) |
|
|
— |
|
|
— |
|
|
97 |
|
|
133 |
|
|
|
(8) |
|
|
— |
|
|
— |
|
|
125 |
|
Aircraft |
|
|
|
265 |
|
|
38 |
|
|
— |
|
|
— |
|
|
303 |
|
|
200 |
|
|
|
8 |
|
|
— |
|
|
— |
|
|
208 |
|
Home equity |
|
|
|
4,615 |
|
|
(344) |
|
|
— |
|
|
34 |
|
|
4,305 |
|
|
5,290 |
|
|
|
(178) |
|
|
— |
|
|
12 |
|
|
5,124 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
|
930 |
|
|
42 |
|
|
(33) |
|
|
10 |
|
|
949 |
|
|
978 |
|
|
|
16 |
|
|
(71) |
|
|
5 |
|
|
928 |
|
Overdrafts |
|
|
|
473 |
|
|
281 |
|
|
(111) |
|
|
74 |
|
|
717 |
|
|
758 |
|
|
|
(189) |
|
|
(159) |
|
|
78 |
|
|
488 |
|
Automobile loans |
|
|
|
334 |
|
|
(66) |
|
|
— |
|
|
5 |
|
|
273 |
|
|
546 |
|
|
|
(74) |
|
|
— |
|
|
1 |
|
|
473 |
|
Other consumer |
|
|
|
533 |
|
|
(57) |
|
|
(17) |
|
|
8 |
|
|
467 |
|
|
639 |
|
|
|
(57) |
|
|
(8) |
|
|
35 |
|
|
609 |
|
Total Traditional Banking |
|
|
|
49,387 |
|
|
(30) |
|
|
(161) |
|
|
166 |
|
|
49,362 |
|
|
40,554 |
|
|
|
3,104 |
|
|
(700) |
|
|
219 |
|
|
43,177 |
|
Warehouse lines of credit |
|
|
|
2,165 |
|
|
(65) |
|
|
— |
|
|
— |
|
|
2,100 |
|
|
2,126 |
|
|
|
449 |
|
|
— |
|
|
— |
|
|
2,575 |
|
Total Core Banking |
|
|
|
51,552 |
|
|
(95) |
|
|
(161) |
|
|
166 |
|
|
51,462 |
|
|
42,680 |
|
|
|
3,553 |
|
|
(700) |
|
|
219 |
|
|
45,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
|
16,019 |
|
|
(5,793) |
|
|
(10,256) |
|
|
30 |
|
|
— |
|
|
15,270 |
|
|
|
4,305 |
|
|
(19,575) |
|
|
— |
|
|
— |
|
Other TRS loans |
|
|
|
10 |
|
|
20 |
|
|
(30) |
|
|
— |
|
|
— |
|
|
95 |
|
|
|
143 |
|
|
(28) |
|
|
1 |
|
|
211 |
|
Republic Credit Solutions |
|
|
|
7,755 |
|
|
1,592 |
|
|
(597) |
|
|
79 |
|
|
8,829 |
|
|
12,386 |
|
|
|
(1,443) |
|
|
(2,008) |
|
|
199 |
|
|
9,134 |
|
Total Republic Processing Group |
|
|
|
23,784 |
|
|
(4,181) |
|
|
(10,883) |
|
|
109 |
|
|
8,829 |
|
|
27,751 |
|
|
|
3,005 |
|
|
(21,611) |
|
|
200 |
|
|
9,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
75,336 |
|
$ |
(4,276) |
|
$ |
(11,044) |
|
$ |
275 |
|
$ |
60,291 |
|
$ |
70,431 |
|
|
$ |
6,558 |
|
$ |
(22,311) |
|
$ |
419 |
|
$ |
55,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
The cumulative loss rate used as the basis for the estimate of the Company’s ACLL as of June 30, 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 values 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.
For its CRE loan pool, the Company employed a one-year forecast of CRE vacancy rates through March 31, 2021 but discontinued use of this forecast during the second quarter of 2021 in favor of a one-year forecast of general CRE values. This change in forecast method had no material impact on the Company’s ACLL.
27
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans, nonperforming assets, and select credit quality ratios follows:
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Loans on nonaccrual status* |
|
$ |
21,621 |
|
$ |
23,548 |
|
|
Loans past due 90-days-or-more and still on accrual** |
|
|
723 |
|
|
47 |
|
|
Total nonperforming loans |
|
|
22,344 |
|
|
23,595 |
|
|
Other real estate owned |
|
|
1,898 |
|
|
2,499 |
|
|
Total nonperforming assets |
|
$ |
24,242 |
|
$ |
26,094 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Total Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
0.49 |
% |
|
0.49 |
% |
|
Nonperforming assets to total loans (including OREO) |
|
|
0.53 |
|
|
0.54 |
|
|
Nonperforming assets to total assets |
|
|
0.39 |
|
|
0.42 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Core Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
0.49 |
% |
|
0.50 |
% |
|
Nonperforming assets to total loans (including OREO) |
|
|
0.53 |
|
|
0.56 |
|
|
Nonperforming assets to total assets |
|
|
0.42 |
|
|
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. |
28
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:
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
* Includes interest income for loans on nonaccrual as of the beginning of the period that were paid off during the period.
29
* Includes interest income for loans on nonaccrual as of the beginning of the period that were paid off during the period.
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous loans. Nonaccrual loans are typically returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future contractual payments are reasonably assured. TDRs on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.
Delinquent Loans
The following tables present the aging of the recorded investment in loans by class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 - 59 |
|
60 - 89 |
|
90 or More |
|
|
|
|
|
|
|
|
|
|
|||
|
June 30, 2021 |
Days |
|
Days |
|
Days |
|
Total |
|
Total |
|
|
|
|
||||||
|
(dollars in thousands) |
|
Delinquent |
|
Delinquent |
|
Delinquent* |
|
Delinquent** |
|
Current |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
1,323 |
|
$ |
425 |
|
$ |
860 |
|
$ |
2,608 |
|
$ |
850,339 |
|
$ |
852,947 |
|
|
Nonowner occupied |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
289,290 |
|
|
289,290 |
|
|
Commercial real estate |
|
|
1,644 |
|
|
127 |
|
|
5,045 |
|
|
6,816 |
|
|
1,382,187 |
|
|
1,389,003 |
|
|
Construction & land development |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
95,180 |
|
|
95,180 |
|
|
Commercial & industrial |
|
|
— |
|
|
12 |
|
|
— |
|
|
12 |
|
|
330,290 |
|
|
330,302 |
|
|
Paycheck Protection Program |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
250,933 |
|
|
250,933 |
|
|
Lease financing receivables |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
9,249 |
|
|
9,249 |
|
|
Aircraft |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
121,112 |
|
|
121,112 |
|
|
Home equity |
|
|
37 |
|
|
— |
|
|
212 |
|
|
249 |
|
|
217,372 |
|
|
217,621 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
47 |
|
|
17 |
|
|
— |
|
|
64 |
|
|
14,690 |
|
|
14,754 |
|
|
Overdrafts |
|
|
143 |
|
|
1 |
|
|
1 |
|
|
145 |
|
|
572 |
|
|
717 |
|
|
Automobile loans |
|
|
— |
|
|
— |
|
|
11 |
|
|
11 |
|
|
21,179 |
|
|
21,190 |
|
|
Other consumer |
|
|
1 |
|
|
3 |
|
|
— |
|
|
4 |
|
|
6,792 |
|
|
6,796 |
|
|
Total Traditional Banking |
|
|
3,195 |
|
|
585 |
|
|
6,129 |
|
|
9,909 |
|
|
3,589,185 |
|
|
3,599,094 |
|
|
Warehouse lines of credit |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
840,155 |
|
|
840,155 |
|
|
Total Core Banking |
|
|
3,195 |
|
|
585 |
|
|
6,129 |
|
|
9,909 |
|
|
4,429,340 |
|
|
4,439,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Other TRS loans |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Republic Credit Solutions |
|
|
6,068 |
|
|
2,018 |
|
|
723 |
|
|
8,809 |
|
|
106,140 |
|
|
114,949 |
|
|
Total Republic Processing Group |
|
|
6,068 |
|
|
2,018 |
|
|
723 |
|
|
8,809 |
|
|
106,140 |
|
|
114,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,263 |
|
$ |
2,603 |
|
$ |
6,852 |
|
$ |
18,718 |
|
$ |
4,535,480 |
|
$ |
4,554,198 |
|
|
Delinquency ratio*** |
|
|
0.20 |
% |
|
0.06 |
% |
|
0.15 |
% |
|
0.41 |
% |
|
|
|
|
|
|
* 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.
30
* All loans past due 90-days-or-more, excluding smaller balance consumer loans, were on nonaccrual status.
** Delinquent status may be determined by either the number of days past due or number of payments past due.
*** Represents total loans 30-days-or-more past due by aging category divided by total loans.
31
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
|
December 31, 2020 |
||||||||
|
|
|
Secured |
|
Secured |
|
Secured |
|
Secured |
||||
|
|
|
by Real |
|
by Personal |
|
by Real |
|
by Personal |
||||
|
(dollars in thousands) |
|
Estate |
|
Property |
|
Estate |
|
Property |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
13,711 |
|
$ |
— |
|
$ |
17,212 |
|
$ |
— |
|
Nonowner occupied |
|
|
102 |
|
|
— |
|
|
81 |
|
|
— |
|
Commercial real estate |
|
|
9,084 |
|
|
— |
|
|
10,205 |
|
|
— |
|
Construction & land development |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Commercial & industrial |
|
|
— |
|
|
— |
|
|
— |
|
|
12 |
|
Paycheck Protection Program |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Lease financing receivables |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Aircraft |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Home equity |
|
|
1,915 |
|
|
— |
|
|
2,899 |
|
|
— |
|
Consumer |
|
|
— |
|
|
162 |
|
|
— |
|
|
237 |
|
Total Traditional Banking |
|
$ |
24,812 |
|
$ |
162 |
|
$ |
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.
32
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 June 30, 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:
33
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 June 30, 2021 and December 31, 2020 follows:
As of June 30, 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 June 30, 2021 and December 31, 2020. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships as of June 30, 2021 or December 31, 2020.
34
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2021 and 2020 that were modified during the three months ended June 30, 2021 and 2020 follows:
The tables above are inclusive of loans that were TDRs at the end of previous periods and were re-modified, e.g., a maturity date extension during the current period.
As of June 30, 2021 and 2020, 85% and 57% of the Bank’s TDR balances that occurred during the second quarters of 2021 and 2020 were performing according to their modified terms. The Bank provided approximately $18,000 and $0 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the second quarters of 2021 and 2020.
There was no significant change between the pre and post modification loan balances for the three months ending June 30, 2021 and 2020.
35
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2021 and 2020 that were modified during the six months ended June 30, 2021 and 2020 follows:
The tables above are inclusive of loans that were TDRs at the end of previous periods and were re-modified, e.g., a maturity date extension during the current period.
As of June 30, 2021 and 2020, 67% and 66% of the Bank’s TDR balances that occurred during the first six months of 2021 and 2020 were performing according to their modified terms. The Bank provided approximately $35,000 and $28,000 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the first six months of 2021 and 2020.
There was no significant change between the pre and post modification loan balances for the six months ending June 30, 2021 and 2020.
36
The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of June 30, 2021 and 2020 and for which there was a payment default during the three and/or six months ended June 30, 2021 and 2020.
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 June 30, 2021, $25 million, or 1% of the Company’s Traditional Bank portfolio remained under a COVID-19 hardship accommodation.
Foreclosures
The following table presents the carrying amount of foreclosed properties held as a result of the Bank obtaining physical possession of such properties:
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
— |
|
$ |
496 |
|
|
Commercial real estate |
|
|
1,898 |
|
|
2,003 |
|
|
|
|
|
|
|
|
|
|
|
Total other real estate owned |
|
$ |
1,898 |
|
$ |
2,499 |
|
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 requirements of the applicable jurisdiction:
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure |
|
$ |
433 |
|
$ |
981 |
|
37
Easy Advances
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.
See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.
Information regarding EAs follows:
5. DEPOSITS
The composition of the deposit portfolio follows:
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Core Bank: |
|
|
|
|
|
|
|
|
Demand |
|
$ |
1,231,449 |
|
$ |
1,217,263 |
|
|
Money market accounts |
|
|
810,307 |
|
|
712,824 |
|
|
Savings |
|
|
281,164 |
|
|
236,335 |
|
|
Individual retirement accounts (1) |
|
|
46,694 |
|
|
47,889 |
|
|
Time deposits, $250 and over (1) |
|
|
78,702 |
|
|
83,448 |
|
|
Other certificates of deposit (1) |
|
|
171,995 |
|
|
199,214 |
|
|
Reciprocal money market and time deposits (1) |
|
|
301,384 |
|
|
314,109 |
|
|
Brokered deposits (1) |
|
|
30,000 |
|
|
25,010 |
|
|
Total Core Bank interest-bearing deposits |
|
|
2,951,695 |
|
|
2,836,092 |
|
|
Total Core Bank noninterest-bearing deposits |
|
|
1,622,279 |
|
|
1,503,662 |
|
|
Total Core Bank deposits |
|
|
4,573,974 |
|
|
4,339,754 |
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
Money market accounts |
|
|
3,450 |
|
|
6,673 |
|
|
Total RPG interest-bearing deposits |
|
|
3,450 |
|
|
6,673 |
|
|
|
|
|
|
|
|
|
|
|
Brokered prepaid card deposits |
|
|
334,967 |
|
|
257,856 |
|
|
Other noninterest-bearing deposits |
|
|
58,203 |
|
|
110,021 |
|
|
Total RPG noninterest-bearing deposits |
|
|
393,170 |
|
|
367,877 |
|
|
Total RPG deposits |
|
|
396,620 |
|
|
374,550 |
|
|
|
|
|
|
|
|
|
|
|
Deposits of discontinued operations (2) |
|
|
46,984 |
|
|
18,877 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
5,017,578 |
|
$ |
4,733,181 |
|
| (1) | Includes time deposit |
| (2) | See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing. |
38
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 June 30, 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:
39
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 June 30, 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 June 30, 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. During the second quarter of 2021, the Company extended one third-party lease for an additional five years, with the extended term beginning during the third quarter of 2021 and valued at approximately $263,000.
The following table presents information concerning the Company’s operating lease expense recorded as a noninterest expense within the “Occupancy” category for the three and six months ended June 30, 2021 and 2020:
The following table presents the weighted average remaining term and weighted average discount rate for the Company’s non-short-term operating leases as of June 30, 2021 and December 31, 2020:
40
The following table presents a maturity schedule of the Company’s operating lease liabilities based on undiscounted cash flows, and a reconciliation of those undiscounted cash flows to the operating lease liabilities recognized on the Company’s balance sheet as of June 30, 2021:
8. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Overnight advances |
|
$ |
25,000 |
|
$ |
225,000 |
|
|
Fixed interest rate advances |
|
|
— |
|
|
10,000 |
|
|
Total FHLB advances |
|
$ |
25,000 |
|
$ |
235,000 |
|
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity. FHLB advances are collateralized by a blanket pledge of eligible real estate loans. As of June 30, 2021 and December 31, 2020, Republic had available borrowing capacity of $909 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 available through various other financial institutions as of June 30, 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:
41
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:
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
42
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 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:
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.
43
The following tables present a rollforward of the ACLC for the three and six months ended June 30, 2021 and 2020:
The Company decreased its ACLC during the three months ended June 30, 2021 based on a decrease in the expected loss rate and the expected usage rate for its unused commitments.
The Company decreased its ACLC during the six months ended June 30, 2021 based on a decrease in the expected loss rate and the expected usage rate for its unused commitments.
44
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 June 30, 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.
45
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.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value 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.
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).
46
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below. Information as of June 30, 2021 is presented net of any applicable ACL.
47
All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2, or 3 assets during the three and six months ended June 30, 2021 and 2020.
Private Label Mortgage-Backed Security
The following table presents a reconciliation of the Bank’s private label mortgage-backed security measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
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.
48
Quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage-backed security follows:
Trust Preferred Security
The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
(in thousands) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
3,650 |
|
$ |
4,100 |
|
$ |
3,800 |
|
$ |
4,000 |
|
|
Total gains or losses included in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount accretion |
|
|
13 |
|
|
11 |
|
|
26 |
|
|
22 |
|
|
Net change in unrealized gain |
|
|
37 |
|
|
(611) |
|
|
(126) |
|
|
(522) |
|
|
Balance, end of period |
|
$ |
3,700 |
|
$ |
3,500 |
|
$ |
3,700 |
|
$ |
3,500 |
|
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.
49
Mortgage Loans Held for Sale
The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of June 30, 2021 and December 31, 2020.
The aggregate fair value, contractual balance, and unrealized gain were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Aggregate fair value |
|
$ |
32,401 |
|
$ |
46,867 |
|
|
Contractual balance |
|
|
31,469 |
|
|
44,781 |
|
|
Unrealized gain |
|
|
932 |
|
|
2,086 |
|
The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2021 and 2020 for mortgage loans held for sale are presented in the following table:
Consumer Loans Held for Sale
RCS carries loans originated through its installment loan program at fair value. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of June 30, 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:
50
The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Aggregate fair value |
|
$ |
13,020 |
|
$ |
3,298 |
|
|
Contractual balance |
|
|
12,928 |
|
|
3,284 |
|
|
Unrealized gain |
|
|
92 |
|
|
14 |
|
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:
51
Assets measured at fair value on a non-recurring basis are summarized below:
|
* |
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. |
52
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:
53
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
(in thousands) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision on collateral-dependent |
|
$ |
45 |
|
$ |
98 |
|
$ |
45 |
|
$ |
128 |
|
Other Real Estate Owned
Details of other real estate owned carrying value and write downs follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Other real estate owned carried at fair value |
|
$ |
1,898 |
|
$ |
2,003 |
|
|
Other real estate owned carried at cost |
|
|
— |
|
|
496 |
|
|
Total carrying value of other real estate owned |
|
$ |
1,898 |
|
$ |
2,499 |
|
54
The carrying amounts and estimated exit price fair values of all financial instruments follow:
55
56
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:
The following table presents the components of Mortgage Banking income:
Activity for capitalized mortgage servicing rights was as follows:
Activity in the valuation allowance for capitalized mortgage servicing rights follows:
57
Other information relating to mortgage servicing rights follows:
|
* |
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:
58
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:
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:
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:
59
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 $7.9 million and $13.3 million as of June 30, 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:
|
* |
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. |
60
Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:
61
14. OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
(in thousands) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses on AFS debt securities |
|
$ |
(614) |
|
$ |
1,099 |
|
$ |
(2,643) |
|
$ |
8,876 |
|
|
Change in unrealized gain of AFS debt security for which a portion of OTTI has been recognized in earnings |
|
|
34 |
|
|
(108) |
|
|
49 |
|
|
(107) |
|
|
Net unrealized (losses) gains |
|
|
(580) |
|
|
991 |
|
|
(2,594) |
|
|
8,769 |
|
|
Tax effect |
|
|
145 |
|
|
(248) |
|
|
648 |
|
|
(2,193) |
|
|
Net of tax |
|
|
(435) |
|
|
743 |
|
|
(1,946) |
|
|
6,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives used for cash flow hedges |
|
|
— |
|
|
(10) |
|
|
— |
|
|
(171) |
|
|
Reclassification amount for net derivative losses realized in income |
|
|
— |
|
|
79 |
|
|
— |
|
|
108 |
|
|
Net gains (losses) |
|
|
— |
|
|
69 |
|
|
— |
|
|
(63) |
|
|
Tax effect |
|
|
— |
|
|
(17) |
|
|
— |
|
|
15 |
|
|
Net of tax |
|
|
— |
|
|
52 |
|
|
— |
|
|
(48) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income components, net of tax |
|
$ |
(435) |
|
$ |
795 |
|
$ |
(1,946) |
|
$ |
6,528 |
|
The table below presents the significant amounts reclassified out of each component of AOCI:
The following is a summary of the AOCI balances, net of tax:
62
15. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company’s net revenue and net revenue concentration from continuing operations by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021 |
|
|||||||||||||||||||||||||||
|
|
|
Core Banking |
|
|
Republic Processing Group |
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Tax |
|
Republic |
|
|
|
|
|
|
|
|
|
||||
|
|
|
Traditional |
|
Warehouse |
|
Mortgage |
|
|
Core |
|
|
Refund |
|
Credit |
|
|
Total |
|
|
|
Total |
|
||||||||
|
(dollars in thousands) |
|
Banking |
|
Lending |
|
Banking |
|
|
Banking |
|
|
Solutions |
|
Solutions |
|
|
RPG |
|
|
|
Company |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (1) |
|
$ |
38,278 |
|
$ |
6,324 |
|
$ |
140 |
|
|
$ |
44,742 |
|
|
$ |
220 |
|
$ |
4,676 |
|
|
$ |
4,896 |
|
|
|
$ |
49,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
3,061 |
|
|
14 |
|
|
— |
|
|
|
3,075 |
|
|
|
(4) |
|
|
— |
|
|
|
(4) |
|
|
|
|
3,071 |
|
|
Mortgage banking income (1) |
|
|
— |
|
|
— |
|
|
4,182 |
|
|
|
4,182 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
|
4,182 |
|
|
Interchange fee income |
|
|
3,367 |
|
|
— |
|
|
— |
|
|
|
3,367 |
|
|
|
1 |
|
|
— |
|
|
|
1 |
|
|
|
|
3,368 |
|
|
Program fees (1) |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
715 |
|
|
2,834 |
|
|
|
3,549 |
|
|
|
|
3,549 |
|
|
Increase in cash surrender value of BOLI (1) |
|
|
600 |
|
|
— |
|
|
— |
|
|
|
600 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
|
600 |
|
|
Net gains (losses) on OREO |
|
|
(44) |
|
|
— |
|
|
— |
|
|
|
(44) |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
|
(44) |
|
|
Other |
|
|
986 |
|
|
— |
|
|
50 |
|
|
|
1,036 |
|
|
|
(1) |
|
|
— |
|
|
|
(1) |
|
|
|
|
1,035 |
|
|
Total noninterest income |
|
|
7,970 |
|
|
14 |
|
|
4,232 |
|
|
|
12,216 |
|
|
|
711 |
|
|
2,834 |
|
|
|
3,545 |
|
|
|
|
15,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
46,248 |
|
$ |
6,338 |
|
$ |
4,372 |
|
|
$ |
56,958 |
|
|
$ |
931 |
|
$ |
7,510 |
|
|
$ |
8,441 |
|
|
|
$ |
65,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-revenue concentration from continuing operations (2) |
|
|
71 |
% |
|
10 |
% |
|
7 |
% |
|
|
88 |
% |
|
|
1 |
% |
|
11 |
% |
|
|
12 |
% |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) | This revenue is not subject to ASC 606. |
| (2) | Net revenue from continuing operations represents net interest income plus total noninterest income from continuing operations. Net-revenue concentration from continuing operations equals segment-level net revenue from continuing operations divided by total Company net revenue from continuing operations. |
63
| (1) | This revenue is not subject to ASC 606. |
| (2) | Net revenue from continuing operations represents net interest income plus total noninterest income from continuing operations. Net-revenue concentration from continuing operations equals segment-level net revenue from continuing operations divided by total Company net revenue from continuing operations. |
64
The following represents information for significant revenue streams from continuing operations 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.
Interchange fee income – As an “issuing bank” for card transactions, the Company earns interchange fee income on transactions executed by its cardholders with various third-party merchants. Through third-party intermediaries, merchants compensate the Company for each transaction for the ability to efficiently settle the transaction and for the Company’s willingness to accept certain risks inherent in the transaction. There is no written contract between the merchant and the Company, but a contract is implied between the two parties by customary business practices. Interchange fee income is recognized almost simultaneously by the Company upon the completion of a related card transaction.
The Company compensates its cardholders by way of cash or other “rewards” for generating card transactions. These rewards are disclosed in cardholder agreements between the Company and its cardholders. Reward costs are accrued over time based on card transactions generated by the cardholder. Interchange fee income is presented net of reward costs within noninterest income.
Net gains/(losses) on other real estate – The Company routinely sells OREO it has acquired through loan foreclosure. Net gains/(losses) on OREO reflect both 1) the gain or loss recognized upon an executed deed and 2) mark-to-market writedowns the Company takes on its OREO inventory.
The Company generally recognizes gains or losses on OREO at the time of an executed deed, although gains may be recognized over a financing period if the Company finances the sale. For financed OREO sales, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.
Mark-to-market writedowns taken by the Company during the property’s holding period are generally at least 10% per year, but may be higher based on updated real estate appraisals or BPOs. Incremental expenditures to bring OREO to salable condition are generally expensed as-incurred.
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16. SEGMENT INFORMATION
Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.
As of June 30, 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.
See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing.
The nature of segment operations and the primary drivers of net revenue by reportable segment are provided below:
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.
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Segment information follows:
* Net revenue from continuing operations represents net interest income plus total noninterest income from continuing operations. Net-revenue concentration from continuing operations equals segment-level net revenue from continuing operations divided by total Company net revenue from continuing operations.
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* Net revenue from continuing operations represents net interest income plus total noninterest income from continuing operations. Net-revenue concentration from continuing operations equals segment-level net revenue from continuing operations divided by total Company net revenue from continuing operations.
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17. DISCONTINUED OPERATIONS
Agreement to Sell Tax Refund Solutions Business to Green Dot
On May 13, 2021, the Bank entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Green Dot to sell substantially all of the assets and operations of the Bank’s Tax Refund Solutions business (the “Sale Transaction”). Pursuant to the terms of the Purchase Agreement, Green Dot will pay the Bank a purchase price of approximately $165 million in cash. Furthermore, under the terms of the Purchase Agreement, the Bank will provide transition services to Green Dot for the TRS business during the 2022 calendar year.
In a Form 8-K filed on July 23, 2021, the Company disclosed that on July 21, 2021 the Company and Green Dot received early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and that the parties expected to complete the Sale Transaction by August 22, 2021, subject to the satisfaction or waiver of the remaining customary conditions set forth in the Purchase Agreement. However, in a Form 8-K filed on August 4, 2021, the Company disclosed that Green Dot recently informed the Company that the Federal Reserve has requested information from Green Dot relating to the proposed Sale Transaction and Green Dot intends to seek the Federal Reserve’s approval of, or non-objection to, as applicable, the Sale Transaction prior to completing the Sale Transaction. As a result, Green Dot does not intend to close the Sale Transaction by August 22, 2021 as previously disclosed. Closing of the Sale Transaction is subject solely to the satisfaction or waiver of the customary conditions set forth in the Purchase Agreement. Receipt of approval or non-objection from the Federal Reserve is not a condition to closing set forth in the Purchase Agreement.
Results of operations for the TRS business sold to Green Dot are presented separately as discontinued operations for all periods because the sale met the relevant criteria as of June 30, 2021. A summary income statement of discontinued operations for the three and six months ended June 30, 2021 is presented below:
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Through its TRS business, 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 business occurs during the first half of each year. TRS traditionally operates at a loss in the second half of the year, during which time it 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:
| ● | Offered only during the first two months of each year; |
| ● | The taxpayer was given the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250; |
| ● | No requirement that the taxpayer pays for another bank product, such as an RT; |
| ● | Multiple funds disbursement methods, including direct deposit, prepaid card, or check, based on the taxpayer-customer’s election; |
| ● | Repayment of the EA to the Bank is deducted from the taxpayer’s tax refund proceeds; and |
| ● | If an insufficient refund to repay the EA occurs: |
| o | there is no recourse to the taxpayer, |
| o | no negative credit reporting on the taxpayer, and |
| o | no collection efforts against the taxpayer. |
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.
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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.
Republic Bancorp Capital Trust is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I Item 1 “Financial Statements.”
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements, except as required by applicable law.
Broadly speaking, forward-looking statements include:
| ● | the potential impact of the COVID-19 pandemic on Company operations; |
| ● | projections of revenue, income, expenses, losses, earnings per share, capital expenditures, dividends, capital structure, or other financial items; |
| ● | descriptions of plans or objectives for future operations, products, or services; |
| ● | forecasts of future economic performance; |
| ● | statements relating to the completion of the Sale Transaction and the potential timing thereof; and |
| ● | descriptions of assumptions underlying or relating to any of the foregoing. |
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:
| ● | the impact of the COVID-19 pandemic on the Company’s operations and credit losses; |
| ● | the ability of borrowers who received COVID-19 loan accommodations to resume repaying their loans upon maturity of such accommodations; |
| ● | natural disasters impacting the Company’s operations; |
| ● | changes in political and economic conditions; |
| ● | the magnitude and frequency of changes to the FFTR implemented by the FOMC of the FRB; |
| ● | long-term and short-term interest rate fluctuations as well as the overall steepness of the U.S. Treasury yield curve; |
| ● | competitive product and pricing pressures in each of the Company’s five reportable segments; |
| ● | equity and fixed income market fluctuations; |
| ● | client bankruptcies and loan defaults; |
| ● | inflation; |
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| ● | recession; |
| ● | future acquisitions; |
| ● | integrations of acquired businesses; |
| ● | changes in technology; |
| ● | changes in applicable laws and regulations or the interpretation and enforcement thereof; |
| ● | changes in fiscal, monetary, regulatory and tax policies; |
| ● | changes in accounting standards; |
| ● | monetary fluctuations; |
| ● | changes to the Company’s overall internal control environment; |
| ● | success in gaining regulatory approvals when required; |
| ● | the Company’s ability to qualify for future R&D federal tax credits; |
| ● | risks related to the completion of the proposed Sale Transaction and the potential timing thereof; |
| ● | the occurrence of any event, change or other circumstances that could give rise to the termination of the Purchase Agreement; |
| ● | disruption from the proposed Sale Transaction making it difficult to maintain business and operational relationships, including retaining and hiring key personnel and maintaining relationships with the Bank’s customers, vendors and others with whom the Bank does business; |
| ● | the risk of litigation and/or regulatory actions related to the proposed Sale Transaction; |
| ● | information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party service providers; and |
| ● | other risks and uncertainties reported from time to time in the Company’s filings with the SEC, including Part 1 Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and Part II Item 1A “Risk Factors” of the current filing. |
Accounting Standards Update
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.
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ACLL and Provision — As of June 30, 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 employed a one-year forecast of CRE vacancy rates through March 31, 2021 but discontinued use of this forecast during the second quarter of 2021 in favor of a one-year forecast of general CRE values. This change in forecast method had no material impact on the Company’s ACLL.
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 CRE values. 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.
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BUSINESS SEGMENT COMPOSITION
As of June 30, 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.
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2021, Republic had 42 full-service banking centers with locations as follows:
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Kentucky — 28 |
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Metropolitan Louisville — 18 |
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Central Kentucky — 7 |
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Georgetown — 1 |
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Lexington — 5 |
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Shelbyville — 1 |
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Northern Kentucky — 3 |
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Covington — 1 |
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Crestview Hills — 1 |
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Florence — 1 |
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Southern Indiana — 3 |
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Floyds Knobs — 1 |
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Jeffersonville — 1 |
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New Albany — 1 |
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Metropolitan Tampa, Florida — 7 |
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Metropolitan Cincinnati, Ohio — 2 |
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Metropolitan Nashville, Tennessee — 2 |
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
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.
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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 for loans generated in states within its footprint and generally sells servicing for loans generated in states outside of its footprint. 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.”
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(IV) Tax Refund Solutions segment
Tax Refund Solutions segment — On May 13, 2021, the Bank entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Green Dot to sell substantially all of the assets and operations of the Bank’s Tax Refund Solutions business (the “Sale Transaction”).
As a result of the Purchase Agreement, the results of operations for the Company and its TRS segment are presented within this filing to reflect continuing versus discontinued operations. TRS’s continuing operations include its immaterial RPS division and certain overhead costs previously allocated to TRS that will remain with the Bank. Discontinued operations are those sold to Green Dot.
See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” of Part I Item 1 “Financial Statements.”
Republic Payment Solutions division — RPS is currently managed and operated within the TRS segment’s continuing operations. The RPS division offers general-purpose reloadable prepaid cards as an issuing bank 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’s continuing operations. 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.”
(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:
| ● | RCS line-of-credit products – Using separate third-party service providers, the Bank originates two line-of-credit products to generally subprime borrowers in multiple states. The first of these two products (the “LOC I”) has been originated by the Bank since 2014. The second (the “LOC II”) was introduced in January 2021. |
| o | RCS’s LOC I represents the substantial majority of RCS activity. Elastic Marketing, LLC and Elevate Decision Sciences, LLC, are third-party service providers for the product and are subject to the Bank’s oversight and supervision. Together, these companies provide the Bank with certain marketing, servicing, technology, and support services, while a separate third party provides customer support, servicing, and other services on the Bank’s behalf. The Bank is the lender for this product and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of the product. |
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.
| o | In January 2021, RCS began originating balances through its LOC II. One of RCS’s existing third-party service providers, subject to the Bank’s oversight and supervision, provides the Bank with marketing services and loan servicing for the LOC II product. The Bank is the lender for this product and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this product. |
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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.
| ● | RCS installment loan product – In December 2019, through RCS, the Bank began offering installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. The same third-party service provider for RCS’s LOC II is the third-party provider for the installment loans. This third-party provider is subject to the Bank’s oversight and supervision and provides the Bank with marketing services and loan servicing for these RCS installment loans. The Bank is the lender for these RCS installment loans and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intention to sell these loans to its third-party service provider generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. |
| ● | RCS healthcare receivables products – The Bank originates healthcare-receivables products across the U.S. through two different third-party service providers. In one program, the Bank retains 100% of the receivables originated. In the other program, the Bank retains 100% of the receivables originated in some instances, and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale through this program are carried at the lower of cost or fair value. |
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.”
OVERVIEW (Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020)
Total Company net income for the second quarter of 2021 was $23.9 million, an $8.1 million, or 51%, increase from the same period in 2020. Diluted EPS increased to $1.16 for the three months ended June 30, 2021 compared to $0.76 for the same period in 2020. The increase in net income reflected a $9.4 million increase in net income from discontinued operations, driven by a $10.2 million positive swing in Provision resulting from significantly higher Easy Advance repayments during the second quarter of 2021 compared to the same period in 2020.
Net income from continuing operations was $16.5 million for the second quarter of 2021, a $1.3 million decrease from the same period in 2020. Diluted EPS from continuing operations were $0.80 for the three months ended June 30, 2021 compared to $0.86 for the same period in 2020. The decrease in net income from continuing operations generally reflected a decrease in net interest income partially offset by a positive reduction in Provision.
The following are general highlights by reportable segment. Discontinued operations for the periods discussed relate entirely to the TRS segment.
See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” of Part I Item 1 “Financial Statements.”
Traditional Banking segment
| ● | Net income increased $3.2 million, or 68%, for the second quarter of 2021 compared to the same period in 2020. |
| ● | Net interest income decreased $757,000, or 2%, for the second quarter of 2021 compared to the same period in 2020. The Traditional Bank’s net interest margin decreased 29 basis points to 2.97% for the second quarter of 2021. |
| ● | Provision decreased $3.2 million to a net credit of $77,000 for the second quarter of 2021 compared to a net charge of $3.1 million for the same period in 2020. |
| ● | Noninterest income increased $1.8 million, or 30%, for the second quarter of 2021 compared to the same period in 2020. |
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| ● | Total noninterest expense increased $249,000, or 1%, for the second quarter of 2021 compared to same period in 2020. |
Warehouse Lending segment
| ● | Net income increased $375,000, or 10%, for the second quarter of 2021 compared to the same period in 2020. |
| ● | Net interest income increased $261,000, or 4%, for the second quarter of 2021 compared to the same period in 2020. |
| ● | The Warehouse Provision was a net credit of $65,000 for the second quarter of 2021 compared to a net charge of $449,000 for the same period in 2020. |
| ● | Average committed Warehouse lines increased to $1.4 billion during the second quarter of 2021 from $1.2 billion during the same period in 2020. |
| ● | Average line usage was 51% during the second quarter of 2021 compared to 68% during the same period in 2020. |
Mortgage Banking segment
| ● | Within the Mortgage Banking segment, mortgage banking income decreased $4.2 million, or 50%, during the second quarter of 2021 compared to the same period in 2020. |
| ● | Overall, Republic’s originations of secondary market loans totaled $141 million during the second quarter of 2021 compared to $219 million during the same period in 2020, with the Company’s gain-as-a-percent-of-loans-sold decreasing from 3.98% to 2.84% from period to period. |
Tax Refund Solutions segment
Continuing Operations
| ● | Net loss from continuing operations was $244,000 for the second quarter of 2021 compared to a net loss of $615,000 for the same period in 2020. The higher loss during the second quarter of 2020 primarily reflected general operating losses related to TRS’s prepaid card division, with such losses substantially occurring prior to May 1, 2020. On May 1, 2020, the RPS division added a large depository relationship that significantly improved profitability on a subsequent basis. |
Discontinued Operations
| ● | Net income from discontinued operations increased $9.4 million for the second quarter of 2021 compared to the same period in 2020. |
| ● | Overall, TRS recorded a net credit to the Provision from discontinued operations of $5.8 million during the second quarter of 2021 compared to a net charge to the Provision of $4.4 million for the same period in 2020. |
| ● | Noninterest income from discontinued operations increased $3.0 million, or 99%, for the second quarter of 2021 compared to the same period in 2020. |
| ● | Net RT revenue from discontinued operations increased $3.0 million, or 103%, for the second quarter of 2021 compared to the same period in 2020. |
| ● | Noninterest expense from discontinued operations was $2.4 million for the second quarter of 2021 compared to $1.6 million for the same period in 2020. |
Republic Credit Solutions segment
| ● | Net income decreased $1.4 million, or 27%, for the second quarter of 2021 compared to the same period in 2020. |
| ● | Net interest income decreased $931,000, or 17%, for the second quarter of 2021 compared to the same period in 2020. |
78
| ● | Overall, RCS recorded a net charge to the Provision of $1.6 million during the second quarter of 2021 compared to a net credit of $1.4 million for the same period in 2020. |
| ● | Noninterest income increased $2.3 million from the second quarter of 2020 to the second quarter of 2021. |
| ● | Noninterest expense was $950,000 for the second quarter of 2021 compared to $903,000 for the same period in 2020. |
RESULTS OF OPERATIONS (Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 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.
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 first quarter of 2020 and 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 unlikely the FFTR will 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 from continuing operations decreased $2.2 million, or 4%, during the second quarter of 2021 compared to the same period in 2020. Total Company net interest margin from continuing operations decreased to 3.27% during the second quarter of 2021 compared to 3.58% for the same period in 2020. Net interest income from discontinued operations was $403,000 during the second quarter of 2021 compared to $393,000 during the second quarter of 2020.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
Traditional Banking segment
The Traditional Banking’s net interest income decreased $757,000, or 2%, for the second quarter of 2021 compared to the same period in 2020. Traditional Banking’s net interest margin was 2.97% for the second quarter of 2021, a decrease of 29 basis points from the same period in 2020.
Table 1 — Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
Due to the short-term nature of the PPP, management believes Traditional Bank net interest income excluding PPP lender fees is a more appropriate measure to analyze the Traditional Bank’s net interest income and net interest margin. The following table reconciles Traditional Bank net interest income and net interest margin to Traditional Bank net interest income and net interest margin excluding PPP lender fees, a non-GAAP measure. Net interest margin excluding PPP lender fees presented below also excludes average PPP loans of $350 million and $387 million for the quarters ended June 30, 2021 and 2020.
79
The decrease in the Traditional Bank’s net interest income and net interest margin during the second quarter of 2021 was primarily attributable to the following factors:
| ● | Excluding accreted PPP lender fees, net interest income decreased $2.8 million, or 8%, from the second quarter 2020, as the Traditional Bank’s net interest margin, excluding PPP loans and related fees, declined from 3.31% for the second quarter of 2020 to 2.81% for the second quarter of 2021. The decline in the net interest margin was substantially driven by a 56-basis point decline in the Traditional Bank’s yield on its average interest-earning assets from the second quarter of 2020 to the second quarter of 2021, as the majority of the Traditional Bank’s growth in interest-earning assets during the previous 12 months was in lower-yielding cash or cash equivalent investments instead of loans. |
| ● | Partially offsetting the Traditional Bank’s margin compression, the Traditional Bank recognized $3.7 million of fee income on its PPP portfolio during the second quarter of 2021 compared to $1.6 million of similar fees during the same period in 2020. The $2.1 million increase in PPP fee income was driven significantly by the forgiveness, payoff, and paydown of $166 million of PPP loans during the second quarter of 2021. As of June 30, 2021, net PPP loans of $251 million remained on the Core Bank’s balance sheet, including $53 million in loan balances originated during 2020, $207 million in loan balances originated during 2021, and $9 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. |
Warehouse Lending segment
Net interest income from the Warehouse segment increased $261,000, or 4%, from the second quarter of 2020 to the second quarter of 2021 driven by an improved net interest margin. Overall the net interest margin for the Warehouse segment improved from 3.01% during the second quarter of 2020 to 3.48% during the second quarter of 2021, as many of the Bank’s Warehouse clients 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.
The improved margin overcame a decrease in average outstanding balances, which declined from $807 million during the second quarter of 2020 to $727 million for the second quarter of 2021, as home-mortgage refinancing dipped from record highs during 2020. Committed Warehouse lines-of-credit grew to $1.4 billion as of June 30, 2021 from $1.2 billion as of June 30, 2020, while average usage rates for Warehouse lines were 51% and 68%, respectively, during the second quarters of 2021 and 2020.
Republic Credit Solutions segment
RCS’s net interest income decreased $931,000, or 17%, from the second quarter of 2020 to the second 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 $3.6 million during the second quarter of 2021 compared to $4.6 million during the same period in 2020 and accounted for 74% and 79% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in balances for RCS’s LOC I product following a reduction of marketing for this product during the second and third quarters of 2020. While the marketing for this product was reinstated during the fourth quarter of 2020, management believes the ongoing impact of government stimulus payments continued to reduce demand for this product 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.
80
Table 2 — Total Company Average Balance Sheets and Interest Rates from Continuing Operations
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021 |
|
|
|
Three Months Ended June 30, 2020 |
|
|
||||||||||||
|
|
|
Average |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
|
Average |
|
|
||
|
(dollars in thousands) |
|
Balance |
|
Interest |
|
Rate |
|
|
|
Balance |
|
Interest |
|
Rate |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
ASSETS (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning deposits |
|
$ |
938,728 |
|
$ |
262 |
|
0.11 |
% |
|
|
$ |
299,760 |
|
$ |
87 |
|
0.12 |
% |
|
|
Investment securities, including FHLB stock (2) |
|
|
562,509 |
|
|
1,912 |
|
1.36 |
|
|
|
|
605,776 |
|
|
2,819 |
|
1.86 |
|
|
|
Intercompany funds loaned to discontinued operations |
|
|
49,443 |
|
|
31 |
|
0.25 |
|
|
|
|
31,584 |
|
|
20 |
|
0.25 |
|
|
|
RCS LOC I product (3) (7) |
|
|
15,107 |
|
|
3,569 |
|
94.50 |
|
|
|
|
19,971 |
|
|
4,647 |
|
93.07 |
|
|
|
Other RPG loans (7) |
|
|
105,685 |
|
|
1,190 |
|
4.50 |
|
|
|
|
92,488 |
|
|
1,046 |
|
4.52 |
|
|
|
Outstanding Warehouse lines of credit (4) (7) |
|
|
727,091 |
|
|
6,824 |
|
3.75 |
|
|
|
|
806,771 |
|
|
7,294 |
|
3.62 |
|
|
|
Paycheck Protection Program loans (5) (7) |
|
|
349,643 |
|
|
4,582 |
|
5.24 |
|
|
|
|
386,664 |
|
|
2,652 |
|
2.74 |
|
|
|
All other Core Bank loans (6) (7) |
|
|
3,331,114 |
|
|
32,914 |
|
3.95 |
|
|
|
|
3,539,379 |
|
|
38,339 |
|
4.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
6,079,320 |
|
|
51,284 |
|
3.37 |
|
|
|
|
5,782,393 |
|
|
56,904 |
|
3.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
(59,555) |
|
|
|
|
|
|
|
|
|
(55,310) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning cash and cash equivalents |
|
|
112,928 |
|
|
|
|
|
|
|
|
|
103,390 |
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
39,117 |
|
|
|
|
|
|
|
|
|
43,733 |
|
|
|
|
|
|
|
|
Bank owned life insurance |
|
|
97,257 |
|
|
|
|
|
|
|
|
|
67,079 |
|
|
|
|
|
|
|
|
Other assets (2) |
|
|
166,355 |
|
|
|
|
|
|
|
|
|
146,867 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,435,422 |
|
|
|
|
|
|
|
|
$ |
6,088,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts |
|
$ |
1,599,721 |
|
$ |
93 |
|
0.02 |
% |
|
|
$ |
1,264,581 |
|
$ |
159 |
|
0.05 |
% |
|
|
Money market accounts |
|
|
773,838 |
|
|
93 |
|
0.05 |
|
|
|
|
727,516 |
|
|
248 |
|
0.14 |
|
|
|
Time deposits |
|
|
303,468 |
|
|
930 |
|
1.23 |
|
|
|
|
424,190 |
|
|
2,188 |
|
2.06 |
|
|
|
Reciprocal money market and time deposits |
|
|
319,509 |
|
|
206 |
|
0.26 |
|
|
|
|
289,804 |
|
|
435 |
|
0.60 |
|
|
|
Brokered deposits |
|
|
23,632 |
|
|
2 |
|
0.03 |
|
|
|
|
121,333 |
|
|
380 |
|
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
3,020,168 |
|
|
1,324 |
|
0.18 |
|
|
|
|
2,827,424 |
|
|
3,410 |
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSUARs |
|
|
169,888 |
|
|
8 |
|
0.02 |
|
|
|
|
176,541 |
|
|
17 |
|
0.04 |
|
|
|
Intercompany funds borrowed from discontinued operations |
|
|
84,015 |
|
|
135 |
|
0.64 |
|
|
|
|
140,141 |
|
|
443 |
|
1.26 |
|
|
|
Federal Reserve PPP Liquidity Facility |
|
|
— |
|
|
— |
|
— |
|
|
|
|
122,769 |
|
|
105 |
|
0.34 |
|
|
|
Federal Home Loan Bank advances |
|
|
25,000 |
|
|
10 |
|
0.16 |
|
|
|
|
263,296 |
|
|
822 |
|
1.25 |
|
|
|
Subordinated note |
|
|
41,240 |
|
|
169 |
|
1.64 |
|
|
|
|
41,240 |
|
|
295 |
|
2.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
3,340,311 |
|
|
1,646 |
|
0.20 |
|
|
|
|
3,571,411 |
|
|
5,092 |
|
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities and Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
2,142,055 |
|
|
|
|
|
|
|
|
|
1,611,026 |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
103,751 |
|
|
|
|
|
|
|
|
|
108,488 |
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
849,305 |
|
|
|
|
|
|
|
|
|
797,227 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
6,435,422 |
|
|
|
|
|
|
|
|
$ |
6,088,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
49,638 |
|
|
|
|
|
|
|
|
$ |
51,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
3.17 |
% |
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
3.58 |
% |
|
| (1) | The table above excludes average assets, average liabilities, interest income, and interest expense for discontinued operations; however, loans to and borrowings from discontinued operations are included above based on the Company’s funds transfer pricing methodology. Net interest income would be $50.0 million and $52.2 million and net interest margin would be 3.31% and 3.62% for the quarters ended June 30, 2021 and 2020 if continuing and discontinued operations were consolidated above. |
| (2) | For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets. |
| (3) | Interest income is entirely composed of loan fees. |
| (4) | Interest income includes loan fees of $789,000 and $791,000 for the quarters ended June 30, 2021 and 2020. |
| (5) | Interest income includes loan fees of $3.7 million and $1.6 million for the quarters ended June 30, 2021 and 2020. |
| (6) | Interest income includes loan fees of $968,000 and $511,000 for the quarters ended June 30, 2021 and 2020. |
| (7) | Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all loan premiums, discounts, fees and costs. |
81
Table 3 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense from continuing operations during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 3 — Total Company Volume/Rate Variance Analysis from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021 |
|
|
||||||
|
|
|
|
Compared to |
|
|
||||||
|
|
|
|
Three Months Ended June 30, 2020 |
|
|
||||||
|
|
|
Total Net |
|
Increase / (Decrease) Due to |
|
|
|||||
|
(in thousands) |
|
Change |
|
Volume |
|
Rate |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning deposits |
|
$ |
175 |
|
$ |
179 |
|
$ |
(4) |
|
|
|
Investment securities, including FHLB stock |
|
|
(907) |
|
|
(190) |
|
|
(717) |
|
|
|
Intercompany funds loaned to discontinued operations |
|
|
11 |
|
|
11 |
|
|
— |
|
|
|
RCS LOC I product |
|
|
(1,078) |
|
|
(1,148) |
|
|
70 |
|
|
|
Other RPG loans |
|
|
144 |
|
|
149 |
|
|
(5) |
|
|
|
Outstanding Warehouse lines of credit |
|
|
(470) |
|
|
(740) |
|
|
270 |
|
|
|
Paycheck Protection Program loans |
|
|
1,930 |
|
|
(276) |
|
|
2,206 |
|
|
|
All other Core Bank loans |
|
|
(5,425) |
|
|
(2,176) |
|
|
(3,249) |
|
|
|
Net change in interest income |
|
|
(5,620) |
|
|
(4,191) |
|
|
(1,429) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts |
|
|
(66) |
|
|
35 |
|
|
(101) |
|
|
|
Money market accounts |
|
|
(155) |
|
|
15 |
|
|
(170) |
|
|
|
Time deposits |
|
|
(1,258) |
|
|
(518) |
|
|
(740) |
|
|
|
Reciprocal money market and time deposits |
|
|
(229) |
|
|
41 |
|
|
(270) |
|
|
|
Brokered deposits |
|
|
(379) |
|
|
(172) |
|
|
(207) |
|
|
|
SSUARs |
|
|
(9) |
|
|
(1) |
|
|
(8) |
|
|
|
Intercompany funds borrowed from discontinued operations |
|
|
(309) |
|
|
(139) |
|
|
(170) |
|
|
|
Federal Reserve PPP Liquidity Facility |
|
|
(105) |
|
|
(105) |
|
|
— |
|
|
|
Federal Home Loan Bank advances |
|
|
(813) |
|
|
(414) |
|
|
(399) |
|
|
|
Subordinated note |
|
|
(123) |
|
|
— |
|
|
(123) |
|
|
|
Net change in interest expense |
|
|
(3,446) |
|
|
(1,258) |
|
|
(2,188) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income |
|
$ |
(2,174) |
|
$ |
(2,933) |
|
$ |
759 |
|
|
* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.
82
Provision
Total Company Provision from continuing operations was a net charge of $1.5 million for the second quarter of 2021 compared to a net charge of $2.1 million for the same period in 2020. Provision from discontinued operations was a net credit of $5.8 million for the second quarter of 2021 compared to a net charge of $4.4 million for the same period in 2020.
The following were the most significant components comprising the Company’s Provision by reportable segment:
Traditional Banking segment
The Traditional Banking Provision during the second quarter of 2021 was a net credit of $77,000 compared to a net charge of $3.1 million for the second quarter of 2020. An analysis of the Provision for the second quarter of 2021 compared to the same period in 2020 follows:
| ● | For the second quarter of 2021, the Traditional Bank Provision was a net credit, generally based on an improving economic outlook in conjunction with limited charge-offs incurred by the Traditional Bank since making significant life-of-loan reserves during 2020 following the onset of the pandemic. The net credit recorded during the second quarter of 2021 primarily included ACLL releases for the residential real estate, CRE, and HELOC portfolios offset by additional reserves for certain Special Mention loans with continued signs of pandemic-related hardship through June 30, 2021. |
| ● | During the second quarter of 2020, the Traditional Bank recorded $4.6 million of additional Provision due to the expected economic impact of the COVID-19 pandemic. Offsetting the increase in Provision due to the impact of the COVID-19 pandemic during the second quarter of 2020 was a reduction in Provision of $1.2 million consistent with a $112 million decrease in Traditional Bank loan spot balances during the same quarter. |
As a percentage of total loans, the Traditional Banking ACLL was 1.37% as of June 30, 2021 compared to 1.34% as of December 31, 2020 and 1.10% as of June 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of June 30, 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 Lending segment
Warehouse recorded a net credit to the Provision of $65,000 for the second quarter of 2021 compared to a net charge of $449,000 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 $26 million during the second quarter of 2021 compared to an increase of $179 million during the second quarter of 2020.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of June 30, 2021, December 31, 2020, and June 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of June 30, 2021.
Tax Refund Solutions segment
Discontinued Operations
TRS recorded a net credit to the Provision from discontinued operations of $5.8 million during the second quarter of 2021 compared to a net charge of $4.4 million for the same period in 2020. Substantially all TRS Provision from discontinued operations in both periods was related to its EA product.
The TRS Provision from discontinued operations swung from a net charge of $4.4 million during the second quarter of 2020 to a net credit of $5.8 million during the second quarter of 2021. The credit to the Provision during the second quarter of 2021 resulted from repayment rates on EA loans from the U.S. Treasury that significantly exceeded those during the second quarter of 2020. Management believes the slower repayment rate from the U.S. Treasury during the second quarter of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax-return processing by the IRS for certain types of tax returns that require further taxpayer communication and verification.
83
The Company completely charged-off all remaining unpaid EAs as of June 30, 2021, in-line with its customary June 30th charge-off policy for EA loans. Any EA payments received after June 30th will be credited as a direct recovery to the Provision in the period it is received for the remainder of 2021.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Republic Credit Solutions segment
As illustrated in Table 4 below, RCS recorded a net charge to the Provision of $1.6 million during the second quarter of 2021 compared to a net credit to the Provision of $1.4 million for the same period in 2020. The negative swing in the Provision was driven by an increase in outstanding balances for RCS’s lines of credit during the second quarter of 2021 compared to a decrease in similar balances during the second quarter of 2020. The Company reduced marketing for its LOC I product during the second and third quarters of 2020, then began incrementally increasing such marketing during the fourth quarter of 2020. The Company began offering its LOC II product during the first 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 7.68% as of June 30, 2021, 7.94% as of December 31, 2020 and 9.21% as of June 30, 2020. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of June 30, 2021.
The following table presents net charges to the RCS Provision from continuing operations by product:
Table 4 — RCS Provision by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Jun. 30, |
|
|
|
|
|
|
||||
|
(in thousands) |
|
2021 |
|
2020 |
|
$ Change |
|
% Change |
|
|||
|
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
1,581 |
|
$ |
(1,454) |
|
$ |
3,035 |
|
(209) |
% |
|
Hospital receivables |
|
|
11 |
|
|
11 |
|
|
— |
|
— |
|
|
Total |
|
$ |
1,592 |
|
$ |
(1,443) |
|
$ |
3,035 |
|
(210) |
% |
84
Table 5 — Summary of Loan and Lease Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
|
June 30, |
|
||||
|
(dollars in thousands) |
|
2021 |
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
ACLL at beginning of period |
|
$ |
75,336 |
|
$ |
70,431 |
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
— |
|
|
(270) |
|
|
Commercial & industrial |
|
|
— |
|
|
(192) |
|
|
Consumer |
|
|
(161) |
|
|
(238) |
|
|
Total Traditional Banking |
|
|
(161) |
|
|
(700) |
|
|
Warehouse lines of credit |
|
|
— |
|
|
— |
|
|
Total Core Banking |
|
|
(161) |
|
|
(700) |
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
Easy Advances |
|
|
(10,256) |
|
|
(19,575) |
|
|
Other TRS loans |
|
|
(30) |
|
|
(28) |
|
|
Republic Credit Solutions |
|
|
(597) |
|
|
(2,008) |
|
|
Total Republic Processing Group |
|
|
(10,883) |
|
|
(21,611) |
|
|
Total charge-offs |
|
|
(11,044) |
|
|
(22,311) |
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
Residential real estate |
|
|
19 |
|
|
45 |
|
|
Commercial real estate |
|
|
12 |
|
|
2 |
|
|
Commercial & industrial |
|
|
4 |
|
|
41 |
|
|
Home equity |
|
|
34 |
|
|
12 |
|
|
Consumer |
|
|
97 |
|
|
119 |
|
|
Total Traditional Banking |
|
|
166 |
|
|
219 |
|
|
Warehouse lines of credit |
|
|
— |
|
|
— |
|
|
Total Core Banking |
|
|
166 |
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
Easy Advances |
|
|
30 |
|
|
— |
|
|
Other TRS loans |
|
|
— |
|
|
1 |
|
|
Republic Credit Solutions |
|
|
79 |
|
|
199 |
|
|
Total Republic Processing Group |
|
|
109 |
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
275 |
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
Net loan recoveries (charge-offs) |
|
|
(10,769) |
|
|
(21,892) |
|
|
|
|
|
|
|
|
|
|
|
Provision from continuing operations- Core Banking |
|
|
(95) |
|
|
3,553 |
|
|
Provision from continuing operations - RPG |
|
|
1,592 |
|
|
(1,443) |
|
|
Provision from discontinued operations - RPG |
|
|
(5,773) |
|
|
4,448 |
|
|
Total Provision |
|
|
(4,276) |
|
|
6,558 |
|
|
ACLL at end of period |
|
$ |
60,291 |
|
$ |
55,097 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Total Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACLL to total loans |
|
|
1.32 |
% |
|
1.09 |
% |
|
ACLL to nonperforming loans |
|
|
270 |
|
|
270 |
|
|
Net loan charge-offs to average loans |
|
|
0.95 |
|
|
1.80 |
|
|
Net loan charge-offs from continuing operations to average loans |
|
|
0.05 |
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Core Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACLL to total loans |
|
|
1.16 |
% |
|
0.92 |
% |
|
ACLL to nonperforming loans |
|
|
238 |
|
|
230 |
|
|
Net loan charge-offs to average loans |
|
|
— |
|
|
0.04 |
|
85
Noninterest Income
Total Company noninterest income from continuing operations increased $78,000 during the second quarter of 2021 compared to the same period in 2020. Noninterest income from discontinued operations increased $3.0 million, or 99% comparing the same periods.
The following were the most significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking segment
Traditional Banking’s noninterest income increased $1.8 million, or 30%, for the second quarter of 2021 compared to the same period in 2020. Interchange Fee Income increased $643,000 from the second quarter of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased $623,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the second quarter of 2020, as a pandemic-driven rise in the consumer savings rates drove a reduction in the Bank’s overdraft-related fees. Both Interchange Fee Income and Service Charges on Deposits began to rise towards normal levels during the first quarter of 2021 following the removal of many pandemic-related restrictions.
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 Accounts for the three months ended June 30, 2021 and 2020 were $1.3 million and $893,000. The total daily overdraft charges, net of refunds, included in interest income for the three months ended June 30, 2021 and 2020 were $257,000 and $0. The Bank suspended its daily overdraft charges during 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.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased $4.2 million, or 50%, during the second quarter of 2021 compared to the same period in 2020. For the second quarter of 2021, the Core Bank originated $141 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 2.84%, with comparable originations of $219 million and comparable gains of 3.98% during the second 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 beginning to normalize during February 2021. 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 at, or below, 2.50%.
Tax Refund Solutions segment
Discontinued Operations
TRS’s noninterest income from discontinued operations increased $3.0 million during the second quarter of 2021 compared to the same period in 2020. This increase reflected a $3.0 million increase in net RT fees, as delays in the 2021 tax season drove a larger share of RT volume into the second quarter of the year.
Republic Credit Solutions segment
RCS’s noninterest income increased $2.3 million during the second quarter of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS’s noninterest income. Pandemic-driven restrictions negatively impacted RCS program fees during the second quarter of 2020, with those program fees beginning to normalize during 2021 following the removal of restrictions.
86
The following table presents RCS program fees by product:
Table 6 — RCS Program Fees by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Jun. 30, |
|
|
|
|
|
|
|
||||
|
(in thousands) |
|
2021 |
|
2020 |
|
$ Change |
|
% Change |
|
|
|||
|
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
1,354 |
|
$ |
529 |
|
$ |
825 |
|
156 |
% |
|
|
Hospital receivables |
|
|
63 |
|
|
(10) |
|
|
73 |
|
(730) |
|
|
|
Installment loans* |
|
|
1,417 |
|
|
1 |
|
|
1,416 |
|
NM |
|
|
|
Total |
|
$ |
2,834 |
|
$ |
520 |
|
$ |
2,314 |
|
445 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
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 from continuing operations increased $89,000 during the second quarter of 2021 compared to the same period in 2020. Noninterest expense from discontinued operations increased $742,000, or 46%, comparing the same periods.
The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking segment
Traditional Banking noninterest expense increased $249,000, or 1%, for the second quarter of 2021 compared to the same period in 2020. The following primarily drove the change in noninterest expense:
| ● | Technology, Equipment, and Communication expense increased $628,000, as the Traditional Bank strategically added 30 Interactive Teller Machines over the previous 12 months, bringing its ITM fleet to over 70 ITMs as of June 30, 2021. |
| ● | Partially offsetting the increase above, Bank Franchise Tax expense decreased $474,000. As previously reported, Kentucky enacted HB354 in March 2019 and as a result, the Bank transitioned from a capital-based bank franchise tax to corporate income tax on January 1, 2021 for Kentucky state taxes. |
Tax Refund Solutions segment
Discontinued Operations
TRS’s noninterest expense from discontinued operations increased $742,000 during the second quarter of 2021 compared to the same period in 2020. This increase reflected approximately $1.0 million in legal costs associated with the Bank’s sale of its TRS operations.
87
OVERVIEW (Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020)
Total Company net income for the first six months of 2021 was $50.0 million, a $7.5 million, or 18%, increase from the same period in 2020. Diluted EPS increased to $2.41 for the six months of June 30, 2021 compared to $2.04 for the same period in 2020.
Net income from continuing operations was $36.8 million for the first six months of 2021, a $4.8 million increase from the same period in 2020. Diluted EPS from continuing operations were $1.78 for the six months ended June 30, 2021 compared to $1.54 for the same period in 2020. The increase in net income and net income from continuing operations primarily reflected a positive reduction in Provision partially offset by a decrease in net interest income.
The following are general highlights by reportable segment. Discontinued operations for the periods discussed relate entirely to the TRS segment.
See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” of Part I Item 1 “Financial Statements.”
Traditional Banking segment
| ● | Net income increased $6.4 million, or 66%, for the first six months of 2021 compared to the same period in 2020. |
| ● | Net interest income decreased $276,000 for the first six months of 2021 compared to the same period in 2020. |
| ● | Provision decreased $8.8 million to a net credit of $82,000 for the first six months of 2021 compared to a net charge of $8.7 million for the same period in 2020. |
| ● | Noninterest income increased $1.4 million, or 10%, for the first six months of 2021 compared to the same period in 2020. |
| ● | Total noninterest expense increased $930,000, or 1%, for the first six months of 2021 compared to same period in 2020. |
| ● | Total Traditional Bank loans decreased $117 million, or 3%, during the first six months of 2021, driven by a $141 million decrease in PPP loans. |
| ● | Total nonperforming loans to total loans for the Traditional Banking segment was 0.60% as of June 30, 2021 compared to 0.63% as of December 31, 2020. |
| ● | Delinquent loans to total loans for the Traditional Banking segment was 0.28% as of June 30, 2021 compared to 0.26% as of December 31, 2020. |
| ● | As of June 30, 2021, $25 million, or 1%, of Traditional Banking loans remained under a COVID-19 hardship accommodation. |
| ● | Total Traditional Bank deposits increased $238 million, or 6%, during the first six months of 2021. |
Warehouse Lending segment
| ● | Net income increased $2.5 million, or 40%, for the first six months of 2021 compared to the same period in 2020. |
| ● | Net interest income increased $2.7 million, or 26%, for the first six months of 2021 compared to the same period in 2020. |
| ● | The Warehouse Provision was a net credit of $307,000 for the first six months of 2021 compared to a net charge of $781,000 for the same period in 2020. |
| ● | Average committed Warehouse lines increased to $1.4 billion during the first six months of 2021 from $1.1 billion during the same period in 2020. |
| ● | Average line usage was 52% during the first six months of 2021 compared to 63% during the same period in 2020. |
88
Mortgage Banking segment
| ● | Within the Mortgage Banking segment, mortgage banking income decreased $1.8 million, or 14%, during the first six months of 2021 compared to the same period in 2020. |
| ● | Overall, Republic’s originations of secondary market loans totaled $355 million during the first six months of 2021 compared to $344 million during the same period in 2020, with the Company’s gain-as-a-percent-of-loans-sold decreasing from 3.93% to 3.10% from period to period. |
Tax Refund Solutions segment
Continuing Operations
| ● | Net loss from continuing operations was $562,000 for the first six months of 2021 compared to a net loss of $1.5 million for the same period in 2020. The higher loss during the first six months of 2020 primarily reflected general operating losses related to TRS’s prepaid card division, with such losses substantially occurring prior to May 1, 2020. On May 1, 2020, the RPS division added a large depository relationship that significantly improved profitability on a subsequent basis. |
Discontinued Operations
| ● | Net income from discontinued operations increased $2.7 million for the first six months of 2021 compared to the same period in 2020. |
| ● | Net interest income from discontinued operations decreased $5.9 million for the first six months of 2021 compared to the same period in 2020. |
| ● | Total EA originations were $250 million during the first six months of 2021 compared to $388 million for the first six months of 2020. |
| ● | Overall, TRS recorded a net charge to the Provision from discontinued operations of $10.1 million during the first six months of 2021 compared to a net charge to the Provision of $19.6 million for the same period in 2020. |
| ● | Noninterest income from discontinued operations decreased $71,000 for the first six months of 2021 compared to the same period in 2020. |
| ● | Net RT revenue decreased $94,000 for the first six months of 2021 compared to the same period in 2020. |
| ● | Noninterest expense from discontinued operations was $6.1 million for the first six months of 2021 compared to $6.5 million for the same period in 2020. |
Republic Credit Solutions segment
| ● | Net income decreased $2.5 million, or 24%, for the first six months of 2021 compared to the same period in 2020. |
| ● | Net interest income decreased $3.2 million, or 25%, for the first six months of 2021 compared to the same period in 2020. |
| ● | Overall, RCS recorded a net charge to the Provision of $1.2 million during the first six months of 2021 compared to a net charge of $263,000 for the same period in 2020. |
| ● | Noninterest income increased $1.3 million, or 47%, from the first six months of 2020 to the first six months of 2021. |
| ● | Noninterest expense was $2.0 million for the first six months of 2021 compared to $1.8 million for the same period in 2020. |
| ● | Total nonperforming loans to total loans for the RCS segment was 0.63% as of June 30, 2021 compared to 0.04% as of December 31, 2020. |
89
| ● | Delinquent loans to total loans for the RCS segment was 7.66% as of June 30, 2021 compared to 9.23% as of December 31, 2020. |
RESULTS OF OPERATIONS (Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 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.
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 first quarter of 2020 and 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 unlikely the FFTR will 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 from continuing operations decreased $1.3 million, or 1%, during the first six months of 2021 compared to the same period in 2020. Total Company net interest margin from continuing operations decreased to 3.42% during the first six months of 2021 compared to 3.75% for the same period in 2020. Net interest income from discontinued operations was $14.8 million during the first six months of 2021 compared to $20.7 million during the same period in 2020.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
Traditional Banking segment
The Traditional Banking’s net interest income decreased $276,000 for the first six months of 2021 compared to the same period in 2020. Traditional Banking’s net interest margin was 3.21% for the first six months of 2021, a decrease of 31 basis points from the same period in 2020.
Table 7 — Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
Due to the short-term nature of the PPP, management believes Traditional Bank net interest income excluding PPP lender fees is a more appropriate measure to analyze the Traditional Bank’s net interest income and net interest margin. The following table reconciles Traditional Bank net interest income and net interest margin to Traditional Bank net interest income and net interest margin excluding PPP lender fees, a non-GAAP measure. Net interest margin excluding PPP lender fees presented below also excludes average PPP loans of $357 million and $193 million for the six months ended June 30, 2021 and 2020.
90
The decrease in the Traditional Bank’s net interest income and net interest margin during the first six months of 2021 was primarily attributable to the following factors:
| ● | Excluding accreted PPP lender fees, net interest income decreased $8.1 million, or 10%, from the first six months of 2020, as the Traditional Bank’s net interest margin, excluding PPP loans and related fees, declined from 3.55% for the first six months of 2020 to 2.97% for the first six months of 2021. The decline in the net interest margin was substantially driven by a 22-basis point decline in the Traditional Bank’s yield on its average interest-earning assets from the first six months of 2020 to the first six months of 2021, as the majority of the Traditional Bank’s growth in interest-earning assets during the previous 12 months was in lower-yielding cash or cash equivalents instead of loans. |
| ● | Partially offsetting the Traditional Bank’s margin compression, the Traditional Bank recognized $9.4 million of fee income on its PPP portfolio during the first six months of 2021 compared to $1.6 million of similar fees during the same period in 2020. The $7.8 million increase in PPP fee income was driven significantly by the forgiveness, payoff, and paydown of $348 million of PPP loans during the first six months of 2021. As of June 30, 2021, net PPP loans of $251 million remained on the Core Bank’s balance sheet, including $53 million in loan balances originated during 2020, $207 million in loan balances originated during 2021, and $9 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. |
Warehouse Lending segment
Net interest income increased $2.7 million, or 26%, for the first six months of 2021 compared to the same period in 2020.
Average committed Warehouse lines increased to $1.4 billion during the first six months of 2021 from $1.2 billion during the same period in 2020, while overall usage rates on Warehouse lines of credit were 52% and 63%, respectively for the same periods. In addition, the Warehouse net interest margin increased to 3.45% for the first six months of 2021 compared to 2.86% for the first six months of 2020, as many of the Bank’s Warehouse client reached contractual interest rate floors on their lines-of-credit during the first six months of 2020 preventing further declines in the segment’s loan yields, while the segment’s cost of funds continued to decline.
Tax Refund Solutions segment
Discontinued Operations
TRS’s net interest income from discontinued operations decreased $5.9 million for the first six months of 2021 compared to the same period in 2020. TRS’s EA product earned $13.1 million in interest income during the first six months of 2021, a $6.4 million decrease from the first six months of 2020 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 six months of 2021.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
91
Republic Credit Solutions segment
RCS’s net interest income decreased $3.2 million, or 25%, from the first six months of 2020 to the first six months 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 $7.3 million during the first six months of 2021 compared to $10.7 million during the same period in 2020 and accounted for 75% and 79% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in balances for RCS’s LOC I product following a reduction of marketing for this product during the second and third quarters of 2020. While the marketing for this product was reinstated during the fourth quarter of 2020, management believes the ongoing impact of government stimulus payments continued to reduce demand for this product 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.
92
Table 8 — Total Company Average Balance Sheets and Interest Rates
| (1) | The table above excludes average assets, average liabilities, interest income, and interest expense for discontinued operations; however, loans to and borrowings from discontinued operations are included above based on the Company’s funds transfer pricing methodology. Net interest income would be $117.8 million and $124.9 million and net interest margin would be 3.97% and 4.55% for the six months ended June 30, 2021 and 2020 if continuing and discontinued operations were consolidated above. |
| (2) | For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets. |
| (3) | Interest income is composed entirely of loan fees. |
| (4) | Interest income includes loan fees of $1.7 million and $1.4 million for the six months ended June 30, 2021 and 2020. |
| (5) | Interest income includes loan fees of $9.4 million and $1.6 million for the six months ended June 30, 2021 and 2020. |
| (6) | Interest income includes loan fees of $1.9 million and $1.7 million for the six months ended June 30, 2021 and 2020. |
| (7) | Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all loan premiums, discounts, fees and costs. |
93
Table 9 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 9 — Total Company Volume/Rate Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2021 |
|
||||||
|
|
|
|
Compared to |
|
||||||
|
|
|
|
Six Months Ended June 30, 2020 |
|
||||||
|
|
|
Total Net |
|
Increase / (Decrease) Due to |
|
|||||
|
(in thousands) |
|
Change |
|
Volume |
|
Rate |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning deposits |
|
$ |
(308) |
|
$ |
595 |
|
$ |
(903) |
|
|
Investment securities, including FHLB stock |
|
|
(1,897) |
|
|
5 |
|
|
(1,902) |
|
|
Intercompany funds loaned to discontinued operations |
|
|
(935) |
|
|
40 |
|
|
(975) |
|
|
RCS LOC I product |
|
|
(3,359) |
|
|
(5,045) |
|
|
1,686 |
|
|
Other RPG loans |
|
|
(55) |
|
|
312 |
|
|
(367) |
|
|
Outstanding Warehouse lines of credit |
|
|
(145) |
|
|
647 |
|
|
(792) |
|
|
Paycheck Protection Program loans |
|
|
8,630 |
|
|
3,399 |
|
|
5,231 |
|
|
All other Core Bank loans |
|
|
(13,902) |
|
|
(4,716) |
|
|
(9,186) |
|
|
Net change in interest income |
|
|
(11,971) |
|
|
(4,763) |
|
|
(7,208) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts |
|
|
(666) |
|
|
191 |
|
|
(857) |
|
|
Money market accounts |
|
|
(1,294) |
|
|
17 |
|
|
(1,311) |
|
|
Time deposits |
|
|
(2,310) |
|
|
(979) |
|
|
(1,331) |
|
|
Reciprocal money market and time deposits |
|
|
(592) |
|
|
231 |
|
|
(823) |
|
|
Brokered deposits |
|
|
(1,671) |
|
|
(757) |
|
|
(914) |
|
|
Securities sold under agreements to repurchase and other short-term borrowings |
|
|
(119) |
|
|
(7) |
|
|
(112) |
|
|
Intercompany funds borrowed from discontinued operations |
|
|
(1,211) |
|
|
(334) |
|
|
(877) |
|
|
Federal Reserve PPP Liquidity Facility |
|
|
(105) |
|
|
(105) |
|
|
— |
|
|
Federal Home Loan Bank advances |
|
|
(2,429) |
|
|
(1,247) |
|
|
(1,182) |
|
|
Subordinated note |
|
|
(306) |
|
|
— |
|
|
(306) |
|
|
Net change in interest expense |
|
|
(10,703) |
|
|
(2,990) |
|
|
(7,713) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income |
|
$ |
(1,268) |
|
$ |
(1,773) |
|
$ |
505 |
|
* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.
94
Provision
Total Company Provision from continuing operations was a net charge of $828,000 for the first six months of 2021 compared to a net charge of $9.7 million for the same period in 2020. Total Company Provision from discontinued operations was a net charge of $10.1 million for the first six months of 2021 compared to a net charge of $19.6 million for the same period in 2020.
The following were the most significant components comprising the Company’s Provision by reportable segment:
Traditional Banking segment
The Traditional Banking Provision during the first six months of 2021 was a net credit of $82,000 compared to an $8.7 million net charge for the first six months of 2020. An analysis of the Provision for the first six months of 2021 compared to the same period in 2020 follows:
| ● | For the first six months of 2021, there was a minimal net credit to the Traditional Bank Provision, generally based on an improving economic outlook in conjunction with limited charge-offs incurred by the Traditional Bank since making significant life-of-loan reserves during 2020 following the onset of the pandemic. The net credit recorded during the first six months of 2021 primarily included ACLL releases for the residential real estate, CRE, and HELOC portfolios offset by additional reserves for certain Special Mention loans with continued signs of pandemic-related hardship through June 30, 2021. |
| ● | During the first six months of 2020, the Traditional Bank recorded $10.9 million of additional Provision due to the expected economic impact of the COVID-19 pandemic. Offsetting the increase in Provision due to the impact of the COVID-19 pandemic during the first six months of 2020 was a reduction in Provision of $2.0 million consistent with a $170 million decrease in Traditional Bank loan spot balances from December 31, 2019 to June 30, 2020. |
As a percentage of total loans, the Traditional Banking ACLL was 1.37% as of June 30, 2021 compared to 1.34% as of December 31, 2020 and 1.10% as of June 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of June 30, 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 Lending segment
Warehouse recorded a net credit to the Provision of $307,000 for the first six months of 2021 compared to a net charge of $781,000 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 $123 million during the first six months of 2021 compared to an increase of $312 million during the first six months of 2020.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of June 30, 2021, December 31, 2020, and June 30, 2020. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of June 30, 2021.
Tax Refund Solutions segment
Discontinued Operations
TRS recorded a net charge to the Provision from discontinued operations of $10.1 million during the first six months of 2021 compared to a net charge of $19.6 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 $10.2 million, or 4.1% of its $250 million in EAs originated during the first six months of 2021, compared to a Provision of $19.5 million, or 5.0% of its $388 million in EAs originated during the first six months of 2020. The lower Provision during the first six months of 2021 resulted from repayment rates on EA loans from the U.S. Treasury that exceeded those during the first six months of 2020. Management believes the slower repayment rates from the U.S. Treasury during the first six months of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax-return processing by the IRS for certain types of tax returns that required further taxpayer communication and verification.
95
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.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Republic Credit Solutions segment
As illustrated in Table 10 below, RCS recorded a net charge to the Provision of $1.2 million during the first six months of 2021 compared to a net charge to the Provision of $263,000 for the same period in 2020. The increase in the Provision was driven by an increase in outstanding balances for RCS’s lines of credit during the first six months of 2021 compared to a decrease in similar balances during the same period in 2020. The Company reduced marketing for its LOC I product during the second and third quarters of 2020, then began incrementally increasing such marketing during the fourth quarter of 2020. The Company began offering its LOC II product during the first 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 7.68% as of June 30, 2021, 7.94% as of December 31, 2020, and 9.21% as of June 30, 2020. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of June 30, 2021.
The following table presents net charges to the RCS Provision by product:
Table 10 — RCS Provision by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended Jun. 30, |
|
|
|
|
|
|
||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
$ Change |
|
% Change |
|||
|
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
1,207 |
|
$ |
253 |
|
$ |
954 |
|
377 |
% |
|
Hospital receivables |
|
|
10 |
|
|
10 |
|
|
— |
|
— |
|
|
Total |
|
$ |
1,217 |
|
$ |
263 |
|
$ |
954 |
|
363 |
% |
96
Table 11 — Summary of Loan and Lease Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
||||
|
|
|
June 30, |
|
||||
|
(dollars in thousands) |
|
2021 |
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
ACLL at beginning of period |
|
$ |
61,067 |
|
$ |
43,351 |
|
|
|
|
|
|
|
|
|
|
|
Adoption of ASC 326 |
|
|
— |
|
|
6,734 |
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
Residential real estate |
|
|
— |
|
|
(27) |
|
|
Commercial real estate |
|
|
(428) |
|
|
(270) |
|
|
Commercial & industrial |
|
|
— |
|
|
(192) |
|
|
Consumer |
|
|
(370) |
|
|
(733) |
|
|
Total Traditional Banking |
|
|
(798) |
|
|
(1,222) |
|
|
Warehouse lines of credit |
|
|
— |
|
|
— |
|
|
Total Core Banking |
|
|
(798) |
|
|
(1,222) |
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
Easy Advances |
|
|
(10,256) |
|
|
(19,575) |
|
|
Commercial & industrial |
|
|
(51) |
|
|
(72) |
|
|
Republic Credit Solutions |
|
|
(1,362) |
|
|
(4,717) |
|
|
Total Republic Processing Group |
|
|
(11,669) |
|
|
(24,364) |
|
|
Total charge-offs |
|
|
(12,467) |
|
|
(25,586) |
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
Residential real estate |
|
|
46 |
|
|
86 |
|
|
Commercial real estate |
|
|
80 |
|
|
473 |
|
|
Commercial & industrial |
|
|
11 |
|
|
44 |
|
|
Home equity |
|
|
41 |
|
|
87 |
|
|
Consumer |
|
|
243 |
|
|
323 |
|
|
Total Traditional Banking |
|
|
421 |
|
|
1,013 |
|
|
Warehouse lines of credit |
|
|
— |
|
|
— |
|
|
Total Core Banking |
|
|
421 |
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
Easy Advances |
|
|
30 |
|
|
42 |
|
|
Commercial & industrial |
|
|
8 |
|
|
1 |
|
|
Republic Credit Solutions |
|
|
171 |
|
|
470 |
|
|
Total Republic Processing Group |
|
|
209 |
|
|
513 |
|
|
Total recoveries |
|
|
630 |
|
|
1,526 |
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
|
(11,837) |
|
|
(24,060) |
|
|
|
|
|
|
|
|
|
|
|
Provision from continuing operations- Core Banking |
|
|
(267) |
|
|
9,228 |
|
|
Provision from continuing operations - RPG |
|
|
1,217 |
|
|
263 |
|
|
Provision from discontinued operations - RPG |
|
|
10,111 |
|
|
19,581 |
|
|
Total Provision |
|
|
11,061 |
|
|
29,072 |
|
|
ACLL at end of period |
|
$ |
60,291 |
|
$ |
55,097 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Total Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACLL to total loans |
|
|
1.32 |
% |
|
1.09 |
% |
|
ACLL to nonperforming loans |
|
|
270 |
|
|
270 |
|
|
Net loan charge-offs to average loans |
|
|
0.51 |
|
|
1.03 |
|
|
Net loan charge-offs from continuing operations to average loans |
|
|
0.07 |
|
|
0.20 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Core Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACLL to total loans |
|
|
1.16 |
% |
|
0.92 |
% |
|
ACLL to nonperforming loans |
|
|
238 |
|
|
230 |
|
|
Net loan charge-offs to average loans |
|
|
0.02 |
|
|
0.01 |
|
97
Noninterest Income
Total Company noninterest income from continuing operations increased $1.6 million, or 5%, during the first six months of 2021 compared to the same period in 2020. Total Company noninterest income from discontinued operations decreased $71,000 during the first six months 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 segment
Traditional Banking’s noninterest income increased $1.4 million, or 10%, for the first six months of 2021 compared to the same period in 2020. Interchange Fee Income increased $1.1 million from the first six months of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased $350,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the first six months of 2020, as a pandemic-driven rise in the consumer savings rate drove a reduction in the Bank’s overdraft-related fees. Both Interchange Fee Income and Service Charges on Deposits began to rise towards normal levels during the first quarter of 2021 following the removal of pandemic-related restrictions.
The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the six months ended June 30, 2021 and 2020 were $2.5 million and $2.7 million. The total daily overdraft charges, net of refunds, included in interest income for the six months ended June 30, 2021 and 2020 were $506,000 and $417,000. The Bank suspended its daily overdraft charges during the first six months 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.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased $1.8 million, or 14%, during the first six months of 2021 compared to the same period in 2020. For the first six months of 2021, the Core Bank originated $355 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 3.10%, with comparable originations of $344 million and comparable gains of 3.93% during the first six months 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 six months of 2021, with these favorable conditions beginning to normalize during February 2021. 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%.
98
Republic Credit Solutions segment
RCS’s noninterest income increased $1.3 million, or 47%, during the first six months of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS’s noninterest income. Pandemic-driven restrictions negatively impacted RCS program fees during the first six months of 2020, with those program fees beginning to normalize during 2021 following the removal of restrictions.
The following table presents RCS program fees by product:
Table 12 — RCS Program Fees by Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended Jun. 30, |
|
|
|
|
|
|
|
||||
|
(in thousands) |
|
2021 |
|
2020 |
|
$ Change |
|
% Change |
|
||||
|
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
2,122 |
|
$ |
1,448 |
|
$ |
674 |
|
47 |
% |
|
|
Hospital receivables |
|
|
111 |
|
|
8 |
|
|
103 |
|
1,288 |
|
|
|
Installment loans* |
|
|
1,930 |
|
|
1,376 |
|
|
554 |
|
NM |
|
|
|
Total |
|
$ |
4,163 |
|
$ |
2,832 |
|
$ |
1,331 |
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees. |
Noninterest Expense
Total Company noninterest expense from continuing operations increased $2.1 million, or 2%, during the first six months of 2021 compared to the same period in 2020. Total Company noninterest expense from discontinued operations decreased $416,000 during the first six months 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 segment
Traditional Banking noninterest expense increased $930,000 for the first six months of 2021 compared to the same period in 2020. The following primarily drove the change in noninterest expense:
| ● | Salaries and benefits expense increased approximately $1.8 million, or 4%, primarily driven by annual merit increases and increases in contract labor, equity compensation, payroll taxes, and health benefits from period to period. |
| ● | Technology, Equipment, and Communication expense increased $736,000, as the Traditional Bank strategically added 30 Interactive Teller Machines over the previous 12 months, bringing its ITM fleet to over 70 ITMs as of June 30, 2021. |
| ● | Occupancy expense increased $436,000, or 7%, driven primarily by increases in snow removal and pandemic-driven janitorial and cleaning costs from period to period. |
| ● | Partially offsetting the increases above, Bank Franchise Tax expense decreased $906,000. As previously reported, Kentucky enacted HB354 in March 2019 and as a result, the Bank transitioned from a capital-based bank franchise tax to the Kentucky corporate income tax on January 1, 2021. |
| ● | Legal and professional fees decreased $472,000 driven by estimated pandemic-related costs during 2020, including consumer compliance consultations. |
| ● | Supplies, meals, entertainment, mileage, and travel costs decreased $540,000, in total, resulting from continuing pandemic-driven restrictions on these activities. |
Mortgage Banking segment
Noninterest expense at the Mortgage Banking segment increased $1.4 million, or 31%, during the first six months of 2021 compared to the same period in 2020, primarily due to higher mortgage commissions recorded during 2021.
99
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 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 $747 million in cash and cash equivalents as of June 30, 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 a weighted-average 0.11% for the first six months of 2021. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.
Table 13 — Loan Portfolio Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
June 30, 2021 |
|
December 31, 2020 |
|
$ Change |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
|
$ |
852,947 |
|
$ |
879,800 |
|
$ |
(26,853) |
|
(3) |
% |
|
Nonowner occupied |
|
|
|
289,290 |
|
|
264,780 |
|
|
24,510 |
|
9 |
|
|
Commercial real estate |
|
|
|
1,389,003 |
|
|
1,349,085 |
|
|
39,918 |
|
3 |
|
|
Construction & land development |
|
|
|
95,180 |
|
|
98,674 |
|
|
(3,494) |
|
(4) |
|
|
Commercial & industrial |
|
|
|
330,302 |
|
|
325,596 |
|
|
4,706 |
|
1 |
|
|
Paycheck Protection Program |
|
|
|
250,933 |
|
|
392,319 |
|
|
(141,386) |
|
(36) |
|
|
Lease financing receivables |
|
|
|
9,249 |
|
|
10,130 |
|
|
(881) |
|
(9) |
|
|
Aircraft |
|
|
|
121,112 |
|
|
101,375 |
|
|
19,737 |
|
19 |
|
|
Home equity |
|
|
|
217,621 |
|
|
240,640 |
|
|
(23,019) |
|
(10) |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
|
14,754 |
|
|
14,196 |
|
|
558 |
|
4 |
|
|
Overdrafts |
|
|
|
717 |
|
|
587 |
|
|
130 |
|
22 |
|
|
Automobile loans |
|
|
|
21,190 |
|
|
30,300 |
|
|
(9,110) |
|
(30) |
|
|
Other consumer |
|
|
|
6,796 |
|
|
8,167 |
|
|
(1,371) |
|
(17) |
|
|
Total Traditional Banking |
|
|
|
3,599,094 |
|
|
3,715,649 |
|
|
(116,555) |
|
(3) |
|
|
Warehouse lines of credit* |
|
|
|
840,155 |
|
|
962,796 |
|
|
(122,641) |
|
(13) |
|
|
Total Core Banking |
|
|
|
4,439,249 |
|
|
4,678,445 |
|
|
(239,196) |
|
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group*: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
|
— |
|
|
— |
|
|
— |
|
NA |
|
|
Other TRS loans |
|
|
|
— |
|
|
— |
|
|
— |
|
NA |
|
|
Republic Credit Solutions |
|
|
|
114,949 |
|
|
110,893 |
|
|
4,056 |
|
4 |
|
|
Total Republic Processing Group |
|
|
|
114,949 |
|
|
110,893 |
|
|
4,056 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans** |
|
|
|
4,554,198 |
|
|
4,789,338 |
|
|
(235,140) |
|
(5) |
|
|
Allowance for credit losses |
|
|
|
(60,291) |
|
|
(61,067) |
|
|
776 |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
|
$ |
4,493,907 |
|
$ |
4,728,271 |
|
$ |
(234,364) |
|
(5) |
% |
*Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans decreased by $235 million, or 5%, during the first six months of 2021 to $4.6 billion as of June 30, 2021. The most significant components comprising the change in loans by reportable segment follow:
100
Traditional Banking segment
Period-end balances for Traditional Banking loans decreased $117 million, or 3%, from December 31, 2020 to June 30, 2021. The following primarily drove the change in loan balances during the first six months of 2021:
| ● | During the first six months of 2021, the Core Bank’s PPP portfolio decreased $141 million, primarily reflecting the forgiveness and payoff of $348 million of 2020 PPP originations and the origination of $208 million of PPP loans during the first six months 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 June 30, 2021, net PPP loans of $251 million remained on the Core Bank’s balance sheet, including $53 million in loan balances originated during 2020, $207 million in loan balances originated during the first six months of 2021, and $9 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.
| ● | The owner-occupied residential real estate and home equity categories decreased $27 million and $23 million. These decreases largely reflect a sharp drop in long-term market interest rates during the previous 12 months that drove an increase in refinance volume for residential mortgages, with much of the refinance activity going into fixed-rate products sold on the secondary market. |
| ● | Offsetting the decreases above, the CRE category increased $40 million and the Aircraft category increased $20 million, as lending activity began normalizing following the removal of pandemic-driven restrictions during the first six months of 2021. |
Warehouse Lending segment
Outstanding Warehouse period end balances decreased $123 million from December 31, 2020 to June 30, 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.
Allowance for Credit Losses
As of June 30, 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 decreased $1 million from $61 million as of December 31, 2020 to $60 million as of June 30, 2021. As a percent of total loans, the total Company’s ACLL increased to 1.32% as of June 30, 2021 compared to 1.27% as of December 31, 2020. An analysis of the ACL by reportable segment follows:
101
Traditional Banking segment
| ● | The Traditional Banking ACLL decreased approximately $337,000 to $49 million as of June 30, 2021 driven primarily by net charge-offs during the first six months of 2021. |
| ● | The Traditional Bank decreased its ACLS $122,000 during the first six months of 2021 to $56,000 based on improved PD and LGD expectations on its corporate bond portfolios. |
| ● | The Traditional Bank decreased its ACLC $55,000 during the first six months of 2021 to $934,000 based on improving economic outlook. |
Warehouse Lending segment
The Warehouse ACLL decreased to approximately $2.1 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing June 30, 2021 to December 31, 2020. As of June 30, 2021, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first six months of 2021.
Republic Credit Solutions segment
The RCS ACLL remained at $9 million from December 31, 2020 to June 30, 2021.
RCS maintained an ACLL for two distinct credit products offered as of June 30, 2021, including its line-of-credit products and its healthcare-receivables products. As of June 30, 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.
102
Asset Quality
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 June 30, 2021, $25 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 PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans increased approximately $20 million during the first six months of 2021, driven primarily by commercial-purpose loans within the hospitality and leisure industry downgraded to Special Mention during the first six months 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 14 — Classified and Special Mention Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
$ Change |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
— |
|
|
Doubtful |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
Substandard |
|
|
26,426 |
|
|
30,193 |
|
|
(3,767) |
|
(12) |
% |
|
PCD - Substandard |
|
|
1,788 |
|
|
1,887 |
|
|
(99) |
|
(5) |
|
|
Total Classified Loans |
|
|
28,214 |
|
|
32,080 |
|
|
(3,866) |
|
(12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Mention |
|
|
113,137 |
|
|
89,206 |
|
|
23,931 |
|
27 |
|
|
PCD - Special Mention |
|
|
853 |
|
|
895 |
|
|
(42) |
|
(5) |
|
|
Total Special Mention Loans |
|
|
113,990 |
|
|
90,101 |
|
|
23,889 |
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Classified and Special Mention Loans |
|
$ |
142,204 |
|
$ |
122,181 |
|
$ |
20,023 |
|
16 |
|
103
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 June 30, 2021 and December 31, 2020.
Nonperforming loans to total loans remained at 0.49% from December 31, 2020 to June 30, 2021. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company’s nonperforming loans is currently uncertain.
Table 15 — Nonperforming Loans and Nonperforming Assets Summary
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Loans on nonaccrual status* |
|
$ |
21,621 |
|
$ |
23,548 |
|
|
Loans past due 90-days-or-more and still on accrual** |
|
|
723 |
|
|
47 |
|
|
Total nonperforming loans |
|
|
22,344 |
|
|
23,595 |
|
|
Other real estate owned |
|
|
1,898 |
|
|
2,499 |
|
|
Total nonperforming assets |
|
$ |
24,242 |
|
$ |
26,094 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Total Company: |
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
0.49 |
% |
|
0.49 |
% |
|
Nonperforming assets to total loans (including OREO) |
|
|
0.53 |
|
|
0.54 |
|
|
Nonperforming assets to total assets |
|
|
0.39 |
|
|
0.42 |
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Ratios - Core Bank: |
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
0.49 |
% |
|
0.50 |
% |
|
Nonperforming assets to total loans (including OREO) |
|
|
0.53 |
|
|
0.56 |
|
|
Nonperforming assets to total assets |
|
|
0.42 |
|
|
0.45 |
|
|
* |
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. |
|
** |
Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans. |
104
Table 16 — Nonperforming Loan Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
December 31, 2020 |
|
||||||||||
|
|
|
|
|
|
|
Percent of |
|
|
|
|
Percent of |
|
||
|
|
|
|
|
|
|
Total |
|
|
|
|
Total |
|
||
|
(in thousands) |
|
Balance |
|
Loan Class |
Balance |
|
Loan Class |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
|
$ |
13,181 |
|
1.55 |
% |
|
$ |
14,328 |
|
1.63 |
% |
|
|
Nonowner occupied |
|
|
|
102 |
|
0.04 |
|
|
|
81 |
|
0.03 |
|
|
|
Commercial real estate |
|
|
|
6,548 |
|
0.47 |
|
|
|
6,762 |
|
0.50 |
|
|
|
Construction & land development |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Commercial & industrial |
|
|
|
50 |
|
0.02 |
|
|
|
55 |
|
0.02 |
|
|
|
Paycheck Protection Program |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Lease financing receivables |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Aircraft |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Home equity |
|
|
|
1,626 |
|
0.75 |
|
|
|
2,141 |
|
0.89 |
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
|
— |
|
— |
|
|
|
5 |
|
0.04 |
|
|
|
Overdrafts |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Automobile loans |
|
|
|
108 |
|
0.51 |
|
|
|
170 |
|
0.56 |
|
|
|
Other consumer |
|
|
|
6 |
|
0.09 |
|
|
|
11 |
|
0.13 |
|
|
|
Total Traditional Banking |
|
|
|
21,621 |
|
0.60 |
|
|
|
23,553 |
|
0.63 |
|
|
|
Warehouse lines of credit |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Total Core Banking |
|
|
|
21,621 |
|
0.49 |
|
|
|
23,553 |
|
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Other TRS loans |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Republic Credit Solutions |
|
|
|
723 |
|
0.63 |
|
|
|
42 |
|
0.04 |
|
|
|
Total Republic Processing Group |
|
|
|
723 |
|
0.63 |
|
|
|
42 |
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
$ |
22,344 |
|
0.49 |
% |
|
$ |
23,595 |
|
0.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
Table 17 — Stratification of Nonperforming Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Nonperforming Loans and Recorded Investment |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
|
|
|
Balance |
|
|
|
|
> $100 & |
|
|
|
|
Balance |
|
|
|
|
Total |
|
||||
|
(dollars in thousands) |
|
No. |
|
<= $100 |
|
|
No. |
|
<= $500 |
|
|
No. |
|
> $500 |
|
|
No. |
|
Balance |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
144 |
|
$ |
4,738 |
|
|
28 |
|
$ |
4,889 |
|
|
4 |
|
$ |
3,554 |
|
|
176 |
|
$ |
13,181 |
|
|
Nonowner occupied |
|
3 |
|
|
102 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3 |
|
|
102 |
|
|
Commercial real estate |
|
— |
|
|
— |
|
|
4 |
|
|
809 |
|
|
3 |
|
|
5,739 |
|
|
7 |
|
|
6,548 |
|
|
Construction & land development |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Commercial & industrial |
|
1 |
|
|
50 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
50 |
|
|
Paycheck Protection Program |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Lease financing receivables |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Aircraft |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Home equity |
|
27 |
|
|
693 |
|
|
4 |
|
|
933 |
|
|
— |
|
|
— |
|
|
31 |
|
|
1,626 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
NM |
|
|
— |
|
|
Overdrafts |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Automobile loans |
|
12 |
|
|
108 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
12 |
|
|
108 |
|
|
Other consumer |
|
7 |
|
|
6 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
7 |
|
|
6 |
|
|
Total Traditional Banking |
|
194 |
|
|
5,697 |
|
|
36 |
|
|
6,631 |
|
|
7 |
|
|
9,293 |
|
|
237 |
|
|
21,621 |
|
|
Warehouse lines of credit |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Total Core Banking |
|
194 |
|
|
5,697 |
|
|
36 |
|
|
6,631 |
|
|
7 |
|
|
9,293 |
|
|
237 |
|
|
21,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Other TRS loans |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Republic Credit Solutions |
|
NM |
|
|
723 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
NM |
|
|
723 |
|
|
Total Republic Processing Group |
|
NM |
|
|
723 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
NM |
|
|
723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
194 |
|
$ |
6,420 |
|
|
36 |
|
$ |
6,631 |
|
|
7 |
|
$ |
9,293 |
|
|
237 |
|
$ |
22,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
Table 18 — Rollforward of Nonperforming Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
(in thousands) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans at the beginning of the period |
|
$ |
22,520 |
|
$ |
20,853 |
|
$ |
23,595 |
|
$ |
23,489 |
|
|
Loans added to nonperforming status during the period that remained nonperforming at the end of the period |
|
|
1,042 |
|
|
3,069 |
|
|
1,772 |
|
|
4,658 |
|
|
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below) |
|
|
(934) |
|
|
(2,981) |
|
|
(2,838) |
|
|
(7,898) |
|
|
Principal balance paydowns of loans nonperforming at both period ends |
|
|
(490) |
|
|
(561) |
|
|
(860) |
|
|
(208) |
|
|
Net change in principal balance of other loans nonperforming at both period ends* |
|
|
206 |
|
|
39 |
|
|
675 |
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans at the end of the period |
|
$ |
22,344 |
|
$ |
20,419 |
|
$ |
22,344 |
|
$ |
20,419 |
|
|
* |
Includes relatively small consumer portfolios, e.g., RCS loans. |
Table 19 — Detail of Loans Removed from Nonperforming Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
(in thousands) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
$ |
— |
|
$ |
(273) |
|
$ |
— |
|
$ |
(2) |
|
|
Loans transferred to OREO |
|
|
— |
|
|
(2,109) |
|
|
— |
|
|
(2,109) |
|
|
Loans refinanced at other institutions |
|
|
(752) |
|
|
(490) |
|
|
(2,650) |
|
|
(2,445) |
|
|
Loans returned to accrual status |
|
|
(182) |
|
|
(109) |
|
|
(188) |
|
|
(3,342) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period |
|
$ |
(934) |
|
$ |
(2,981) |
|
$ |
(2,838) |
|
$ |
(7,898) |
|
Based on the Bank’s review as of June 30, 2021, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.
Delinquent Loans
Total Company delinquent loans to total loans remained at 0.41% from December 31, 2020 to June 30, 2021. Core Bank delinquent loans to total Core Bank loans increased to 0.22% as of June 30, 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 June 30, 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.
107
Table 20 — Delinquent Loan Composition*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
December 31, 2020 |
|
||||||||||
|
|
|
|
|
|
|
Percent of |
|
|
|
|
Percent of |
|
||
|
|
|
|
|
|
|
Total |
|
|
|
|
Total |
|
||
|
(in thousands) |
|
Balance |
|
Loan Class |
Balance |
|
Loan Class |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
|
$ |
2,608 |
|
0.31 |
% |
|
$ |
3,260 |
|
0.37 |
% |
|
|
Nonowner occupied |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Commercial real estate |
|
|
|
6,816 |
|
0.49 |
|
|
|
5,457 |
|
0.40 |
|
|
|
Construction & land development |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Commercial & industrial |
|
|
|
12 |
|
0.00 |
|
|
|
12 |
|
0.00 |
|
|
|
Paycheck Protection Program |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Lease financing receivables |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Aircraft |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Home equity |
|
|
|
249 |
|
0.11 |
|
|
|
702 |
|
0.29 |
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
|
64 |
|
0.43 |
|
|
|
73 |
|
0.51 |
|
|
|
Overdrafts |
|
|
|
145 |
|
20.22 |
|
|
|
147 |
|
25.04 |
|
|
|
Automobile loans |
|
|
|
11 |
|
0.05 |
|
|
|
56 |
|
0.18 |
|
|
|
Other consumer |
|
|
|
4 |
|
0.06 |
|
|
|
6 |
|
0.07 |
|
|
|
Total Traditional Banking |
|
|
|
9,909 |
|
0.28 |
|
|
|
9,713 |
|
0.26 |
|
|
|
Warehouse lines of credit |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Total Core Banking |
|
|
|
9,909 |
|
0.22 |
|
|
|
9,713 |
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Refund Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easy Advances |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Other TRS loans |
|
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
Republic Credit Solutions |
|
|
|
8,809 |
|
7.66 |
|
|
|
10,234 |
|
9.23 |
|
|
|
Total Republic Processing Group |
|
|
|
8,809 |
|
7.66 |
|
|
|
10,234 |
|
9.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquent loans |
|
|
$ |
18,718 |
|
0.41 |
% |
|
$ |
19,947 |
|
0.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* 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.
108
Table 21 — Rollforward of Delinquent Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
(in thousands) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans at the beginning of the period |
|
$ |
14,986 |
|
$ |
42,627 |
|
$ |
19,947 |
|
$ |
20,804 |
|
|
Loans added to delinquency status during the period and remained in delinquency status at the end of the period |
|
|
2,717 |
|
|
2,823 |
|
|
3,276 |
|
|
3,080 |
|
|
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below) |
|
|
(1,425) |
|
|
(29,901) |
|
|
(3,016) |
|
|
(7,513) |
|
|
Principal balance paydowns of loans delinquent at both period ends |
|
|
(31) |
|
|
(1,394) |
|
|
(54) |
|
|
(2,189) |
|
|
Net change in principal balance of other loans delinquent at both period ends* |
|
|
2,471 |
|
|
(109) |
|
|
(1,435) |
|
|
(136) |
|
|
Delinquent loans at the end of period |
|
$ |
18,718 |
|
$ |
14,046 |
|
$ |
18,718 |
|
$ |
14,046 |
|
|
* |
Includes relatively-small consumer portfolios, e.g., RCS loans. |
Table 22 — Detail of Loans Removed from Delinquent Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
(in thousands) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
$ |
(2) |
|
$ |
(2) |
|
$ |
(1) |
|
$ |
(2) |
|
|
Easy Advances paid-off or charged-off |
|
|
— |
|
|
(23,467) |
|
|
— |
|
|
— |
|
|
Loans transferred to OREO |
|
|
— |
|
|
(2,109) |
|
|
— |
|
|
(2,109) |
|
|
Loans refinanced at other institutions |
|
|
(667) |
|
|
(1,270) |
|
|
(1,796) |
|
|
(3,012) |
|
|
Loans paid current |
|
|
(756) |
|
|
(3,053) |
|
|
(1,219) |
|
|
(2,390) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period |
|
$ |
(1,425) |
|
$ |
(29,901) |
|
$ |
(3,016) |
|
$ |
(7,513) |
|
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 23 — Collateral-Dependent Loans and Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
$ Change |
|
% Change |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashflow-dependent TDRs |
|
$ |
8,807 |
|
$ |
10,938 |
|
$ |
(2,131) |
|
(19) |
% |
|
|
Collateral-dependent TDRs |
|
|
9,506 |
|
|
9,840 |
|
|
(334) |
|
(3) |
|
|
|
Total TDRs |
|
|
18,313 |
|
|
20,778 |
|
|
(2,465) |
|
(12) |
|
|
|
Collateral dependent loans (which are not TDRs) |
|
|
15,468 |
|
|
20,806 |
|
|
(5,338) |
|
(26) |
|
|
|
Total recorded investment in TDRs and collateral-dependent loans |
|
$ |
33,781 |
|
$ |
41,584 |
|
$ |
(7,803) |
|
(19) |
% |
|
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.
109
Deposits
Table 24 — Deposit Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2021 |
|
December 31, 2020 |
|
$ Change |
|
% Change |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
$ |
1,231,449 |
|
$ |
1,217,263 |
|
$ |
14,186 |
|
1 |
% |
|
|
|
Money market accounts |
|
|
810,307 |
|
|
712,824 |
|
|
97,483 |
|
14 |
|
|
|
|
Savings |
|
|
281,164 |
|
|
236,335 |
|
|
44,829 |
|
19 |
|
|
|
|
Individual retirement accounts (1) |
|
|
46,694 |
|
|
47,889 |
|
|
(1,195) |
|
(2) |
|
|
|
|
Time deposits, $250 and over (1) |
|
|
78,702 |
|
|
83,448 |
|
|
(4,746) |
|
(6) |
|
|
|
|
Other certificates of deposit (1) |
|
|
171,995 |
|
|
199,214 |
|
|
(27,219) |
|
(14) |
|
|
|
|
Reciprocal money market and time deposits (1) |
|
|
301,384 |
|
|
314,109 |
|
|
(12,725) |
|
(4) |
|
|
|
|
Brokered deposits (1) |
|
|
30,000 |
|
|
25,010 |
|
|
4,990 |
|
20 |
|
|
|
|
Total Core Bank interest-bearing deposits |
|
|
2,951,695 |
|
|
2,836,092 |
|
|
115,603 |
|
4 |
|
|
|
|
Total Core Bank noninterest-bearing deposits |
|
|
1,622,279 |
|
|
1,503,662 |
|
|
118,617 |
|
8 |
|
|
|
|
Total Core Bank deposits |
|
|
4,573,974 |
|
|
4,339,754 |
|
|
234,220 |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Processing Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
|
|
3,450 |
|
|
6,673 |
|
|
(3,223) |
|
(48) |
|
|
|
|
Total RPG interest-bearing deposits |
|
|
3,450 |
|
|
6,673 |
|
|
(3,223) |
|
(48) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokered prepaid card deposits |
|
|
334,967 |
|
|
257,856 |
|
|
77,111 |
|
30 |
|
|
|
|
Other noninterest-bearing deposits |
|
|
58,203 |
|
|
110,021 |
|
|
(51,818) |
|
(47) |
|
|
|
|
Total RPG noninterest-bearing deposits |
|
|
393,170 |
|
|
367,877 |
|
|
25,293 |
|
7 |
|
|
|
|
Total RPG deposits |
|
|
396,620 |
|
|
374,550 |
|
|
22,070 |
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits of discontinued operations (2) |
|
|
46,984 |
|
|
18,877 |
|
|
28,107 |
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
5,017,578 |
|
$ |
4,733,181 |
|
$ |
284,397 |
|
6 |
% |
|
|
| (1) | Includes time deposit |
| (2) | See additional detail regarding the Bank’s agreement to sell TRS under Footnote 17 “Discontinued Operations” in this section of the filing. |
Total Company deposits increased $284 million, or 6%, from December 31, 2020 to $5.0 billion as of June 30, 2021.
Total Core Bank deposits increased $234 million, or 5%, with the following primarily driving growth:
| ● | Management believes its deposit balances continue to be the beneficiary of Federal government stimulus brought about by the COVID-19 pandemic. During the first six months of 2021, the Federal government issued two rounds of economic stimulus payments. At this time, management is uncertain how long these stimulus funds may remain at the Bank. |
| ● | The Core Bank originated $208 million of PPP loans during the first six months of 2021, with PPP borrowers generally retaining their loan proceeds within a deposit account at the Bank. |
| ● | Management believes that much of the growth in noninterest-bearing and interest-bearing deposits at the Core Bank has been, and continues to be, a flight to safety brought about by the COVID-19 pandemic. At this time, management is unable to predict how long these funds might remain at the Bank due to the uncertain economic environment for many of the depositors, including the depositors’ short-term and long-term cash needs. |
Total RPG deposits from continuing operations increased $22 million, or 6%, for the first six months of 2021, with the following primarily driving growth:
| ● | RPG noninterest-bearing deposits growth was primarily driven by the following: |
| ● | RPG prepaid card balances within its RPS division increased $77 million, driven by government stimulus funds applied to prepaid card deposit balances. At this time, management is uncertain how long these stimulus funds may remain at the Bank. |
110
| ● | RPG other noninterest-bearing deposits decreased $52 million, driven by an outflow of funds associated with the RCS segment’s line-of-credit products. |
Federal Home Loan Bank Advances
FHLB advances declined by $210 million from December 31, 2020 to June 30, 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 0.15% as of June 30, 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 June 30, 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 98% as of June 30, 2021 and 108% as of December 31, 2020. As of June 30, 2021 and December 31, 2020, the Company had cash and cash equivalents on-hand of $747 million and $486 million. The Bank also had available borrowing capacity of $909 million and $683 million from the FHLB as of June 30, 2021 and December 31, 2020. In addition, the Bank’s liquidity resources included unencumbered debt securities of $280 million and $274 million as of June 30, 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 June 30, 2021 and December 31, 2020, these pledged investment securities had a fair value of $291 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 June 30, 2021, the Bank had approximately $1.5 billion in deposits from 242 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $637 million, or 13%, of the Company’s total deposit balances as of June 30, 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.
111
Capital
Total stockholders’ equity increased from $823 million as of December 31, 2020 to $845 million as of June 30, 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 June 30, 2021, RB&T could, without prior approval, declare dividends of approximately $163 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 13.25% as of June 30, 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. In July 2021, the Company’s board approved the redemption of the RBCT TPS and the repayment of the subordinated note for the end of the third quarter of 2021.
112
Table 25 — Capital Ratios (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021 |
|
As of December 31, 2020 |
|
|
||||||
|
(dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Bancorp, Inc. |
|
$ |
920,201 |
|
18.93 |
% |
$ |
896,053 |
|
18.52 |
% |
|
|
Republic Bank & Trust Company |
|
|
833,178 |
|
17.15 |
|
|
796,114 |
|
16.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital to risk-weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Bancorp, Inc. |
|
$ |
868,526 |
|
17.04 |
% |
$ |
803,682 |
|
16.61 |
% |
|
|
Republic Bank & Trust Company |
|
|
781,503 |
|
16.09 |
|
|
743,743 |
|
15.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 (core) capital to risk-weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Bancorp, Inc. |
|
$ |
828,526 |
|
17.86 |
% |
$ |
843,682 |
|
17.43 |
% |
|
|
Republic Bank & Trust Company |
|
|
781,503 |
|
16.09 |
|
|
743,743 |
|
15.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage capital to average assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic Bancorp, Inc. |
|
$ |
828,526 |
|
13.51 |
% |
$ |
843,682 |
|
13.70 |
% |
|
|
Republic Bank & Trust Company |
|
|
781,503 |
|
12.17 |
|
|
743,743 |
|
12.11 |
|
|
| (1) | The Company and the Bank elected in 2020 to defer the impact of CECL on regulatory capital. The deferral period is five years, with the total estimated CECL impact 100% deferred for the first two years, then phased in over the next three years. If not for this election, the Company’s regulatory capital ratios would have been approximately 15 basis points lower than those presented in the table above as of June 30, 2021. |
113
Asset/Liability Management and Market Risk
Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards, and achieve acceptable net interest income based on the Bank’s risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank’s overall earnings and balance sheet.
The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances, and other factors.
The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank’s deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.
As of June 30, 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 July 1, 2021 and ending June 30, 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 26 — Bank Interest Rate Sensitivity (Continuing Operations)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Rates |
|
|||||||||||||
|
|
-100 |
|
+100 |
|
+200 |
|
+300 |
|
+400 |
|
|||||
|
|
Basis Points |
|
Basis Points |
|
Basis Points |
|
Basis Points |
|
Basis Points |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change from base net interest income as of June 30, 2021 |
|
(1.0) |
% |
|
(1.7) |
% |
|
(1.4) |
% |
|
2.4 |
% |
|
6.5 |
% |
|
% Change from base net interest income as of December 31, 2020 |
|
0.4 |
% |
|
(4.5) |
% |
|
(7.0) |
% |
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(5.7) |
% |
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(4.2) |
% |
The Bank’s dynamic simulation model run for June 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 June 2021 was generally because the Bank had less ability in June 2021 than December to reprice its liabilities downward. The improvement in the Up-rate scenarios was due partially to growth in interest-earning assets and partially to a smaller projected falloff in secondary market fees for the June 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 June 30, 2021 Compared to Three Months Ended June 30, 2020) and “RESULTS OF OPERATIONS (Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020.”
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Item 3.Quantitative and Qualitative Disclosures about Market Risk.
Information required by this item is included under Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4.Controls and Procedures.
As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.Legal Proceedings.
In the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. There is no proceeding pending or threatened litigation, to the knowledge of management, in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or the Bank.
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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 second quarter of 2021 are included in the following table:
The Company repurchased 255,060 shares during the second quarter of 2021. In connection with employee stock awards, there were 15,846 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 June 30, 2021, the Company had 638,280 remaining shares that could be repurchased under its current share repurchase program.
During the second quarter of 2021, there were approximately 32,000 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.
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Item 6.Exhibits.
The following exhibits are filed or furnished as a part of this report:
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Exhibit Number |
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Description of Exhibit |
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2.1 |
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3.1 |
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10.1 |
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Republic Bancorp, Inc. 401(k) Retirement Plan, as Amended and Restated, effective May 1, 2021 |
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10.2 |
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31.1 |
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Certification of Principal Executive Officer pursuant to the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 |
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32* |
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101 |
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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 June 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020, (iii) Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 and (v) Notes to Consolidated Financial Statements |
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104 |
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Cover Page Interactive Data File formatted in iXBRL and contained in Exhibit 101. |
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* |
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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REPUBLIC BANCORP, INC. |
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(Registrant) |
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Principal Executive Officer: |
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Date: August 6, 2021 |
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/s/ Steven E. Trager |
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By: Steven E. Trager |
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Chairman and Chief Executive Officer |
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Principal Financial Officer: |
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Date: August 6, 2021 |
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/s/ Kevin Sipes |
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By: Kevin Sipes |
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Executive Vice President, Chief Financial |
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Officer and Chief Accounting Officer |
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