REPUBLIC BANCORP, INC. The consolidated financial statements include the accounts ofRepublic Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiaries,Republic Bank & Trust Company andRepublic Insurance Services, Inc. As used in this filing, the terms "Republic," the "Company," "we," "our," and "us" refer toRepublic 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 inLouisville, Kentucky . The Bank is aKentucky -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 theU.S. The Captive is aNevada -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. In 2005,Republic Bancorp Capital Trust , an unconsolidated trust subsidiary of Republic, was formed and issued$40 million in TPS. OnSeptember 30, 2021 , as permitted under the terms of RBCT's governing documents, Republic redeemed these securities at the par amount of approximately$40 million , without penalty. Republic's capital ratios remained well above "well capitalized" levels following the redemption of the TPS, which were treated as part of Republic'sTier I Capital while outstanding.
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
the FRB;
? long-term and short-term interest rate fluctuations as well as the overall
steepness of the
? 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;
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? inflation;
? 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?
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
Annual Report on Form 10-K for the year ended
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 endedDecember 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 ofSeptember 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. EffectiveJanuary 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 theU.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 throughMarch 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 theU.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 endedDecember 31, 2020 . 72 Table of Contents
BUSINESS SEGMENT COMPOSITION
As ofSeptember 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
?Kentucky - 28
? Metropolitan
?Central Kentucky - 7 ?Georgetown - 1 ?Lexington - 5 ?Shelbyville - 1 ?Northern Kentucky - 3 ?Covington - 1 ?Crestview Hills - 1 ? Florence - 1 ?Southern Indiana - 3 ?Floyds Knobs - 1 ?Jeffersonville - 1 ?New Albany - 1
?
?
? Metropolitan
Republic's headquarters are in
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'sCommercial 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. 73 Table of Contents Aircraft Lending - InOctober 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 forAlaska andHawaii . 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
TheCore Bank provides short-term, revolving credit facilities to mortgage bankers acrossthe 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. TheCore 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 theFNMA . 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." 74
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(IV) Tax Refund Solutions segment
Tax Refund Solutions segment - OnMay 13, 2021 , the Bank entered into the Purchase Agreement with Green Dot providing for the Sale Transaction. As a result of the Purchase Agreement and the proposed Sale Transaction, the results for the Company, RPG, and its TRS segment are presented within this filing to reflect continuing versus discontinued operations. RPG's continuing operations include its RCS segment, its RPS division, and certain overhead costs previously allocated to TRS that will remain with RPG. Discontinued operations are those contracted to be sold. These discontinued operations have historically contained the majority of TRS's revenue and expense. Interest income and expense for continuing and discontinued operations also include intercompany interest charged and earned based on the Company's funds transfer pricing methodology. OnOctober 4, 2021 , Green Dot announced that it had been unable to obtain theFederal Reserve's approval of or non-objection to the Sale Transaction and that, as a result, Green Dot would not consummate the Sale Transaction. OnOctober 5, 2021 , the Bank filed a lawsuit against Green Dot in theDelaware Court of Chancery alleging breach of contract. In so doing, the Bank seeks, among other relief, specific performance to require that Green Dot proceed with the Sale Transaction as the parties had agreed to in the Purchase Agreement. Due to the inherent uncertainties of legal proceedings, at this time, the Company cannot predict the outcome of these proceedings and their impact on the Company's financial condition and results of operations.
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 . RCS's LOC I represents the substantial majority of RCS activity. Elastic
providers for the product and are subject to the Bank's oversight and
supervision. Together, these companies provide the Bank with certain marketing,
o 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.
In
o RCS's existing third-party service providers, subject to the Bank's oversight
and supervision, provides the Bank with marketing services and loan
75
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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.
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 underlyingLOC 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
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
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 theU.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
Total Company net income for the third quarter of 2021 was$20.0 million , a$380,000 , or 2%, decrease from the same period in 2020. Diluted EPS was$0.99 for the three months endedSeptember 30, 2021 , an increase of approximately 1% compared to$0.98 for the same period in 2020. The 3% difference between the 2% decrease in net income and the 1% increase in Diluted EPS of the Company represents the benefit of the Company's on-going stock buyback program. As ofSeptember 30, 2021 , the stock buyback program has reduced the number of shares outstanding by approximately 748,000 shares since the buyback was implemented in early 2021. The decrease in net income reflected a$1.5 million decrease in net income from discontinued operations, driven by a change in the timing of Easy Advance recoveries, as the Company received a higher rate and a higher volume of EA recoveries during the third quarter of 2020 compared to the third quarter of 2021. Net income from continuing operations was$18.4 million for the third quarter of 2021, a$1.1 million , or 7%, increase from the same period in 2020. Diluted EPS from continuing operations was$0.91 for the three months endedSeptember 30, 2021 , an increase of approximately 10% over the$0.83 for the same period in 2020. The overall increase in net income from continuing operations generally reflected an increase in RPG program fees, a positive reduction in Provision, offset by a reduction in Mortgage Banking 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 for the third quarter of 2021 compared to the same period in 2020. 76 Table of Contents
Net interest income increased
? 2021 compared to the same period in 2020.
margin remained at 3.22% for the third quarter of 2021.
Provision decreased
? quarter of 2021 compared to a net charge of
2020.
? Noninterest income increased
compared to the same period in 2020.
? Total noninterest expense decreased
2021 compared to same period in 2020. Warehouse Lending segment
? Net income remained at
the same period in 2020.
? Net interest income decreased
2021 compared to the same period in 2020.
? The Warehouse Provision was a net credit of
2021 compared to a net credit of
? Average committed Warehouse lines increased to
quarter of 2021 from
? Average line usage was 51% during the third quarter of 2021 compared to 68%
during the same period in 2020. Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 51%, during the third quarter of 2021 compared to the same period
in 2020.
Overall, Republic's originations of secondary market loans totaled
? during the third quarter of 2021 compared to
period in 2020, with the Company's cash gain-as-a-percent-of-loans-sold decreasing from 4.49% to 2.94% from period to period. Tax Refund Solutions segment Continuing Operations
? Net loss from continuing operations was
compared to a net loss of$123,000 for the same period in 2020. Discontinued Operations
? Net income from discontinued operations decreased
quarter of 2021 compared to the same period in 2020.
Overall, TRS recorded a net credit to the Provision from discontinued
? operations of
credit to the Provision of$4.3 million for the same period in 2020.
? Noninterest income from discontinued operations increased
the third quarter of 2021 compared to the same period in 2020.
? Net RT revenue from discontinued operations increased to
third quarter of 2021 compared to
? Noninterest expense from discontinued operations was
quarter of 2021, equal to$1.7 million for the same period in 2020. 77 Table of Contents
Republic
? Net income decreased
to the same period in 2020.
? Net interest income increased
compared to the same period in 2020.
Overall, RCS recorded a net charge to the Provision of
? third quarter of 2021 compared to a net credit of
in 2020.
? Noninterest income increased
third quarter of 2021.
? Noninterest expense was
$1.2 million for the same period in 2020.
RESULTS OF OPERATIONS (Three Months Ended
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 theFOMC reduced the FFTR to approximately 25 basis points during 2020. TheFOMC 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 increased$260,000 during the third quarter of 2021 compared to the same period in 2020.Total Company net interest margin from continuing operations decreased to 3.55% during the third quarter of 2021 compared to 3.57% for the same period in 2020. Net interest income from discontinued operations was$123,000 during the third quarter of 2021 compared to$203,000 during the third 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 increased$1.5 million , or 4%, for the third quarter of 2021 compared to the same period in 2020. Traditional Banking's net interest margin remained at 3.22% for the third quarter of 2021 compared to the same period in 2020. 78 Table of Contents
Table 1 - Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
The Company earns fees and a coupon interest of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believesTraditional Bank net interest income excluding PPP fees and interest is a more appropriate measure to analyze the challenges within theTraditional Bank's net interest income and net interest margin. The following table reconcilesTraditional Bank net interest income and net interest margin toTraditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure. Net interest margin excluding PPP fees and interest presented below also excludes average PPP loans of$186 million and$513 million for the quarters endedSeptember 30, 2021 and 2020. Net Interest Income Net Interest Margin Three Months Ended Sep. 30, Three Months Ended Sep. 30, (dollars in thousands) 2021 2020 $ Change % Change 2021 2020 Change Traditional Banking - GAAP$ 40,297 $ 38,753 $ 1,544 4 % 3.22 % 3.22 % - % Less: PPP fees and interest 5,668 3,497 2,171 62 0.35 (0.06) 0.41
Traditional Banking ex PPP fees and interest - non-GAAP
$ 35,256 $ (627) (2) % 2.87 3.28 (0.41)
The increase in the
portfolio during the third quarter of 2021 compared to
fees and interest during the same period in 2020. The
PPP fees and interest was driven significantly by the forgiveness, payoff, and
paydown of
?
Bank's balance sheet, including
2020,
unaccreted PPP fees reported as a credit offset to these originated balances.
Unaccreted PPP 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.Traditional Bank net interest income, excluding PPP fees and interest,
decreased
Bank's net interest margin, excluding PPP loans and related fees and interest,
declined from 3.28% for the third quarter of 2020 to 2.87% for the third
? quarter of 2021. The decline in the net interest margin was substantially
driven by a 66-basis point decline in the
average non-PPP interest-earning assets from the third quarter of 2020 to the
third quarter of 2021, as the majority of the
non-PPP interest-earning assets during the previous 12 months was in lower-yielding cash instead of loans. Warehouse Lending segment Net interest income from the Warehouse segment decreased$1.1 million , or 14%, from the third quarter of 2020 to the third quarter of 2021 driven primarily by a decrease in average outstanding balances, while the net interest margin for the Warehouse segment increased from 3.41% to 3.51% during the same time periods. Overall average outstanding Warehouse balances declined from$860 million during the third quarter of 2020 to$717 million for the third quarter of 2021, as home-mortgage refinancing dipped from record highs during 2020.Committed Warehouse lines-of-credit grew to$1.4 billion as ofSeptember 30, 2021 from$1.3 billion as ofSeptember 30, 2020 , while average usage rates for Warehouse lines were 51% and 68%, respectively, during the third quarters of 2021 and 2020. The net interest margin for the Warehouse segment improved from quarter to quarter due to a decline in the segment's assigned cost of funds while many of the segment's lines-of-credit reached contractual floors for their interest rates, allowing the yield for the Warehouse portfolio to remain higher than it otherwise would have been by contractual formula. Due to increasing competitive pressures, however, the Company began lowering the contractual interest-rate floors on its Warehouse lines during the third quarter of 2021. Management expects these lower floors to have a negative impact on the Warehouse net interest margin going forward. 79 Table of Contents
Republic
RCS's net interest income increased$321,000 , or 6%, from the third quarter of 2020 to the third quarter of 2021. The increase was driven primarily by an increase in fee income from RCS's LOC I product. Loan fees on this product, recorded as interest income on loans, increased to$4.2 million during the third quarter of 2021 compared to$4.0 million during the same period in 2020 and accounted for 77% and 76% of all RCS interest income on loans during the periods. The increase in loan fees was the direct result of a change in marketing strategy for the product from period to period.
Future loan fee income from RCS's LOC I product may be negatively impacted by the on-going COVID-19 pandemic.
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Table 2 - Total Company Average Balance Sheets and Interest Rates from
Continuing Operations
Three Months Ended September 30, 2021 Three Months Ended September 30, 2020
Average Average Average Average(dollars in thousands) Balance Interest Rate Balance Interest Rate ASSETS (1) Interest-earning assets: Federal funds sold and other interest-earning deposits$ 924,859 $ 359
0.16 %
555,934 1,928 1.39 600,943 2,363 1.57
Intercompany funds loaned to
discontinued operations 5,964 4 0.27 2,316 1 0.17
RCS LOC I product (3) (7) 19,231 4,166 86.65 17,369 3,996 92.03
Other RPG loans (7) 109,317 1,212 4.43 97,379 1,137 4.67
Outstanding Warehouse lines of credit
(4) (7) 717,036 6,698 3.74 860,420 7,966 3.70
Paycheck Protection Program loans (5)
(7) 185,931 5,668 12.19 513,201 3,497 2.73
All other Core Bank loans (6) (7) 3,373,085 33,665 3.99 3,419,261 36,851 4.31
Total interest-earning assets 5,891,357 53,700 3.65 5,824,170 55,905 3.84
Allowance for credit losses (61,562) (55,213)
Noninterest-earning assets:
Noninterest-earning cash and cash
equivalents 133,743 92,731
Premises and equipment, net 38,242 42,167
Bank owned life insurance 99,386
67,447
Other assets (2) 186,848 180,236
Total assets $ 6,288,014 $ 6,151,538
LIABILITIES AND STOCKHOLDERS' EQUITY
(1)
Interest-bearing liabilities:
Transaction accounts $ 1,569,407 $ 91 0.02 % $ 1,366,830 $ 178 0.05 %
Money market accounts 822,190 96 0.05 734,203 235 0.13
Time deposits 298,179 835 1.12 409,088 2,025 1.98
Reciprocal money market and time
deposits 188,357 124 0.26 292,948 378 0.52
Brokered deposits 30,001 2 0.03 135,994 60 0.18
Total interest-bearing deposits 2,908,134 1,148 0.16 2,939,063 2,876 0.39 SSUARs 242,867 21 0.03 213,010 22 0.04 Intercompany funds borrowed from discontinued operations 43,259 50 0.46 28,732 70 0.97 Federal Reserve PPP Liquidity Facility - - - 53,338 48 0.36 Federal Home Loan Bank advances 25,000 6 0.10 126,250 658 2.08 Subordinated note 40,792 166 1.63 41,240 182 1.77 Total interest-bearing liabilities 3,260,052 1,391 0.17 3,401,633 3,856 0.45 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,074,941
1,817,820
Other liabilities 104,086 120,734
Stockholders' equity 848,935 811,351
Total liabilities and stockholders'
equity $ 6,288,014 $ 6,151,538
Net interest income $ 52,309 $ 52,049
Net interest spread 3.48 % 3.39 %
Net interest margin 3.55 % 3.57 %
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 (1) Company's funds transfer pricing methodology. Net interest income would be
3.59% for the quarters ended
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
ended
(5) Interest income includes loan fees of
quarters ended
(6) Interest income includes loan fees of
quarters ended
Average balances for loans include the principal balance of nonaccrual loans (7) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees and costs.
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Table of Contents
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 September 30, 2021
Compared to
Three Months Ended September 30, 2020
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ 265 $ 230 $ 35
Investment securities, including
FHLB stock (435) (169) (266)
Intercompany funds loaned to
discontinued operations 3 2 1
RCS LOC I product 170 412 (242)
Other RPG loans 75 135 (60)
Outstanding Warehouse lines of
credit (1,268) (1,339) 71
Paycheck Protection Program loans 2,171 (3,432)
5,603
All other Core Bank loans (3,186) (492) (2,694)
Net change in interest income (2,205) (4,653) 2,448
Interest expense:
Transaction accounts (87) 24 (111)
Money market accounts (139) 26 (165)
Time deposits (1,190) (457) (733)
Reciprocal money market and time
deposits (254) (107) (147)
Brokered deposits (58) (28) (30)
SSUARs (1) 3 (4)
Intercompany funds borrowed from
discontinued operations (20) 27 (47)
Federal Reserve PPP Liquidity
Facility (48) (48) -Federal Home Loan Bank advances (652) (298)
(354)
Subordinated note (16) (5)
(11)
Net change in interest expense (2,465) (863)
(1,602)
Net change in net interest income
$ 4,050
* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.
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Provision
Total Company Provision from continuing operations was a net charge of$3.6 million for the third quarter of 2021 compared to a net charge of$5.8 million for the same period in 2020. Provision from discontinued operations was a net credit of$2.3 million for the third quarter of 2021 compared to a net credit of$4.3 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 third quarter of 2021 was a net credit of$44,000 compared to a net charge of$5.9 million for the third quarter of 2020. An analysis of the Provision for the third quarter of 2021 compared to the same period in 2020 follows:
For the third quarter of 2021, the
? Provision was primarily driven by net loan loss recoveries of
quarter. Loan loss recoveries were positively impacted by a
from one borrower.
During the third quarter of 2020, the
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 third quarter of 2020 was a reduction in Provision
of
non-PPP loan spot balances during the same quarter. As a percentage of totalTraditional Bank loans, the Traditional Banking ACLL was 1.42% as ofSeptember 30, 2021 compared to 1.34% as ofDecember 31, 2020 and 1.26% as ofSeptember 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofSeptember 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$223,000 for the third quarter of 2021 compared to a net credit of$3,000 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$89 million during the third quarter of 2021 compared to a decrease of$1 million during the third quarter of 2020. As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofSeptember 30, 2021 ,December 31, 2020 , andSeptember 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofSeptember 30, 2021 . Tax Refund Solutions segment Discontinued Operations
TRS recorded a net credit to the Provision from discontinued operations of$2.3 million during the third quarter of 2021 compared to a net credit of$4.3 million for the same period in 2020. These credits to the Provision primarily reflected recoveries on EA loans charged off during the first six months of the year. While TRS experienced a higher rate of EAs charged-off during the first six months of 2020 than the comparable six months in 2021, it also experienced a higher rate of EA recoveries during the third quarter of 2020 than the comparable quarter of 2021. Management believes the higher rate of EAs charged-off through the first six months of 2020 and recovered during the third quarter of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax return processing by theIRS for certain types of tax returns that require further taxpayer communication and verification. With the third quarter EA paydowns, the percent of unpaid EAs to total EAs originated was 3.19% as ofSeptember 30, 2021 . This compares to 3.93% as ofSeptember 30, 2020 , a positive difference of 74 basis points. With all unpaid EAs having been charged off as ofJune 30, 2021 , any EA payments received during the fourth quarter of 2021 will continue to represent recovery credits directly to income from discontinued operations. 83 Table of Contents
See additional detail regarding the EA product under Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
As illustrated in Table 4 below, RCS recorded a net charge to the Provision of$3.8 million during the third quarter of 2021 compared to a net credit to the Provision of$12,000 for the same period in 2020. The negative swing in the Provision was driven by a$6.0 million increase in outstanding balances for RCS's lines of credit during the third quarter of 2021 compared to a$1.3 million decrease in similar balances during the third 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 itsLOC 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 9.99% as ofSeptember 30, 2021 , 7.94% as ofDecember 31, 2020 , and 7.82% as ofSeptember 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as ofSeptember 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 Sep. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 3,830 $ (40) $ 3,870 NM %
Hospital receivables (10) 28 (38) (136)
Total $ 3,820 $ (12) $ 3,832 NM %
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Table 5 - Summary of Loan and Lease Loss Experience
Three Months Ended
September 30,
(dollars in thousands) 2021 2020
ACLL at beginning of period $ 60,291 $ 55,097
Charge-offs:
Traditional Banking:
Residential real estate - (13)
Commercial & industrial (35) (255)
Home equity - (14)
Consumer (279) (227)
Total Traditional Banking (314) (509)
Warehouse lines of credit - -
Total Core Banking (314) (509)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - -
Other TRS loans - (22)
Republic Credit Solutions (1,064) (684)Total Republic Processing Group (1,064)
(706) Total charge-offs (1,378) (1,215) Recoveries: Traditional Banking: Residential real estate 329 28 Commercial real estate 3 - Commercial & industrial 16 80 Home equity 5 21 Consumer 128 77 Total Traditional Banking 481 206 Warehouse lines of credit - - Total Core Banking 481 206Republic Processing Group : Tax Refund Solutions: Easy Advances 2,242 4,294 Other TRS loans 19 - Republic Credit Solutions 75 83
Total Republic Processing Group 2,336
4,377 Total recoveries 2,817 4,583
Net loan recoveries (charge-offs) 1,439
3,368
Provision from continuing operations- Core Banking (265)
5,780
Provision from continuing operations - RPG 3,820
(12)
Provision from discontinued operations - RPG (2,261)
(4,342) Total Provision 1,294 1,426 ACLL at end of period$ 63,024 $ 59,891
Credit Quality Ratios -
ACLL to total loans 1.45 % 1.20 % ACLL to nonperforming loans 301
284
Net loan charge-offs (recoveries) to average loans (0.13)
(0.27)
Net loan charge-offs from continuing operations to average loans 0.07
0.07
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.22 % 1.05 % ACLL to nonperforming loans 254
245
Net loan charge-offs (recoveries) to average loans (0.02)
0.03
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Noninterest Income
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$970,000 , or 14%, for the third quarter of 2021 compared to the same period in 2020. Interchange Fee Income increased$326,000 from the third quarter of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased$262,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the third 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 trend upward toward more 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 endedSeptember 30, 2021 and 2020 were$1.6 million and$1.3 million . The total daily overdraft charges, net of refunds, included in interest income for the three months endedSeptember 30, 2021 and 2020 were$304,000 and$99,000 . 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 onSeptember 1, 2020 . Mortgage Banking segment
Mortgage Banking income decreased from$10.8 million for the third quarter of 2020 to$5.3 million for the third quarter of 2021. For the third quarter of 2021, theCore Bank originated$170 million in secondary market loans and achieved an average cash gain-as-a-percent-of-loans-sold during the quarter of 2.94%, with both figures solid by normal historical comparisons. During the third quarter of 2020, however, secondary market originations were$204 million with comparable gains-as-a-percent-of-loans-sold of 4.49%. Favorable market conditions during the third quarter of 2020 brought on by the COVID pandemic drove gains-as-a-percent-of-loans-sold to all-time record highs for theCore Bank and, in general, the entire mortgage industry.
Republic
RCS's noninterest income increased$2.9 million during the third 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 third quarter of 2020, with those program fees beginning to normalize during 2021 following the removal of restrictions. 86 Table of Contents
The following table presents RCS program fees by product:
Table 6 - RCS Program Fees by Product
Three Months Ended Sep. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 2,046 $ 752 $ 1,294 172 %
Hospital receivables 62 45 17 38
Installment loans* 1,659 47 1,612 NM
Total $ 3,767 $ 844 $ 2,923 346 %
* 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 decreased$1.2 million during the third quarter of 2021 compared to the same period in 2020. Noninterest expense from discontinued operations decreased$87,000 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 decreased$488,000 , or 1%, for the third quarter of 2021 compared to the same period in 2020. The following primarily drove the change in noninterest expense:
Bank Franchise Tax expense decreased
? enacted HB354 in
capital-based bank franchise tax to corporate income tax on
Kentucky state taxes.
Other expenses decreased
losses on off-balance sheet credit exposures decreased
lower expected usage rates on the Bank's committed credit lines coupled with a
? generally improving economic outlook. Additionally, within the other expenses
line item, the following expenses experienced decreases: fraud-related
expenses, supplies, freight, core deposit amortization, and ATM promotions,
with most of these decreases generally driven by the impact of the ongoing
pandemic.
Salaries and Benefits increased from
2020 to
merit increases, which averaged approximately 3%, along with higher
? equity-based compensation expenses. These increases to compensation expense
were partially offset by lower salaries resulting from a reduction in full-time
equivalent employees, which decreased from 976 FTEs as of
949 FTEs as ofSeptember 30, 2021 . Warehouse Lending segment Noninterest expense at the Warehouse segment decreased$819,000 during the third quarter of 2021 compared to the same period in 2020, primarily due to higher incentive compensation expense recorded during 2020, generally due to higher Warehouse client loan volumes during 2020. Mortgage Banking segment
Noninterest expense at the Mortgage Banking segment increased$425,000 , or 15%, during the third quarter of 2021 compared to the same period in 2020, primarily due to higher mortgage commissions recorded during 2021, as the Company broadened the base of associates eligible to receive commissions during 2021. 87 Table of Contents
OVERVIEW (Nine Months Ended
Total Company net income for the first nine months of 2021 was$70.0 million , a$7.1 million , or 11%, increase from the same period in 2020. Diluted EPS increased to$3.39 for the nine months ofSeptember 30, 2021 compared to$3.02 for the same period in 2020.
Net income from continuing operations was$55.2 million for the first nine months of 2021, a$5.9 million increase from the same period in 2020. Diluted EPS from continuing operations increased to$2.68 for the nine months endedSeptember 30, 2021 compared to$2.37 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 Mortgage Banking income and 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
compared to the same period in 2020.
? Net interest income increased
2021 compared to the same period in 2020.
Provision had a
? the first nine months of 2021 compared to a net charge of
same period in 2020.
? Noninterest income increased
2021 compared to the same period in 2020.
? Total noninterest expense increased
compared to same period in 2020.
?
nine months of 2021, driven primarily by a
? Total nonperforming loans to total loans for the Traditional Banking segment
was 0.58% as of
? Delinquent loans to total loans for the Traditional Banking segment was 0.22%
as of
?
nine months of 2021. Warehouse Lending segment
? Net income increased
compared to the same period in 2020.
? Net interest income increased
2021 compared to the same period in 2020.
? The Warehouse Provision was a net credit of
of 2021 compared to a net charge of
? Average committed Warehouse lines increased to
nine months of 2021 from$1.2 billion during the same period in 2020.
? Average line usage was 52% during the first nine months of 2021 compared to 65%
during the same period in 2020.
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Table of Contents
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 31%, during the first nine months of 2021 compared to the same
period in 2020.
Overall, Republic's originations of secondary market loans totaled
? during the first nine months of 2021 compared to
period in 2020, with the Company's gain-as-a-percent-of-loans-sold decreasing
from 4.57% to 3.11% from period to period. Tax Refund Solutions segment Continuing Operations
Net loss from continuing operations was
2021 compared to a net loss of
higher loss during the first nine months of 2020 primarily reflected general
? operating losses related to TRS's prepaid card division, with such losses
substantially occurring prior to
added a large depository relationship that significantly improved profitability
on a subsequent basis. Discontinued Operations
? Net income from discontinued operations increased
first nine months of 2021 compared to the same period in 2020.
? Net interest income from discontinued operations decreased
28%, for the first nine months of 2021 compared to the same period in 2020.
? Total EA originations were
compared to
Overall, TRS recorded a net charge to the Provision from discontinued
? operations of
net charge to the Provision of
? Noninterest income from discontinued operations increased
nine months of 2021 compared to the same period in 2020.
? Net RT revenue increased
the same period in 2020.
? Noninterest expense from discontinued operations was
nine months of 2021 compared to
Republic
? Net income decreased
compared to the same period in 2020.
? Net interest income decreased
of 2021 compared to the same period in 2020.
Overall, RCS recorded a net charge to the Provision of
? first nine months of 2021 compared to a net charge of
period in 2020.
? Noninterest income increased
of 2020 to the first nine months of 2021.
? Noninterest expense was
million for the same period in 2020.
? Total nonperforming loans to total loans for the RCS segment was 0.59% as of
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? Delinquent loans to total loans for the RCS segment was 8.31% as of September
30, 2021 compared to 9.23% as ofDecember 31, 2020 .
RESULTS OF OPERATIONS (Nine Months Ended
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 theFOMC reduced the FFTR to approximately 25 basis points during 2020. TheFOMC 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$1.0 million , or 1%, during the first nine months of 2021 compared to the same period in 2020.Total Company net interest margin from continuing operations decreased to 3.46% during the first nine months of 2021 compared to 3.69% for the same period in 2020. Net interest income from discontinued operations was$14.9 million during the first nine months of 2021 compared to$20.9 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 increased$1.3 million for the first nine months of 2021 compared to the same period in 2020. Traditional Banking's net interest margin was 3.21% for the first nine months of 2021, a decrease of 20 basis points from the same period in 2020.
Table 7 - Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
The Company earns fees and a coupon interest rate of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believesTraditional Bank net interest income excluding PPP fees and coupon interest is a more appropriate measure to analyze the challenges within theTraditional Bank's net interest income and net interest margin. The following table reconcilesTraditional Bank net interest income and net interest margin toTraditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure. Net interest margin excluding PPP fees and interest presented below also excludes average PPP loans of$299 million and$301 million for the nine months endedSeptember 30, 2021 and 2020. 90 Table of Contents Net Interest Income Net Interest Margin Nine Months Ended Sep. 30, Nine Months Ended Sep. 30, (dollars in thousands) 2021 2020 $ Change % Change 2021 2020 Change Traditional Banking - GAAP$ 119,677 $ 118,409 $ 1,268 1 % 3.21 % 3.41 % (0.20) % Less: PPP fees and interest 16,949 6,149 10,800 176 0.28 (0.05) 0.33
Traditional Banking ex PPP fees and interest - non-GAAP
$ 112,260 $ (9,532) (8) % 2.93 3.46 (0.53)
The decrease in the
decreased
and interest, declined from 3.46% for the first nine months of 2020 to 2.93%
? for the first nine months of 2021. The decline in the net interest margin was
substantially driven by an 83-basis point decline in the
yield on its average non-PPP interest-earning assets from the first nine months
of 2020 to the first nine 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
Bank recognized
the first nine months of 2021 compared to
the same period in 2020. The
was driven significantly by the forgiveness, payoff, and paydown of
million of PPP loans during the first nine months of 2021. As of
? 2021, net PPP loans of
sheet, including
million in loan balances originated during 2021, and
PPP fees reported as a credit offset to these originated balances. Unaccreted
PPP 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
Average committed Warehouse lines increased to$1.4 billion during the first nine 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 65%, respectively for the same periods. In addition, the Warehouse net interest margin increased to 3.47% for the first nine months of 2021 compared to 3.07% for the first nine months of 2020, as many of theBank's Warehouse clients reached contractual interest rate floors on their lines-of-credit during the first nine months of 2020 preventing further declines in the segment's loan yields, while the segment's cost of funds continued to decline. Due to increasing competitive pressures, the Company began lowering the contractual interest-rate floors on its Warehouse lines during 2021. Management expects these lower floors to have a negative impact on the Warehouse net interest margin going forward. Tax Refund Solutions segment Discontinued Operations TRS's net interest income from discontinued operations decreased$5.9 million for the first nine months of 2021 compared to the same period in 2020. TRS's EA product earned$13.2 million in interest income during the first nine months of 2021, a$6.4 million decrease from the first nine 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 nine 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."
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Table of Contents
Republic
RCS's net interest income decreased$2.9 million , or 16%, from the first nine months of 2020 to the first nine 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$11.5 million during the first nine months of 2021 compared to$14.7 million during the same period in 2020 and accounted for 76% and 78% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in balances for RCS's LOC I product following a reduction of marketing for this product during the second and third quarters of 2020. While the marketing for this product was reinstated during the fourth quarter of 2020, management believes the ongoing impact of government stimulus payments continued to reduce demand for this product during the first six months of 2021.
Future loan fee income from RCS's LOC I product will likely continue to be negatively impacted by the on-going COVID-19 pandemic.
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Table 8 - Total Company Average Balance Sheets and Interest Rates from
Continuing Operations
Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Average Average Average Average(dollars in thousands) Balance Interest Rate Balance Interest Rate ASSETS (1) Interest-earning assets: Federal funds sold and other interest-earning deposits$ 792,858 $ 774
0.13 %
560,780 5,860 1.39 575,575 8,191 1.90
Intercompany funds loaned to
discontinued operations 108,228 199 0.25 103,442 1,131 1.46
RCS LOC I product (3) (7) 16,885 11,505 90.85 21,300 14,692 91.97
Other RPG loans (7) 105,292 3,539 4.48 92,803 3,519 5.06
Outstanding Warehouse lines of credit
(4) (7) 744,522 20,892 3.74 770,454 22,305 3.86
Paycheck Protection Program loans (5)
(7) 299,458 16,949 7.55 300,733 6,149 2.73
All other Core Bank loans (6) (7) 3,349,804 100,548 4.00 3,508,851 117,637 4.47
Total interest-earning assets 5,977,827 160,266 3.57 5,646,762 174,442 4.12
Allowance for credit loss (60,682) (52,652)
Noninterest-earning assets:
Noninterest-earning cash and cash
equivalents 117,763 94,679
Premises and equipment, net 38,845 43,836
Bank owned life insurance 88,414
67,061
Other assets (2) 173,927 148,773
Total assets $ 6,336,094 $ 5,948,459
LIABILITIES AND STOCKHOLDERS' EQUITY
(1)
Interest-bearing liabilities:
Transaction accounts $ 1,551,690 $ 266 0.02 % $ 1,253,811 $ 1,019 0.11 %
Money market accounts 776,448 292 0.05 741,205 1,725 0.31
Time deposits 305,456 2,871 1.25 417,171 6,370 2.04
Reciprocal money market and time
deposits 273,312 585 0.29 263,681 1,432 0.72
Brokered deposits 38,864 23 0.08 176,127 1,752 1.33
Total interest-bearing deposits 2,945,770 4,037 0.18 2,851,995 12,298 0.57 Securities sold under agreements to repurchase and other short-term borrowings 201,992 37 0.02 199,556 158 0.11 Intercompany funds borrowed from discontinued operations 102,190 313 0.41 132,497 1,543 1.55 Federal Reserve PPP Liquidity Facility - - - 58,683 153 0.35 Federal Home Loan Bank advances 30,989 47 0.20 253,157 3,128 1.65 Subordinated note 41,089 507 1.65 41,240 829 2.68 Total interest-bearing liabilities 3,322,030 4,941 0.20 3,537,128 18,109 0.68 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,061,144
1,506,109
Other liabilities 108,035 109,339
Stockholders' equity 844,885 795,883
Total liabilities and stock-holders'
equity $ 6,336,094 $ 5,948,459
Net interest income $ 155,325 $ 156,333
Net interest spread 3.37 % 3.44 %
Net interest margin 3.46 % 3.69 %
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 (1) Company's funds transfer pricing methodology. Net interest income would be
4.21% for the nine months ended
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
nine months ended
(5) Interest income includes loan fees of
nine months ended
(6) Interest income includes loan fees of
nine months ended
Average balances for loans include the principal balance of nonaccrual loans (7) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees and costs.
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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 from Continuing Operations
Nine Months Ended September 30, 2021
Compared to
Nine Months Ended September 30, 2020
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ (44) $ 781 $ (825)
Investment securities, including
FHLB stock (2,331) (205) (2,126)
Intercompany funds loaned to
discontinued operations (932) 50 (982)
RCS LOC I product (3,187) (7,321) 4,134
Other RPG loans 20 444 (424)
Outstanding Warehouse lines of
credit (1,413) (739) (674)
Paycheck Protection Program loans 10,800 (26)
10,826
All other Core Bank loans (17,089) (5,164) (11,925)
Net change in interest income (14,176) (12,180) (1,996)
Interest expense:
Transaction accounts (753) 198 (951)
Money market accounts (1,433) 78 (1,511)
Time deposits (3,499) (1,436) (2,063)
Reciprocal money market and time
deposits (847) 51 (898)
Brokered deposits (1,729) (784)
(945)
Securities sold under agreements to repurchase and other short-term borrowings (121) 2
(123)
Intercompany funds borrowed from discontinued operations (1,230) (292) (938) Federal Reserve PPP Liquidity Facility (153) (153) -
Federal Home Loan Bank advances (3,081) (1,540)
(1,541)
Subordinated note (322) (3)
(319)
Net change in interest expense (13,168) (3,879)
(9,289)
Net change in net interest income
* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.
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Provision
Total Company Provision from continuing operations was a net charge of$4.4 million for the first nine months of 2021 compared to a net charge of$15.6 million for the same period in 2020. Total Company Provision from discontinued operations was a net charge of$7.9 million for the first nine months of 2021 compared to a net charge of$15.2 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 nine months of 2021 was a net credit of$126,000 compared to a net charge of$14.5 million for the first nine months of 2020. An analysis of the Provision for the first nine months of 2021 compared to the same period in 2020 follows:
For the first nine 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 net charge-offs incurred by the
making significant life-of-loan reserves during 2020 following the onset of the
? pandemic. The net credit recorded during the first nine months of 2021
primarily included nominal 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
2021.
During the first nine months of 2020, the
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 nine months of 2020 was a reduction in
Provision of
2020. As a percentage of totalTraditional Bank loans, the Traditional Banking ACLL was 1.42% as ofSeptember 30, 2021 compared to 1.34% as ofDecember 31, 2020 and 1.26% as ofSeptember 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofSeptember 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$530,000 for the first nine months of 2021 compared to a net charge of$778,000 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$212 million during the first nine months of 2021 compared to an increase of$311 million during the first nine months of 2020. As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofSeptember 30, 2021 ,December 31, 2020 , andSeptember 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofSeptember 30, 2021 . Tax Refund Solutions segment Discontinued Operations
TRS recorded a net charge to the Provision from discontinued operations of$7.9 million during the first nine months of 2021 compared to a net charge of$15.2 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$8.0 million , or 3.19% of its$250 million in EAs originated during the first nine months of 2021, compared to a Provision of$15.2 million , or 3.93% of its$388 million in EAs originated during the first nine months of 2020. The lower Provision during the first nine months of 2021 resulted from repayment rates on EA loans from theU.S. Treasury that exceeded those during the first nine months of 2020. Management believes the slower repayment rates from theU.S. Treasury during 95
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the first nine months of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax-return processing by theIRS for certain types of tax returns that required further taxpayer communication and verification. EAs are only originated during the first two months of each year, with all uncollected EAs charged off byJune 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
As illustrated in Table 10 below, RCS recorded a net charge to the Provision of$5.0 million during the first nine months of 2021 compared to a net charge to the Provision of$251,000 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 nine 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 itsLOC 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 9.99% as ofSeptember 30, 2021 , 7.94% as ofDecember 31, 2020 , and 7.82% as ofSeptember 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as ofSeptember 30, 2021 .
The following table presents net charges to the RCS Provision by product:
Table 10 - RCS Provision by Product
Nine Months Ended Sep. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 5,036 $ 214 $ 4,822 NM %
Hospital receivables 1 37 (36) (97)
Total $ 5,037 $ 251 $ 4,786 NM %
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Table 11 - Summary of Loan and Lease Loss Experience
Nine Months Ended
September 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 - (40)
Commercial real estate (428) (270)
Commercial & industrial (35) (447)
Home equity - (14)
Consumer (649) (960)
Total Traditional Banking (1,112) (1,731)
Warehouse lines of credit - -
Total Core Banking (1,112) (1,731)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances (10,256) (19,575)
Other TRS loans (51) (94)
Republic Credit Solutions (2,427) (5,401)Total Republic Processing Group (12,734)
(25,070) Total charge-offs (13,846) (26,801) Recoveries: Traditional Banking: Residential real estate 376 116 Commercial real estate 82 472 Commercial & industrial 27 124 Home equity 46 108 Consumer 371 399 Total Traditional Banking 902 1,219 Warehouse lines of credit - - Total Core Banking 902 1,219Republic Processing Group : Tax Refund Solutions: Easy Advances 2,272 4,336 Other TRS loans 27 1 Republic Credit Solutions 247 553
Total Republic Processing Group 2,546
4,890 Total recoveries 3,448 6,109 Net loan charge-offs (10,398) (20,692)
Provision from continuing operations- Core Banking (532)
15,008
Provision from continuing operations - RPG 5,037
251
Provision from discontinued operations - RPG 7,850
15,239 Total Provision 12,355 30,498 ACLL at end of period$ 63,024 $ 59,891
Credit Quality Ratios -
ACLL to total loans 1.45 % 1.20 % ACLL to nonperforming loans 301
284
Net loan charge-offs to average loans 0.30
0.58
Net loan charge-offs from continuing operations to average loans 0.07
0.15
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.22 % 1.05 % ACLL to nonperforming loans 254
245
Net loan charge-offs to average loans 0.01
0.01
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Noninterest Income
Total Company noninterest income from continuing operations increased $236,000
during the first nine months of 2021 compared to the same period in 2020. Total
Company noninterest income from discontinued operations increased $76,000 during
the first nine 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$2.4 million , or 12%, for the first nine months of 2021 compared to the same period in 2020. Interchange Fee Income increased$1.4 million from the first nine months of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased$612,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the first nine 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 trend upward toward more 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 nine months endedSeptember 30, 2021 and 2020 were$4.0 million and$4.1 million . The total daily overdraft charges, net of refunds, included in interest income for the nine months endedSeptember 30, 2021 and 2020 were$810,000 and$517,000 . The Bank suspended its daily overdraft charges during the first nine 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 onSeptember 1, 2020 . Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased$7.3 million , or 31%, during the first nine months of 2021 compared to the same period in 2020. For the first nine months of 2021, theCore Bank originated$525 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 3.11%, with comparable originations of$548 million and comparable gains of 4.57% during the first nine months of 2020. Favorable market conditions drove a higher gain percentage for theCore Bank and the mortgage industry, in general, during the last nine months of 2020 and for a portion of the first nine months of 2021. These favorable conditions began to normalize duringFebruary 2021 causing theCore Bank's gain-as-a-percentage-of-loans-sold to trend toward more normal historical levels at or near 2.50%. Management believes this trend will likely continue during the remainder of 2021. 98 Table of Contents
Republic
RCS's noninterest income increased$4.3 million , or 116%, during the first nine 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 nine 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
Nine Months Ended Sep. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 4,168 $ 2,199 $ 1,969 90 %
Hospital receivables 173 53 120 226
Installment loans* 3,589 1,424 2,165 NM
Total $ 7,930 $ 3,676 $ 4,254 116 %
* The Company has elected the fair value option for this product, with
mark-to-market adjustments recorded as a component of program fees.
Noninterest ExpenseTotal Company noninterest expense from continuing operations increased$905,000 , or 1%, during the first nine months of 2021 compared to the same period in 2020.Total Company noninterest expense from discontinued operations decreased$503,000 during the first nine 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
Salaries and benefits expense increased approximately
? 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
?
previous 12 months, bringing its ITM fleet to over 70 ITMs as of
2021.
Interchange-related expense increased
? began rising to normal levels during the first quarter of 2021 following the
removal of pandemic-related restrictions.
Partially offsetting the increases above, Bank Franchise Tax expense decreased
?
as a result, the Bank transitioned from a capital-based bank franchise tax to
theKentucky corporate income tax onJanuary 1, 2021 .
Other expenses decreased
credit losses on off-balance sheet credit exposures decreased
by lower expected usage rates on the Bank's committed credit lines coupled with
? a generally improving economic outlook. Additionally, within the other expenses
line item, the following expenses experienced decreases: fraud-related
expenses, supplies, freight, and ATM promotions, with most of these decreases
generally driven by the impact of the ongoing pandemic. Mortgage Banking segment Noninterest expense at the Mortgage Banking segment increased$1.9 million , or 25%, during the first nine months of 2021 compared to the same period in 2020, primarily due to higher mortgage commissions recorded during 2021. 99
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COMPARISON OF FINANCIAL CONDITION AS OF
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$1.0 billion in cash and cash equivalents as ofSeptember 30, 2021 compared to$486 million as ofDecember 31, 2020 . The growth in cash balances was driven by continued growth in deposit balances along with a continued general decline in loans. Given the near-term risk of inflation and rising market interest rates, combined with the requirement that the term of the investments would have to be extended in order to pick up a meaningful increase in the overall yield, management chose to not redeploy significant excess cash into the investment portfolio throughSeptember 30, 2021 . During the fourth quarter of 2021, however, management began evaluating potential changes to its existing strategy for redeploying excess cash as a result of a recent steepening of the yield curve. For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This yield was a weighted-average 0.13% for the first nine 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) September 30, 2021 December 31, 2020 $ Change % Change Traditional Banking: Residential real estate: Owner occupied $ 827,898 $ 879,800$ (51,902) (6) % Nonowner occupied 294,818 264,780 30,038 11 Commercial real estate 1,393,241 1,349,085 44,156 3
Construction & land development 105,968
98,674 7,294 7 Commercial & industrial 333,795 325,596 8,199 3 Paycheck Protection Program 126,271 392,319 (266,048) (68) Lease financing receivables 9,427 10,130 (703) (7) Aircraft 130,398 101,375 29,023 29 Home equity 215,282 240,640 (25,358) (11) Consumer: Credit cards 14,781 14,196 585 4 Overdrafts 753 587 166 28 Automobile loans 17,533 30,300 (12,767) (42) Other consumer 6,223 8,167 (1,944) (24) Total Traditional Banking 3,476,388 3,715,649 (239,261) (6) Warehouse lines of credit* 750,682 962,796 (212,114) (22) Total Core Banking 4,227,070 4,678,445 (451,375) (10) Republic Processing Group*: Tax Refund Solutions: Easy Advances - - - NA Other TRS loans 1 - 1 NA Republic Credit Solutions 116,711 110,893 5,818 5
Total Republic Processing Group 116,712
110,893 5,819 5 Total loans** 4,343,782 4,789,338 (445,556) (9) Allowance for credit losses (63,024) (61,067) (1,957) 3 Total loans, net $ 4,280,758 $ 4,728,271$ (447,513) (9) %
*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.
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Gross loans decreased by$446 million , or 9%, during the first nine months of 2021 to$4.3 billion as ofSeptember 30, 2021 . The most significant components comprising the change in loans by reportable segment follow: Traditional Banking segment Period-end balances for Traditional Banking loans decreased$239 million , or 6%, fromDecember 31, 2020 toSeptember 30, 2021 . The following primarily drove the change in loan balances during the first nine months of 2021:
During the first nine months of 2021, the
?
of 2020 PPP originations and the net increase of
during the first nine months of 2021. The CARES Act was enacted inMarch 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 inDecember 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 ofSeptember 30, 2021 , net PPP loans of$126 million remained on theTraditional Bank's balance sheet, including$19 million in loan balances originated during 2020,$111 million in loan balances originated during 2021, and$4 million of unaccreted PPP fees reported as a credit offset to these originated balances. Unaccreted PPP 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
? decreases largely reflect the impact of 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
? Aircraft category increased
following the removal of pandemic-driven restrictions during the first nine
months of 2021. Warehouse Lending segmentOutstanding Warehouse period end balances decreased$212 million fromDecember 31, 2020 toSeptember 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 theBank'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 theBank's Warehouse lines have ranged from a low of 40% during 2013 to a high of 66% during 2020.
Allowance for Credit Losses
As ofSeptember 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. 101 Table of Contents
The Company's ACLL increased$2 million from$61 million as ofDecember 31, 2020 to$63 million as ofSeptember 30, 2021 . As a percent of total loans, the total Company's ACLL increased to 1.45% as ofSeptember 30, 2021 compared to 1.27% as ofDecember 31, 2020 . An analysis of the ACL by reportable segment follows:
Traditional Banking segment
The Traditional Banking ACLL decreased approximately
? of
months of 2021.
? of 2021 to
bond portfolios.
?
2021 to$937,000 based on an improving economic outlook. Warehouse Lending segment The Warehouse ACLL decreased to approximately$1.9 million , and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparingSeptember 30, 2021 toDecember 31, 2020 . As ofSeptember 30, 2021 , the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first nine months of 2021.
Republic
The RCS ACLL increased
RCS maintained an ACLL for two distinct credit products offered as ofSeptember 30, 2021 , including its line-of-credit products and its healthcare-receivables products. As ofSeptember 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. Asset Quality COVID-19 Loan Accommodations
The CARES Act provided several forms of economic relief designed to defray the impact of COVID-19. InApril 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 ofDecember 31, 2019 .
As of
The ultimate long-term 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.
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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$12 million during the first nine months of 2021, driven primarily by commercial-purpose loans within the hospitality and leisure industry downgraded to Special Mention during the first nine months of 2021. As previously mentioned, the ultimate long-term 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) September 30, 2021 December 31, 2020 $ Change % Change Loss $ - $ - $ - - Doubtful - - - - Substandard 24,501 30,193 (5,692) (19) % PCD - Substandard 1,739 1,887 (148) (8) Total Classified Loans 26,240 32,080 (5,840) (18) Special Mention 107,227 89,206 18,021 20 PCD - Special Mention 831 895 (64) (7) Total Special Mention Loans 108,058
90,101 17,957 20
Total Classified and Special Mention Loans $ 134,298 $ 122,181$ 12,117 10 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$6 million and$7 million as ofSeptember 30, 2021 andDecember 31, 2020 .
Nonperforming loans to total loans remained at 0.48% fromDecember 31, 2020 toSeptember 30, 2021 . As previously mentioned, the ultimate long-term impact of loans accommodated due to COVID-19 on the Company's nonperforming loans is
currently uncertain.
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Table 15 - Nonperforming Loans and Nonperforming Assets Summary
(in thousands) September 30, 2021 December 31, 2020 Loans on nonaccrual status* $ 20,252 $ 23,548 Loans past due 90-days-or-more and still on accrual** 691 47 Total nonperforming loans 20,943 23,595 Other real estate owned 1,845 2,499 Total nonperforming assets $ 22,788 $ 26,094 Credit Quality Ratios -Total Company : Nonperforming loans to total loans 0.48 % 0.49 % Nonperforming assets to total loans (including OREO) 0.52
0.54
Nonperforming assets to total assets 0.37
0.42
Credit Quality Ratios -Core Bank : Nonperforming loans to total loans 0.48 % 0.50 % Nonperforming assets to total loans (including OREO) 0.52
0.56
Nonperforming assets to total assets 0.39
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.
Table 16 - Nonperforming Loan Composition
September 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 $ 11,708 1.41 % $ 14,328 1.63 %
Nonowner occupied 99 0.03 81 0.03
Commercial real estate 6,607 0.47 6,762 0.50Construction & land development - - -
-
Commercial & industrial 93 0.03 55 0.02
Paycheck Protection Program - - - -
Lease financing receivables - - - -
Aircraft - - - -
Home equity 1,657 0.77 2,141 0.89
Consumer:
Credit cards - - 5 0.04
Overdrafts - - - -
Automobile loans 84 0.48 170 0.56
Other consumer 4 0.06 11 0.13
Total Traditional Banking 20,252 0.58 23,553 0.63
Warehouse lines of credit - - - -
Total Core Banking 20,252 0.48 23,553 0.50
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - - - -
Other TRS loans - - - -
Republic Credit Solutions 691 0.59 42 0.04Total Republic Processing Group 691 0.59 42
0.04
Total nonperforming loans $ 20,943 0.48 % $ 23,595 0.49 %
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Table 17 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance
September 30, 2021 Balance >$100 & Balance Total
(dollars in thousands) No. <= $100 No. <= $500 No. >$500 No. Balance
Traditional Banking:
Residential real estate:
Owner occupied 143 $ 5,002 25 $ 4,511 2 $ 2,195 170 $ 11,708
Nonowner occupied 3 99 - - - - 3 99
Commercial real estate - - 4 895 3 5,712 7 6,607Construction & land development - - - - - - - - Commercial & industrial 4 93 - - - - 4 93 Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - -
Aircraft - - - - - - - -
Home equity 27 741 4 916 - - 31 1,657
Consumer:
Credit cards - - - - - - NM -
Overdrafts - - - - - - - -
Automobile loans 10 84 - - - - 10 84
Other consumer 4 4 - - - - 4 4Total Traditional Banking 191 6,023 33 6,322 5 7,907 229 20,252 Warehouse lines of credit - - - - - - - - Total Core Banking 191 6,023 33 6,322
5 7,907 229 20,252
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans - - - - - - - -
Republic Credit Solutions NM 691 - - - - NM 691Total Republic Processing Group NM 691 - -
- - NM 691
Total 191 $ 6,714 33 $ 6,322 5 $ 7,907 229 $ 20,943
Number of Nonperforming
Loans and
Balance
December 31, 2020 Balance >$100 & Balance Total
(dollars in thousands) No. <= $100 No. <= $500 No. >$500 No. Balance
Traditional Banking:
Residential real estate:
Owner occupied 146 $ 5,110 27 $ 4,966 5 $ 4,252 178 $ 14,328
Nonowner occupied 3 81 - - - - 3 81
Commercial real estate 2 45 3 925 3 5,792 8 6,762Construction & land development - - - - - - - - Commercial & industrial 2 55 - - - - 2 55 Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - -
Aircraft - - - - - - - -
Home equity 26 867 6 1,274 - - 32 2,141
Consumer:
Credit cards NM 5 - - - - NM 5
Overdrafts - - - - - - - -
Automobile loans 14 170 - - - - 14 170
Other consumer 7 11 - - - - 7 11Total Traditional Banking 200 6,344 36 7,165 8 10,044 244 23,553 Warehouse lines of credit - - - - - - - - Total Core Banking 200 6,344 36 7,165
8 10,044 244 23,553
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans - - - - - - - -
Republic Credit Solutions NM 42 - - - - NM 42Total Republic Processing Group NM 42 - -
- - NM 42
Total 200 $ 6,386 36 $ 7,165 8 $ 10,044 244 $ 23,595
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Table 18 - Rollforward of Nonperforming Loans
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Nonperforming loans at the beginning
of the period $ 22,344 $ 20,419 $ 23,595 $ 23,489
Loans added to nonperforming status
during the period that remained
nonperforming at the end of the period 1,248 3,721 2,641 8,169
Loans removed from nonperforming
status during the period that were
nonperforming at the beginning of the
period (see table below) (2,233) (2,251) (4,839) (5,932)
Principal balance paydowns of loans
nonperforming at both period ends (384) (360) (1,098) (4,660)
Net change in principal balance of
other loans nonperforming at both
period ends* (32) (444) 644 19
Nonperforming loans at the end of the period$ 20,943 $ 21,085 $
20,943
* Includes relatively small consumer portfolios, e.g., RCS loans.
Table 19 - Detail of Loans Removed from Nonperforming Status
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Loans charged off $ - $ - $ - $ (2)
Loans transferred to OREO - - - (2,109)
Loans refinanced at other institutions (2,150) (1,917) (4,559) (2,870)
Loans returned to accrual status (83) (334) (280) (951)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period$ (2,233) $ (2,251) $ (4,839) $ (5,932)
Based on the Bank's review as of
Delinquent LoansTotal Company delinquent loans to total loans decreased to 0.40% as ofSeptember 30, 2021 from 0.42% as ofDecember 31, 2020 .Core Bank delinquent loans to totalCore Bank loans decreased to 0.18% as ofSeptember 30, 2021 from 0.21% as ofDecember 31, 2020 . With the exception of small-dollar consumer loans, allTraditional Bank loans past due 90-days-or-more as ofSeptember 30, 2021 andDecember 31, 2020 were on nonaccrual status. As previously mentioned, the ultimate long-term impact of loans accommodated due to COVID-19 on the Company's delinquent loans is currently uncertain. 106
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Table 20 - Delinquent Loan Composition*
September 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 $ 2,128 0.26 % $ 3,260 0.37 %
Nonowner occupied - - - -
Commercial real estate 5,037 0.36 5,457 0.40Construction & land development - - -
-
Commercial & industrial 66 0.02 12 0.00
Paycheck Protection Program - - - -
Lease financing receivables - - - -
Aircraft - - - -
Home equity 259 0.12 702 0.29
Consumer:
Credit cards 45 0.30 73 0.51
Overdrafts 145 19.26 147 25.04
Automobile loans 11 0.06 56 0.18
Other consumer 1 0.02 6 0.07
Total Traditional Banking 7,692 0.22 9,713 0.26
Warehouse lines of credit - - - -
Total Core Banking 7,692 0.18 9,713 0.21
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - - - -
Other TRS loans - - - -
Republic Credit Solutions 9,701 8.31 10,234 9.23Total Republic Processing Group 9,701 8.31 10,234
9.23
Total delinquent loans $ 17,393 0.40 % $ 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.
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Table 21 - Rollforward of Delinquent Loans
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Delinquent loans at the beginning of the
period $ 18,718 $ 14,046 $ 19,947 $ 20,804
Loans added to delinquency status during
the period and remained in delinquency
status at the end of the period 945 6,093 1,268 7,817
Loans removed from delinquency status
during the period that were in
delinquency status at the beginning of
the period (see table below) (3,109) (2,205) (3,179) (8,488)
Principal balance paydowns of loans
delinquent at both period ends (34) (788) (81) (2,977)
Net change in principal balance of other
loans delinquent at both period ends* 873 (93)
(562) (103)
Delinquent loans at the end of period
* Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 22 - Detail of Loans Removed from Delinquent Status
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Loans charged off $ - $ - $ (1) $ (3) Easy Advances paid off or charged off - - - - Loans transferred to OREO - - - (2,109) Loans refinanced at other institutions (1,652) (1,189) (1,938) (3,856) Loans paid current (1,457) (1,016)
(1,240) (2,520)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period$ (3,109) $ (2,205) $ (3,179) $ (8,488)
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) September 30, 2021 December 31, 2020 $ Change % Change
Cashflow-dependent TDRs $ 6,227 $ 10,938$ (4,711) (43) % Collateral-dependent TDRs 10,224 9,840 384 4 Total TDRs 16,451 20,778 (4,327) (21) Collateral-dependent loans (which are not TDRs) 14,781 20,806 (6,025) (29) Total recorded investment in TDRs and collateral-dependent loans $ 31,232 $
41,584$ (10,352) (25) %
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.
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Deposits
Table 24 - Deposit Composition
(in thousands) September 30, 2021 December 31, 2020 $ Change % Change Core Bank: Demand $ 1,342,395 $ 1,217,263$ 125,132 10 % Money market accounts 793,236 712,824 80,412 11 Savings 295,663 236,335 59,328 25 Individual retirement accounts (1) 46,196 47,889 (1,693) (4) Time deposits,$250 and over (1) 84,340 83,448 892 1 Other certificates of deposit (1) 163,345 199,214 (35,869) (18) Reciprocal money market and time deposits (1) 101,109 314,109 (213,000) (68) Brokered deposits (1) 30,001 25,010 4,991 20Total Core Bank interest-bearing deposits 2,856,285 2,836,092 20,193 1Total Core Bank noninterest-bearing deposits 1,691,413 1,503,662 187,751 12Total Core Bank deposits 4,547,698 4,339,754 207,944 5Republic Processing Group : Money market accounts 5,114 6,673 (1,559) (23) Total RPG interest-bearing deposits 5,114
6,673 (1,559) (23)
Brokered prepaid card deposits 323,250 257,856 65,394 25 Other noninterest-bearing deposits 38,822 110,021 (71,199) (65) Total RPG noninterest-bearing deposits 362,072 367,877 (5,805) (2) Total RPG deposits 367,186 374,550 (7,364) (2) Deposits of discontinued operations (2) 33,063 18,877 14,186 75 Total deposits $ 4,947,947 $ 4,733,181$ 214,766 5 % (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.
Management believes its deposit balances continue to be the beneficiary of
Federal government stimulus brought about by the COVID-19 pandemic. During the
? first nine 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
? 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
? 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. Offsetting the positive growth mentioned above, deposit balances were
negatively impacted by a shift of approximately
interest-bearing reciprocal money market accounts to SSUARs. This shift
? occurred as the Bank lowered its reciprocal money market account pricing to its
clients due to the high cost of the additional fees associated with
participation in the money market network, which allows clients to fully insure
their deposits through
banks.
Total RPG deposits from continuing operations decreased
? RPG noninterest-bearing deposits growth was primarily driven by the following:
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RPG prepaid card balances within its RPS division increased
? 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.
RPG other noninterest-bearing deposits decreased
? outflow of commercial settlement deposits associated with the RCS segment's
line-of-credit products.
Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings
SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank's control.
SSUARs increased$50 million during the first nine months of 2021 to$261 million as ofSeptember 30, 2021 compared to$211 million as ofDecember 31, 2020 . As mentioned above, Bank clients shifted approximately$140 million in balances from interest-bearing reciprocal money market accounts to SSUARs after the Bank lowered its reciprocal money market account pricing due to the high cost to the Bank of participating in the money market network. The increase driven by this shift was partially offset by a$94 million decrease in SSUARs during the first nine months of 2021, driven by the exit of one corporate client following the acquisition of this client by another company. The substantial majority of SSUARs are indexed to immediately repricing indices such as the FFTR.
Federal Home Loan Bank Advances
FHLB advances declined by$210 million fromDecember 31, 2020 toSeptember 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 0.14% as ofSeptember 30, 2021 , compared to$225 million in overnight advances at a rate of 0.16% as ofDecember 31, 2020 . Given the overall amount of liquidity on the Company's balance sheet as ofSeptember 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 95% as ofSeptember 30, 2021 and 108% as ofDecember 31, 2020 . As ofSeptember 30, 2021 andDecember 31, 2020 , the Company had cash and cash equivalents on-hand of$1.0 billion and$486 million . The Bank also had available borrowing capacity of$898 million and$683 million from the FHLB as ofSeptember 30, 2021 andDecember 31, 2020 . In addition, the Bank's liquidity resources included unencumbered debt securities of$187 million and$274 million as ofSeptember 30, 2021 andDecember 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 ofSeptember 30, 2021 andDecember 31, 2020 , these pledged investment securities had a fair value of$354 110 Table of Contents 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 ofSeptember 30, 2021 , the Bank had approximately$1.6 billion in deposits from 245 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . The 20 largest non-sweep deposit relationships represented approximately$609 million , or 12%, of the Company's total deposit balances as ofSeptember 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 theTraditional Bank deposits they replace, potentially decreasing the Bank's earnings. Capital Total stockholders' equity increased from$823 million as ofDecember 31, 2020 to$839 million as ofSeptember 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
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 ClassB Common shares have ten votes per share. ClassB 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 ofSeptember 30, 2021 , RB&T could, without prior approval, declare dividends of approximately$176 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 1Risk-Based Capital ratio, an 8.0% Tier 1Risk-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 1Risk-Based Capital above their minimum risk-based capital requirements. Republic continues to exceed the regulatory requirements forTotal Risk-Based Capital ,Common Equity Tier I Risk-Based Capital ,Tier I Risk Based-Capital andTier I Leverage Capital . Republic and the Bank intend to maintain a capital
position that meets or
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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 13.33% as of September 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, Republic Bancorp Capital Trust , an unconsolidated trust subsidiary of
Republic, was formed and issued $40 million in TPS. On September 30, 2021 , as
permitted under the terms of RBCT's governing documents, Republic redeemed these
securities at the par amount of approximately $40 million , without penalty.
Republic's capital ratios remained well above "well capitalized" levels
following the redemption of the TPS, which were treated as part of Republic's
Tier I Capital while outstanding.
Table 25 - Capital Ratios (1)
As of September 30, 2021 As of December 31, 2020
(dollars in thousands) Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Republic Bancorp, Inc. $ 877,936 18.25 % $ 896,053 18.52 %
Republic Bank & Trust Company 849,951 17.67 796,114 16.46
Common equity tier 1 capital to risk-weighted assets Republic Bancorp, Inc.$ 824,203 17.13 %$ 803,682 16.61 % Republic Bank & Trust Company 796,218 16.56
743,743 15.38
Tier 1 (core) capital to risk-weighted assets Republic Bancorp, Inc.$ 824,203 17.13 %$ 843,682 17.43 % Republic Bank & Trust Company 796,218 16.56
743,743 15.38
Tier 1 leverage capital to average assets Republic Bancorp, Inc.$ 824,203 13.13 %$ 843,682 13.70 % Republic Bank & Trust Company 796,218 12.72
743,743 12.11
The Company and the Bank elected in 2020 to defer the impact of CECL onregulatory capital. The deferral period is five years, with the total (1) 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 14 basis points lower than those
presented in the table above as of September 30, 2021 .
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Asset/Liability Management and Market Risk
Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards, and achieve acceptable net interest income based on the Bank's risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank's overall earnings and balance sheet.
The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances, and other factors.
The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a "Base" case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank's deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve. As ofSeptember 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 beginningOctober 1, 2021 and endingSeptember 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 excludesTraditional 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 September 30, 2021 - % (1.8) % (1.7) % 2.8 % 7.3 % % Change from base net interest income as of December 31, 2020 0.4 % (4.5) %
(7.0) % (5.7) % (4.2) %
The Bank's dynamic simulation model run for September 2021 projected no change
in the Bank's net interest income plus secondary market loan fees for the
"Down-100" scenario, a decrease in the "Up-100" and "Up-200" scenarios, and an
increase in the "Up-300" and "Up-400" rate scenarios. 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 September 2021 was generally because the Bank had less ability in September
2021 than December 2020 to reprice its liabilities downward. The improvement in
the Up-rate scenarios was primarily due to the following:
? Growth in interest-earning cash balances from
and
? A smaller projected falloff in secondary market fees for the
simulation than previously projected for theDecember 2020 simulation. 113 Table of Contents LIBOR Exposure InJuly 2017 , theFinancial Conduct Authority (the "FCA"), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, inNovember 2020 , theFCA announced that many tenors of LIBOR would continue to be published throughJune 2023 . Bank regulators have instructed banks to discontinue new originations referencing LIBOR as soon as possible, but no later thanDecember 2021 . To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability ofLIBOR. Management focuses on operational readiness, as well as instituting processes and systems to validate that contract risk is clearly identified and understood. New originations and any modifications or renewals of LIBOR-based contracts contain fallback language to assist in an orderly transition to an alternative reference rate. For Bank contracts that have a duration beyondDecember 31, 2021 , and that reference LIBOR, all fallback provisions and variations are currently being identified and sorted into classifications based upon those provisions. Upon classification, the contracts are monitored and possibly remediated if fallback provisions are not deemed sufficiently robust. The Bank realizes that remediating certain contracts indexed to LIBOR may require consent from the counterparties, which could be difficult and costly to obtain in certain limited circumstances. As ofSeptember 30, 2021 , the Company had approximately$1.3 billion of assets that reference LIBOR, with short-term Warehouse balances representing$751 million of these assets and commercial and mortgage loans primarily making up the remainder. These amounts exclude derivative assets and liabilities on the Company's consolidated balance sheet. As ofSeptember 30, 2021 , the notional amount of the Company's LIBOR-referenced interest rate derivative contracts was more than$250 million . Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR. 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 EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 ) and "RESULTS OF OPERATIONS (Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 ."
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