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.
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; 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 Company 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 Company 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;
? inflation;
? recession;
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? 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;
? 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, 2019 . Management continually evaluates the Company's accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management's estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management. Critical accounting policies are those that management believes are the most important to the portrayal of the Company's financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.
Republic believes its critical accounting policies and estimates relate to the following:
? ACLL and Provision
?
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ACLL and Provision - AtSeptember 30, 2020 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly, and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly. EffectiveJanuary 1, 2020 , the Company adopted ASC 326 Financial Instruments - Credit Losses, which replaces the pre-January 1, 2020 "probable-incurred" method for calculating the Company's ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures. When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower "expected" threshold for loss recognition versus a higher "probable" threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts. The Company's CECL method is a "static-pool" method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use theU.S. national unemployment rate as its primary forecasting tool. For its CRE loan pool, the Company also uses one-year forecasts of vacancy rates for CRE in the Company's market footprint. Management's evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast. Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on theU.S. national unemployment rate and vacancy rates for CRE in the Company's market footprint. Subsequent to the one-year forecasts, loss rates are assumed to immediately revert back to long-term historical averages. Prospectively, the impact of utilizing the CECL approach to calculate the ACLL will be significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company's reported earnings. See additional detail regarding the Company's adoption of ASC 326 and the CECL method under Footnote 1 "Basis of Presentation and Summary of Significant Accounting Policies" and Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements."Goodwill and Other Intangible Assets - The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely goodwill impairment has occurred. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is likely that goodwill impairment has occurred. If, after assessing the totality of events or circumstances, the Company determines it is likely that goodwill impairment has not occurred, then performing a quantitative impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform an impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The Company typically performs its impairment test annually as ofSeptember 30 . Under its qualitative analysis, management concluded there was insufficient evidence of impairment of the Company's$16 million of goodwill atSeptember 30, 2020 .
All goodwill is attributable to the Company's Traditional Banking segment and is not expected to be deductible for tax purposes.
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BUSINESS SEGMENT COMPOSITION
As ofSeptember 30, 2020 , the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute "Core Bank " or "Core Banking" operations, while the last two segments collectively constitute RPG operations. MemoryBank®, the Company's national branchless banking platform, is part of the Traditional Banking segment.
(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
*Includes one LPO
Republic's headquarters are in
As ofSeptember 30, 2020 and through the date of this filing, generally all Traditional Banking products and services, except for a selection of deposit products offered through the Bank's separately branded national branchless banking platform, MemoryBank, were offered through the Company's traditional RB&T brand.
The Bank's principal lending activities consist of the following:
Retail Mortgage Lending - Through its retail banking centers and its Consumer Direct channel, the Bank originates single family, residential real estate loans. In addition, the Bank originates HEALs and HELOCs through its retail banking centers. Such loans are generally collateralized by owner occupied property.
Consumer Direct Lending - Through its Consumer Direct channel, formerly named its Internet Lending channel, the Bank accepts online loan applications for its RB&T branded products through its website at www.republicbank.com. Historically, the majority of loans originated through its Consumer Direct channel have been within the Bank's traditional markets ofKentucky ,Florida ,Indiana , andTennessee . Other states where loans are marketed includeAlabama ,Arizona ,California ,Colorado ,Connecticut ,Georgia ,Illinois ,Louisiana ,Michigan ,Minnesota ,Mississippi ,Missouri ,New Jersey ,North Carolina ,Ohio ,Oregon, Pennsylvania ,South Carolina ,Utah ,Virginia ,Washington , andWisconsin , as well as theDistrict of Columbia . 76 Table of Contents
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 near by the market footprint. Construction and Land Development Lending - The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots. Consumer Lending - Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank's markets. Aircraft Lending - InOctober 2017 , the Bank created an Aircraft Lending division. The initial loan size offered was up to$500,000 . In 2019, the Bank increased the opportunity to finance up to$1.0 million and in mid-2020 the Bank raised its opportunity to finance, once again, up to$2.0 million . Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. Loans range between$55,000 and$2,000,000 in size and have terms up to 20 years. 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:
MemoryBank - MemoryBank, a national branchless banking platform, is a separately branded division of the Bank, which, from a marketing perspective, focuses on technologically savvy clients that prefer to carry larger balances in highly liquid interest-bearing bank accounts. MemoryBank products are offered through its website, www.mymemorybank.com. Private Banking - The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank's Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele. Treasury Management Services - The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank's Treasury Management department. Internet Banking - The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking - The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services - The Bank also provides title insurance and other financial institution related products and services.
Bank Acquisitions - The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements."
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(II) Warehouse Lending segment
TheCore Bank provides short-term, revolving credit facilities to mortgage bankers across theU.S. through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. 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. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions. See additional detail regarding the Mortgage Banking segment under Footnote 11 "Mortgage Banking Activities" and Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements."
(IV) Tax Refund Solutions segment
Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout theU.S. , as well as tax-preparation software providers (collectively, the "Tax Providers"). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year's tax season. RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item "Net refund transfer fees." 78 Table of Contents
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2020 and 2019:
? Offered only during the first two months of each year;
? The taxpayer was given the option to choose from multiple loan-amount tiers,
subject to underwriting, up to a maximum advance amount of
? No requirement that the taxpayer pays for another bank product, such as an RT;
? Multiple funds disbursement methods, including direct deposit, prepaid card,
check, or Walmart Direct2Cash®, based on the taxpayer-customer's election;
? Repayment of the EA to the Bank is deducted from the taxpayer's tax refund
proceeds; and
? If an insufficient refund to repay the EA occurs:
o there is no recourse to the taxpayer,
o no negative credit reporting on the taxpayer, and
o no collection efforts against the taxpayer.
The Company reports fees paid for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer's tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer's tax return is submitted to the applicable taxing authority. Provision on EAs are estimated when advances are made, with Provision for all expected EA losses made in the first quarter of each year. Unpaid EAs are charged-off byJune 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged-off loans. Related to the overall credit losses on EAs, the Bank's ability to control losses is highly dependent upon its ability to predict the taxpayer's likelihood to receive the tax refund as claimed on the taxpayer's tax return. Each year, the Bank's EA approval model is based primarily on the prior-year's tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year's tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management's predictions if tax refund payment patterns change materially between years. In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EAs product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company's financial condition and results of operations.
See additional detail regarding the EA product under Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic Payment Solutions division - RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company's overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
(V) Republic Credit Solutions segment
Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
RCS line-of-credit product - The Bank originates a line-of-credit product to
generally subprime borrowers in multiple states. Elevate Credit, Inc., a
third-party service provider subject to the Bank's oversight and supervision,
provides the Bank with certain marketing, servicing, technology, and support
? services for the RCS line-of-credit program, while a separate third party also
provides customer support, servicing, and other services for the RCS
line-of-credit product on the Bank's behalf. The Bank is the lender for the RCS
line-of-credit product and is marketed as such. Further, the Bank controls the
loan
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terms and underwriting guidelines, and the Bank exercises consumer compliance
oversight of the RCS line-of-credit product. The Bank sells participation interests in the RCS line-of-credit product. These participation interests are a 90% interest in advances made to borrowers under the borrower's line-of-credit account, and the participation interests are generally sold three business days following the Bank's funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying RCS line-of-credit account with each borrower. The RCS line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale through this program are carried at the lower of cost or fair value.
RCS installment loan products - From the first quarter of 2016 through the
first quarter of 2018, the Bank piloted a consumer installment loan product
across the
the Bank sold 100% of the balances generated through the program back to its
third-party service provider approximately 21 days after origination. During
the second quarter of 2018, the Bank and its third-party service provider
? suspended the origination of new loans and the sale of unsold loans through
this program. Since program suspension in 2018, the Bank has carried all unsold
loans under this program as "held for investment" on its balance sheet and has
continued to wind down those balances. Additionally, loans under this program
are carried at fair value under a fair value option on the Bank's balance sheet
with the portfolio marked to market monthly. Approximately
remained held for investment under this program as of
Through a new program launched inDecember 2019 , the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. A third-party service provider subject to the Bank's oversight and supervision provides the Bank with marketing services and loan servicing for these RCS installment loans. The Bank is the lender for these RCS installment loans, and is marketed as such. Further, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under this RCS installment loan program are carried as "held for sale" on the Bank's balance sheet, with the intention to sell these loans to its third-party service provider generally within sixteen days following the Bank's origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. 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."
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OVERVIEW (Three Months Ended
Total Company net income for the third quarter of 2020 was$20.4 million , a$2.0 million , or 11%, increase from the same period in 2019. Diluted EPS increased to$0.98 for the three months endedSeptember 30, 2020 compared to$0.88 for the same period in 2019.
The following are general highlights by reportable segment:
Traditional Banking segment
? Net income decreased
compared to the same period in 2019.
Driven by continued net interest margin compression, net interest income
? decreased
same period in 2019.
Driven primarily by COVID-19 related concerns, Provision increased
? to
same period in 2019.
Driven primarily by a change in client savings and spending patterns during the
? pandemic, total noninterest income decreased
quarter of 2020 compared to the same period in 2019.
Driven primarily by additional investments in technology, total noninterest
? expense increased
same period in 2019. Warehouse Lending segment
? Net income increased
compared to the same period in 2019.
? Net interest income increased
2020 compared to the same period in 2019.
? The Warehouse Provision was a net credit of
2020 compared to a net charge of$620,000 for the same period in 2019.
? Average committed Warehouse lines were
2020 compared to
? Average line usage was 68% during both the third quarter of 2020 and 2019.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased
? million, or 252%, during the third quarter of 2020 compared to the same period
in 2019.
Overall, Republic's originations of secondary market loans totaled
? during the third quarter of 2020 compared to
period in 2019, with the Company's cash gain recognized as a percent of total
sales increasing approximately 250 basis points from period to period. Tax Refund Solutions segment
? Net income increased
same period in 2019.
? Net interest income increased
to the same period in 2019.
Overall, TRS recorded a net credit to the Provision of
? third quarter of 2020 compared to a net credit of$2.0 million for the same period in 2019. 81 Table of Contents
? Noninterest income increased
2020 compared to the same period in 2019.
? Net RT revenue increased
same period in 2019.
? Noninterest expense was
$3.0 million for the same period in 2019.
Republic
? Net income decreased
the same period in 2019.
? Net interest income decreased
2020 compared to the same period in 2019.
Overall, RCS recorded a net credit to the Provision of
? quarter of 2020 compared to a net charge of
2019.
? Noninterest income decreased
to the third quarter of 2020.
? Noninterest expense was
$959,000 for the same period in 2019.
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.
Total Company net interest income decreased 6% during the third quarter of 2020 compared to the same period in 2019.Total Company net interest margin decreased to 3.59% during the third quarter of 2020 compared to 4.07% for the same period in 2019. A large amount of the Company's financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended higher fromDecember 2015 throughDecember 2018 but began trending lower again during 2019 as theFOMC reduced the FFTR by 75 basis points during the year. TheFOMC further lowered the FFTR 100 basis points during the first quarter of 2020 following market reactions to the COVID-19 pandemic. Consistent with decreases in market rates in the previous 12 months, theTotal Company's net interest spread and net interest margin both compressed 27 basis points and 48 basis points, respectively, from the third quarter of 2019 to the same period in 2020. The Company's net interest spread, the difference between the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed primarily because the Company's interest-bearing liabilities had less room to reprice downward than its interest-earning assets. The Company's net interest margin compressed 21 basis points more than its net interest spread due to the reduction in benefit the Bank receives from its noninterest-bearing funding in a falling rate environment. Management believes the Company's net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice
lower.
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The following were the most significant components affecting the Company's net interest income by reportable segment:
Traditional Banking segment The Traditional Banking's net interest income decreased$4.1 million , or 10%, for the third quarter of 2020 compared to the same period in 2019. Traditional Banking's net interest margin was 3.22% for the third quarter of 2020, a decrease of 54 basis points from the same period in 2019.
The decrease in the
its interest-earning assets less the weighted average cost paid on its
interest-bearing liabilities, compressed 54 basis points primarily because the
? earning asset counterparts.
compressed 54 basis points primarily due to an 80 basis point decrease in its
loan yield. This margin compression was partially offset due to robust growth
of
which the Bank was able to utilize to reduce interest-bearing liabilities and
their associated costs.
Partially offsetting the decline in net interest income driven by the decrease
in the
interest income increased partially due to a rise in third quarter 2020 average
loans of
Bank originated
? following the passage of the CARES Act on
contributed
fees, for the third quarter of 2020. The rise in averages from the PPP Loans
was partially offset by a
including the impact of the sale of
loans inNovember 2019 as part of the Company's branch divestiture. Warehouse Lending segment
Warehouse net interest income increased
Falling mortgage rates during 2020 drove a surge in consumer refinance volume for Warehouse clients resulting in a 14% increase in average Warehouse loans for the third quarter of 2020 over the same period in 2019. Overall usage rates on Warehouse lines of credit were 68% for both the third quarter of 2020 and 2019. In addition, the Warehouse net interest margin increased to 3.41% for the third quarter of 2020 compared to 2.30% for the third quarter of 2019, as many of theBank's Warehouse clients reached contractual interest rate floors on their lines-of-credit during the second quarter of 2020 preventing further declines in the segment's loan yields, while the segment's cost of funds continued to decline.
Republic
RCS's net interest income decreased$2.8 million , or 36%, from the third quarter of 2019 to the third quarter of 2020. The decrease was driven primarily by a decline in fee income from RCS's line-of-credit product. Loan fees on RCS's line-of-credit product, recorded as interest income on loans, decreased to$4.0 million during the third quarter of 2020 compared to$6.5 million during the same period in 2019 and accounted for 76% and 77% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances, as the Company reduced marketing for the product in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2020. Future loan fee income from RCS's higher-yielding line-of-credit product will likely continue to be negatively impacted by the on-going COVID-19 pandemic. As ofSeptember 30, 2020 the current on-balance-sheet Board-approved risk limit was$40 million for the Company. As ofSeptember 30, 2020 , the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was$18 million . 83 Table of Contents
Table 1 - Total Company Average Balance Sheets and Interest Rates
$53,33 Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate ASSETS Interest-earning assets: Federal funds sold and other interest-earning deposits$ 313,281 $ 94
0.12 %
600,943 2,362 1.57 547,281 3,497 2.56
Other RPG loans (2) (6) 114,224 5,268 18.45 126,619 8,417 26.59
Outstanding Warehouse lines of credit
(3) (6) 860,420 7,966 3.70 752,089 8,834 4.70
Paycheck Protection Program loans (4)
(6) 513,201 3,497 2.73 - - -
All other Core Bank loans (5) (6) 3,419,261 36,8514.31 3,727,431 45,645 4.90
Total interest-earning assets 5,821,330 56,038
3.85 5,455,576 68,059 4.99
Allowance for credit loss (55,423) (47,379) Noninterest-earning assets: Noninterest-earning cash and cash equivalents 95,570 63,655 Premises and equipment, net 42,167 45,960 Bank owned life insurance 67,447
65,878
Other assets (1) 180,952 127,946
Total assets $ 6,152,043 $ 5,711,636 LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities: Transaction accounts$ 1,366,830 $ 178
0.05 %
734,203 235 0.13 790,852 2,071 1.05
Time deposits 409,088 2,025 1.98 426,453 2,217 2.08
Reciprocal money market and time
deposits 292,948 378 0.52 214,321 768 1.43
Brokered deposits 135,994 60 0.18 241,477 1,437 2.38
Total interest-bearing deposits 2,939,063 2,876 0.39 2,833,632 8,042 1.14 Securities sold under agreements to repurchase and other short-term borrowings 213,010 22 0.04 246,889 298 0.48 Federal Reserve Paycheck Protection Program Liquidity Facility 53,338 48 0.36 - - - Federal Home Loan Bank advances 126,250 658 2.08 690,457 3,839 2.22 Subordinated note 41,240 182 1.77 41,240 394 3.82 Total interest-bearing liabilities 3,372,901 3,786
0.45 3,812,218 12,573 1.32
Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 1,846,552 1,065,904 Other liabilities 121,239 91,338 Stockholders' equity 811,351 742,176 Total liabilities and stockholders' equity$ 6,152,043 $ 5,711,636 Net interest income$ 52,252 $ 55,486 Net interest spread 3.40 % 3.67 % Net interest margin 3.59 % 4.07 %
(1) For the purpose of this calculation, the fair market value adjustment on debt
securities is included as a component of other assets.
(2) Interest income includes loan fees of
three months ended
(3) Interest income includes loan fees of
months ended
(4) Interest income includes loan fees of
(5) Interest income includes loan fees of
months ended
Average balances for loans include the principal balance of nonaccrual loans (6) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees and costs.
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Table 2 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities impacted
Republic's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume) and (iii) net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
Table 2 - Total Company Volume/Rate Variance Analysis
Three Months Ended September 30, 2020
Compared to
Three Months Ended September 30, 2019
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ (1,572) $ 59 $ (1,631)
Investment securities, including
FHLB stock (1,135) 316 (1,451)
Other RPG loans (3,149) (763)
(2,386)
Outstanding Warehouse lines of credit (868) 1,164
(2,032)
Paycheck Protection Program loans 3,497 3,497
-
All other Core Bank loans (8,794) (3,589) (5,205)
Net change in interest income (12,021) 684 (12,705)
Interest expense:
Transaction accounts (1,371) 234 (1,605)
Money market accounts (1,836) (138) (1,698)
Time deposits (192) (88) (104)
Reciprocal money market and time
deposits (390) 216 (606)
Brokered deposits (1,377) (441)
(936)
Securities sold under agreements to repurchase and other short-term borrowings (276) (36) (240) Federal Reserve Paycheck Protection Program Liquidity Facility 48 48 -
Federal Home Loan Bank advances (3,181) (2,954)
(227)
Subordinated note (212) -
(212)
Net change in interest expense (8,787) (3,159)
(5,628)
Net change in net interest income
$ (7,077) Provision EffectiveJanuary 1, 2020 , the Company adopted ASC 326 Financial Instruments - Credit Losses, which replaces the pre-January 1, 2020 "probable-incurred" method for calculating the Company's ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures.
See additional detail regarding the Company's adoption of ASC 326 and the CECL method under Footnote 1 "Basis of Presentation and Summary of Significant Accounting Policies" of Part I Item 1 "Financial Statements."
Total Company Provision was
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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 2020 was$5.9 million , compared to$1.6 million for the third quarter of 2019. An analysis of the Provision for the third quarter of 2020 compared to the same period in
2019 follows:
Related to the Bank's pass-rated and non-rated loans, the Bank recorded net
charges of
2020 and 2019. For the third quarter of 2020, the
? economic impact of the COVID-19 pandemic along with rising vacancy rates on CRE
within the
Provision due to the impact of the COVID-19 pandemic was a reduction in Provision of$1.2 million driven by a$83 million decrease in non-PPP Traditional Bank period-end balances during the third quarter of 2020.
The Bank recorded net charges to the Provision of
the third quarters of 2020 and 2019 related to loans rated Substandard, Special
? Mention, and PCD loans. The charge during the third quarter of 2019 included a
the quarter. As a percentage of total loans, the Traditional Banking ACLL was 1.26% atSeptember 30, 2020 compared to 0.78% atDecember 31, 2019 and 0.86% atSeptember 30, 2019 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at September
30, 2020.
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in this section of the filing under "Comparison of Financial Condition" for additional discussion regarding the Provision and the Bank's credit quality.
See additional detail regarding the impact of COVID-19 under:
? Part I Item 1 "Financial Statements"
o Footnote 2 "
o Footnote 4 "Loans and Allowance for Credit Losses"
o Footnote 9 "Off Balance Sheet Risks, Commitments, and Contingent Liabilities"
? Part II Item 1A "Risk Factors"
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Warehouse Lending segment
Warehouse recorded a net credit to the Provision of $3,000 for the third quarter
of 2020 compared to a net charge of $620,000 for the same period in 2019.
Provision for both periods reflected changes in general reserves consistent with
changes in outstanding period-end balances. Outstanding Warehouse period-end
balances decreased $1 million during the third quarter of 2020 compared to an
increase of $248 million during the third quarter of 2019.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was
0.25% at
Tax Refund Solutions segment The TRS Provision incurred a positive change from a net credit of$2.0 million during the third quarter of 2019 to a net credit of$4.3 million during the third quarter of 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 2019, it also experienced a higher rate of EA recoveries during the third quarter of 2020 than the comparable quarter of 2019. 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 related to the impact of the current 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 3.93% atSeptember 30, 2020 . This compares to 2.91% atSeptember 30, 2019 , a difference of 102 basis points. By comparison, the unpaid EA percentage was 5.05% atJune 30, 2020 , compared to 3.45% atJune 30, 2019 , representing a difference of 160 basis points. With all unpaid EAs having been charged off as ofJune 30, 2020 , any EA payments received during the fourth quarter of 2020 will continue to represent recovery credits directly to income.
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 3 below, RCS recorded a credit to the Provision of$12,000 during the third quarter of 2020 compared to a charge to the Provision of$3.0 million for the same period in 2019. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS's line-of-credit product, as the Company reduced marketing for RCS's line-of-credit product in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2020.
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 7.82% atSeptember 30, 2020 , 12.45% atDecember 31, 2019 and 13.32% atSeptember 30, 2019 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses atSeptember 30, 2020 .
The following table presents net charges (credits) to the RCS Provision by product:
Table 3 - RCS Provision by Product
Three Months Ended Sep. 30,
(in thousands) 2020 2019 $ Change % Change
Product:
Line of credit $ (40) $ 2,981 $ (3,021) (101) %
Hospital receivables 28 5 23 460
Total $ (12) $ 2,986 $ (2,998) (100) %
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Table 4 - Summary of Loan and Lease Loss Experience
Three Months Ended
September 30,
(dollars in thousands) 2020 2019
ACLL at beginning of period $ 55,097 $ 45,983
Charge-offs:
Traditional Banking:
Residential real estate (13) (17)
Commercial real estate - (1,407)
Commercial & industrial (255) -
Home equity (14) -
Consumer (227) (547)
Total Traditional Banking (509) (1,971)
Warehouse lines of credit - -
Total Core Banking (509) (1,971)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - -
Other TRS loans (22) (90)
Republic Credit Solutions (684) (2,799)
Total Republic Processing Group (706) (2,889)
Total charge-offs (1,215) (4,860)
Recoveries:
Traditional Banking:
Residential real estate 28 126
Commercial real estate - -
Commercial & industrial 80 1
Home equity 21 23
Consumer 77 150
Total Traditional Banking 206 300
Warehouse lines of credit - -
Total Core Banking 206 300
Republic Processing Group :
Tax Refund Solutions:
Easy Advances 4,294 2,098
Other TRS loans - 2
Republic Credit Solutions 83 256
Total Republic Processing Group 4,377 2,356
Total recoveries 4,583 2,656
Net loan recoveries (charge-offs) 3,368 (2,204)
Provision - Core Banking 5,780 2,175
Provision - RPG (4,354) 978
Total Provision 1,426 3,153
ACLL at end of period $ 59,891 $ 46,932 Credit Quality Ratios -
ACLL to total loans 1.20 % 1.01 % ACLL to nonperforming loans 284
226
Net loan charge-offs (recoveries) to average loans (0.27) 0.19
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.05 % 0.73 % ACLL to nonperforming loans 245
163
Net loan charge-offs to average loans 0.03 0.15
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Noninterest Income
Traditional Banking segment Traditional Banking's noninterest income decreased$964,000 for the third quarter of 2020 compared to the same period in 2019. Service charges on deposit accounts decreased$738,000 and interchange income decreased$135,000 from the third quarter of 2019 to the same period in 2020. Both decreases largely reflect a change in client savings and spending patterns during the pandemic-driven economic restrictions. In general, during the third quarter of 2020, client spending decreased meaningfully from the third quarter of 2019, while client deposit balances increased, thus producing less overdraft activity and less interchange revenue for the Bank. Client spending patterns did appear to increase between the second and third quarters of 2020, however, management is uncertain at this time if this pattern will continue in the near term. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months endedSeptember 30, 2020 and 2019 were$1.3 million and$2.3 million . The total daily overdraft charges, net of refunds, included in interest income for the three months endedSeptember 30, 2020 and 2019 were$99,000 and$612,000 . The Bank suspended its daily overdraft charges during the first quarter of 2020 to cushion the economic blow 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 increased$7.7 million , or 252%, during the third quarter of 2020 compared to the same period in 2019. Falling mortgage rates during 2020 drove strong growth in the Company's consumer refinance activity, particularly within the Company's relatively new Consumer Direct channel. Overall, the Company originated$204 million of secondary market mortgage loans during the third quarter of 2020 compared to$124 million for the third quarter of 2019. In addition to the strong mortgage banking origination volume during the third quarter of 2020, the Company's cash gain recognized as a percent of total sales increased by approximately 250 basis points from period to period. The stronger gain percentages resulted from favorable market conditions on pricing during the quarter. If and when consumer refinance volume begins to slow down in the future, management believes market conditions for pricing will become more competitive and return to a range of 2.0%-3.0%, which is more in-line with historical averages for gains-as-a-percentage-of-loans-sold. Tax Refund Solutions segment
TRS's noninterest income increased$1.4 million during the third quarter of 2020 compared to the same period in 2019 resulting from an$835,000 increase in net RT revenue and a$521,000 increase in prepaid card program fees as a result of the Company'sMay 1, 2020 acquisition of$250 million in prepaid card balances. Management believes the RTs processed for the third quarter of 2020 increased over the third quarter of 2019 due to delays in 2020 associated with the COVID-19 pandemic. 89 Table of Contents
Republic
RCS's noninterest income decreased$351,000 , or 29%, during the third quarter of 2020 compared to the same period in 2019. As illustrated in Table 5 below, RCS program fees decreased$351,000 resulting primarily from a decline in outstanding line-of-credit balances as the Company reduced marketing for its installment loan product and its line-of-credit product in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2020.
The following table presents RCS program fees by product:
Table 5 - RCS Program Fees by Product
Three Months Ended Sep. 30,
(in thousands) 2020 2019 $ Change % Change
Product:
Line of credit $ 752 $ 1,172 $ (420) (36) %
Hospital receivables 45 79 (34) (43)
Installment loans* 47 (56) 103 NM
Total $ 844 $ 1,195 $ (351) (29) %
* The Company has elected the fair value option for this product, with
mark-to-market adjustments recorded as a component of program fees.
Noninterest Expense
Total Company noninterest expense increased$3.1 million , or 7%, during the third quarter of 2020 compared to the same period in 2019. The following were the most significant components comprising the increase in noninterest expense by reportable segment: Traditional Banking segment
Driven by the Company's increased investment in technology sinceSeptember 30, 2019 , Traditional Banking noninterest expense increased$533,000 , or 1%, for the third quarter of 2020 compared to the same period in 2019. A substantial portion of the technological increase was driven by the Company's investment in loan systems used to facilitate processing for its PPP clients. Warehouse Lending segment
Noninterest expense at the Warehouse segment increased$989,000 during the third quarter of 2020 compared to the same period in 2019, primarily due to higher incentive compensation expense recorded during 2020. Mortgage Banking segment
Noninterest expense at the Mortgage Banking segment increased
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OVERVIEW (Nine Months Ended
The following are general highlights by reportable segment:
Traditional Banking segment
? Net income decreased
compared to the same period in 2019.
Driven primarily by net interest margin compression, net interest income
? decreased
the same period in 2019.
Driven by COVID-19 related concerns in combination with the new allowance
? methodology as required by the adoption of ASC 326, Provision increased
million to
million for the same period in 2019.
Driven primarily by a change in client savings and spending patterns during the
? pandemic, noninterest income decreased
months of 2020 compared to the same period in 2019.
? Total noninterest expense increased
compared to same period in 2019.
? Total nonperforming loans to total loans for the Traditional Banking segment
was 0.54% at
? Delinquent loans to total loans for the Traditional Banking segment was 0.29%
atSeptember 30, 2020 compared to 0.36% atDecember 31, 2019 .
At
? portfolio had been granted COVID-19 loan accommodations earlier in 2020, with
accommodation after the expiration of the initial accommodation period. Warehouse Lending segment
? Net income increased
compared to the same period in 2019.
? Net interest income increased
of 2020 compared to the same period in 2019.
? The Warehouse Provision was a net charge of
of 2020 compared to a net charge of
? Average committed Warehouse lines increased to
nine months of 2020 from$1.1 billion during the same period in 2019.
? Average line usage was 65% during the first nine months of 2020 compared to 55%
during the same period in 2019. Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased
? million, or 241%, during the first nine months of 2020 compared to the same
period in 2019.
Overall, Republic's originations of secondary market loans totaled
? during the first nine months of 2020 compared to
period in 2019, with the Company's cash gain recognized as a percent of total
sales increasing approximately 130 basis points from period to period.
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Table of Contents
Tax Refund Solutions segment
? Net income decreased
compared to the same period in 2019.
? Net interest income increased
compared to the same period in 2019.
? Total EA originations were
compared to$389 million for the first nine months of 2019.
Overall, TRS recorded a net charge to the Provision of
? first nine months of 2020 compared to a net charge to the Provision of
million for the same period in 2019.
? Noninterest income increased
compared to the same period in 2019.
? Net RT revenue decreased
compared to the same period in 2019.
? Noninterest expense was
compared to
Republic
? Net income increased
compared to the same period in 2019.
? Net interest income decreased
of 2020 compared to the same period in 2019.
Overall, RCS recorded a net charge to the Provision of
? first nine months of 2020 compared to a net charge of
period in 2019.
? Noninterest income decreased
to the first nine months of 2020.
? Noninterest expense was
to
? Total nonperforming loans to total loans for the RCS segment was 0.03% at
? Delinquent loans to total loans for the RCS segment was 5.36% at
2020 compared to 7.25% atDecember 31, 2019 .
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.
Total Company net interest income decreased 2% during the first nine months of 2020 compared to the same period in 2019.Total Company net interest margin decreased to 4.21% during the first nine months of 2020 compared to 4.60% for the same period in 2019. 92 Table of Contents
A large amount of the Company's financial instruments track closely with or are primarily indexed to either the FFTR, Prime, or LIBOR. These market rates trended higher fromDecember 2015 throughDecember 2018 but began trending lower again during 2019 as theFOMC reduced the FFTR by 75 basis points during the year. TheFOMC further lowered the FFTR 100 basis points during the first quarter of 2020 following market reactions to the COVID-19 pandemic. Consistent with decreases in market rates in the previous 12 months, theTotal Company's net interest spread and net interest margin compressed 24 basis points and 39 basis points, respectively, from the first nine months of 2019 to the same period in 2020. The Company's net interest spread, the difference between the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities, compressed primarily because the Company's interest-bearing liabilities had less room to reprice downward than its interest-earning assets. The Company's net interest margin compressed 15 basis points more than its net interest spread due to the reduction in benefit the Bank sees from noninterest-bearing funding in a falling rate environment. Management believes the Company's net interest margin, as well as the net interest margin of its various operating segments will likely continue to decline in the near term as its earning asset yields continue to reprice lower.
The following were the most significant components affecting the Company's net interest income by reportable segment:
Traditional Banking segment The Traditional Banking's net interest income decreased$7.7 million , or 6%, for the first nine months of 2020 compared to the same period in 2019. Traditional Banking's net interest margin was 3.41% for the first nine months of 2020, a decrease of 34 basis points from the same period in 2019.
The decrease in the
its interest-earning assets less the weighted average cost paid on its
? interest-bearing liabilities, compressed 29 basis points primarily because the
Core Bank's liabilities had less room to reprice downward than its interest-earning asset counterparts.
basis points more than its net interest spread, due to the decreased value from
the
between the Traditional Banking segment's net interest margin and net interest
? spread was 14 basis points during the first nine months of 2020 compared to 19
basis points during the first nine months of 2019, with the differential of
five basis points representing the decreased value to the net interest margin
of noninterest-bearing deposits and stockholders' equity. The decrease in this
value was driven by a 52 basis-point decline in the yield on the Traditional
Banking segment's interest-earning assets from period to period.
Partially offsetting the decline in net interest income driven by the decrease
in the
interest income increased partially due to a rise in YTD 2020 average loans,
which increased
? third quarters of 2020 following the passage of the CARES Act on
2020. This PPP portfolio contributed
loans for the first nine months of 2020. The increase in
from the PPP program was partially offset by a
portfolios, which included the impact of the sale of
divestiture. Warehouse Lending segment
Net interest income increased
Falling mortgage rates during 2020 drove a surge in consumer refinance volume for Warehouse clients resulting in a 29% increase in average Warehouse loans for the first nine months of 2020 over the same period in 2019. Overall usage rates on Warehouse lines of credit were 65% for the first nine months of 2020 compared to 55% for the first nine months of 2019. In addition, the Warehouse net interest margin increased to 3.07% for the first nine months of 2020 compared to 2.49% for the first nine months of 2019, as many of theBank's Warehouse client reached contractual interest rate floors on their lines-of-credit during the second quarter of 2020 preventing further declines in the segment's loan yields, while the segment's cost of funds continued to decline. 93 Table of Contents Tax Refund Solutions segment
TRS's net interest income increased$1.0 million for the first nine months of 2020 compared to the same period in 2019. TRS's EA product earned$19.6 million in interest income during the first nine months of 2020, a$504,000 increase resulting primarily from modifications to the product's pricing tiers. EA pricing includes a direct fee to the taxpayer, with the annual percentage rate to the taxpayer for his or her portion of the total fee being less than 36%
for all offering tiers.
See additional detail regarding the EA product under Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
RCS's net interest income decreased$4.9 million , or 22%, from the first nine months of 2019 to the first nine months of 2020. The decrease was driven primarily by a decline in fee income from RCS's line-of-credit product. Loan fees on RCS's line-of-credit product, recorded as interest income on loans, decreased to$14.7 million during the first nine months of 2020 compared to$19.3 million during the same period in 2019 and accounted for 78% and 79% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances, as the Company reduced marketing for the product in response to the COVID-19 pandemic. Future loan fee income from RCS's higher-yielding line-of-credit product will likely continue to be negatively impacted by the on-going COVID-19 pandemic. As ofSeptember 30, 2020 the current on-balance-sheet Board-approved risk limit was$40 million for the Company. As ofSeptember 30, 2020 , the total outstanding on-balance-sheet amount, including loans held for sale, related to this product was$18 million . 94 Table of Contents
Table 6 - Total Company Average Balance Sheets and Interest Rates
Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate
ASSETS
Interest-earning assets:
Federal funds sold and other
interest-earning deposits $ 273,604 $
818 0.40 %
575,575 8,190 1.90 541,739 11,278 2.78
TRS Easy Advance loans (2) 52,004 19,602 50.26 45,406 19,098 56.08
Other RPG loans (3) (7) 124,479 19,587 20.98 122,106 25,301 27.63
Outstanding Warehouse lines of credit(4)
(7) 770,454 22,305 3.86 599,302 22,148 4.93
Paycheck Protection Program loans (5)
(7) 300,733 6,149 2.73 - - -
All other Core Bank loans (6) (7) 3,508,837 117,637 4.47 3,663,704 133,388 4.85
Total interest-earning assets 5,605,686
194,288 4.62 5,268,731 216,356 5.48
Allowance for credit loss (59,896) (52,159) Noninterest-earning assets: Noninterest-earning cash and cash equivalents 135,755 109,585 Premises and equipment, net 43,836 44,694 Bank owned life insurance 67,061
65,484
Other assets (1) 166,071 120,781
Total assets $ 5,958,513 $ 5,557,116 LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities: Transaction accounts$ 1,253,811 $ 1,019 0.11 %$ 1,140,171 $ 4,652 0.54 % Money market accounts 741,205 1,725 0.31 764,055 5,873 1.02 Time deposits 417,171 6,370 2.04 408,419 6,108 1.99 Reciprocal money market and time deposits 263,681 1,432 0.72 201,492 2,042 1.35 Brokered deposits 216,098 2,279 1.41 170,688 3,018 2.36 Total interest-bearing deposits 2,891,966 12,825 0.59 2,684,825 21,693 1.08 Securities sold under agreements to repurchase and other short-term borrowings 199,556 158 0.11 232,949 1,049 0.60 Federal Reserve Paycheck Protection Program Liquidity Facility 58,683 153 0.35 - - - Federal Home Loan Bank advances 253,157 3,128 1.65 638,237 10,631 2.22 Subordinated note 41,240 829 2.68 41,240 1,252 4.05 Total interest-bearing liabilities 3,444,602 17,093 0.66 3,597,251 34,625 1.28 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 1,598,635 1,140,355 Other liabilities 119,393 93,491 Stockholders' equity 795,883 726,019 Total liabilities and stock-holders' equity$ 5,958,513 $ 5,557,116 Net interest income$ 177,195 $ 181,731 Net interest spread 3.96 % 4.20 % Net interest margin 4.21 % 4.60 %
(1) For the purpose of this calculation, the fair market value adjustment on debt
securities is included as a component of other assets.
(2) Interest income for Easy Advances is composed entirely of loan fees.
(3) Interest income includes loan fees of
nine months ended
(4) Interest income includes loan fees of
nine months ended
(5) Interest income includes loan fees of
(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.
95
Table of Contents
Table 7 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities impacted
Republic's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume) and (iii) net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
Table 7 - Total Company Volume/Rate Variance Analysis
Nine Months Ended September 30, 2020
Compared to
Nine Months Ended September 30, 2019
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ (4,325) $ (369) $ (3,956)
Investment securities, including
FHLB stock (3,088) 668 (3,756)
TRS Easy Advance loans* 504 (1,934) 2,438
Other RPG loans (5,714) 483 (6,197)
Outstanding Warehouse lines of
credit 157 5,546 (5,389)
Paycheck Protection Program loans 6,149 6,149
-
All other Core Bank loans (15,751) (5,483) (10,268)
Net change in interest income (22,068) 5,060 (27,128)
Interest expense:
Transaction accounts (3,633) 422 (4,055)
Money market accounts (4,148) (170) (3,978)
Time deposits 262 132 130
Reciprocal money market and time
deposits (610) 513 (1,123)
Brokered deposits (739) 674
(1,413)
Securities sold under agreements to repurchase and other short-term borrowings (891) (131)
(760)
Federal Reserve Paycheck Protection Program Liquidity Facility 153 153 - Federal Home Loan Bank advances (7,503) (5,255)
(2,248)
Subordinated note (423) -
(423)
Net change in interest expense (17,532) (3,662)
(13,870)
Net change in net interest income
* Volume for Easy Advances is based on total loans originated during the period
presented.
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Provision
Effective January 1, 2020 , the Company adopted ASC 326 Financial Instruments -
Credit Losses, which replaces the pre-January 1, 2020 "probable-incurred" method
for calculating the Company's ACL with the CECL method. CECL is applicable to
financial assets measured at amortized cost, including loan and lease
receivables and held-to-maturity debt securities. CECL also applies to certain
off-balance sheet credit exposures.
See additional detail regarding the Company's adoption of ASC 326 and the CECL method under Footnote 1 "Basis of Presentation and Summary of Significant Accounting Policies" of Part I Item 1 "Financial Statements."
Total Company Provision was
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 2020 was$14.5 million , compared to$3.2 million for the first nine months of 2019. An analysis of the Provision for the first nine months of 2020 compared to the same period in 2019 follows:
Related to the Bank's pass-rated and non-rated loans, the Bank recorded net
charges of
? months of 2020 and 2019. For the first nine months of 2020, the Traditional
Bank recorded
economic impact of the COVID-19 pandemic. The Company's analysis included the
following:
o the pandemic's impact on national unemployment;
o an analysis of loans to industries more directly harmed by the pandemic, such
as the hospitality industry;
o the number and amount in loans receiving pandemic related accommodations from
the Bank; and,
o a forecasted rise in vacancy rates for CRE within the
footprint.
Offsetting the increase in the Provision due to the impact of the COVID-19
pandemic was a reduction in the Provision of
The Bank recorded a net reduction to the Provision of
nine months of 2020 compared to a net charge to the Provision of
during the same period in 2019 related to loans rated Substandard, Special
? Mention, or PCD. The net reduction during the first nine months of 2020 was
driven by a
relationship that had been partially charged-off in a prior period. The charge
during the first nine months of 2019 includes
two commercial relationships that defaulted during the period.
Related to the Bank's corporate bonds held within its investment securities
portfolio, the Bank recorded
? of 2020, driven by higher PD and LGD assumptions stemming from COVID-19
economic concerns. The Company began provisioning for credit loss for its
investment securities in 2020 as part of its adoption of ASC 326; therefore, no
similar Provision was recognized during the first nine months of 2019. As a percentage of total loans, the Traditional Banking ACLL was 1.26% atSeptember 30, 2020 compared to 0.78% atDecember 31, 2019 and 0.86% atSeptember 30, 2019 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses at September
30, 2020.
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in this section of the filing under "Comparison of Financial Condition" for additional discussion regarding the Provision and the Bank's credit quality.
97
Table of Contents
See additional detail regarding the impact of COVID-19 under:
? Part I Item 1 "Financial Statements"
o Footnote 2 "
o Footnote 4 "Loans and Allowance for Credit Losses"
o Footnote 9 "Off Balance Sheet Risks, Commitments, and Contingent Liabilities"
? Part II Item 1A "Risk Factors"
Warehouse Lending segment
Warehouse recorded a net charge to the Provision of$778,000 for the first nine months of 2020 compared to a net charge of$1.3 million for the same period in 2019. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances.Outstanding Warehouse period-end balances increased$311 million during the first nine months of 2020 compared to an increase of$505 million during the first nine months of 2019.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was
0.25% at
Tax Refund Solutions segment TRS recorded a net charge to the Provision of$15.2 million during the first nine months of 2020 compared to a net charge of$11.8 million for the same period in 2019. Substantially all TRS Provision in both periods was related
to its EA product.
TRS's Provision for EA loan losses was$15.2 million , or 3.93% of its$388 million in EAs originated during the first nine months of 2020, compared to a Provision of$11.2 million , or 2.91% of its$389 million of EAs originated during the first nine months of 2019. The higher net charges to the Provision during the first nine months of 2020 resulted from EA repayment rates from theU.S. Treasury that significantly lagged those during the same period in 2019. Management believes the significant decline in repayment rates from theU.S. Treasury during 2020, particularly during the second quarter, was directly related to the impact of the current COVID-19 pandemic and the resulting delay in tax return processing by 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 3.93% atSeptember 30, 2020 . This compares to 2.91% atSeptember 30, 2019 , a difference of 102 basis points. By comparison, the unpaid EA percentage was 5.05% atJune 30, 2020 , compared to 3.45% atJune 30, 2019 , representing a difference of 160 basis points. With all unpaid EAs having been charged off as ofJune 30, 2020 , any EA payments received during the fourth quarter of 2020 will continue to represent recovery credits directly to income.
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 8 below, RCS recorded a charge to the Provision of$251,000 during the first nine months of 2020 compared to a charge to the Provision of$8.6 million for the same period in 2019. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS's line-of-credit product, as the Company reduced marketing for RCS's line-of-credit product in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2020.
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 7.82% atSeptember 30, 2020 , 12.45% atDecember 31, 2019 and 13.32% atSeptember 30, 2019 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses at
September 30, 2020 . 98 Table of Contents
The following table presents net charges to the RCS Provision by product:
Table 8 - RCS Provision by Product
Nine Months Ended Sep. 30,
(in thousands) 2020 2019 $ Change % Change
Product:
Line of credit $ 214 $ 8,554 $ (8,340) (97) %
Hospital receivables 37 39 (2) (5)
Total $ 251 $ 8,593 $ (8,342) (97) %
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Table 9 - Summary of Loan and Lease Loss Experience
Nine Months Ended
September 30,
(dollars in thousands) 2020 2019
ACLL at beginning of period $ 43,351 $ 44,675
Adoption of ASC326 6,734 -
Charge-offs:
Traditional Banking:
Residential real estate (40) (474)
Commercial real estate (270) (1,407)
Commercial & industrial (447) -
Home equity (14) (13)
Consumer (960) (1,480)
Total Traditional Banking (1,731) (3,374)
Warehouse lines of credit - -
Total Core Banking (1,731) (3,374)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances (19,575) (13,425)
Commercial & industrial (94) (371)
Republic Credit Solutions (5,401) (9,306)
Total Republic Processing Group (25,070) (23,102)
Total charge-offs (26,801) (26,476)
Recoveries:
Traditional Banking:
Residential real estate 116 393
Commercial real estate 472 4
Commercial & industrial 124 6
Home equity 108 61
Consumer 399 445
Total Traditional Banking 1,219 909
Warehouse lines of credit - -
Total Core Banking 1,219 909
Republic Processing Group :
Tax Refund Solutions:
Easy Advances 4,336 2,103
Commercial & industrial 1 2
Republic Credit Solutions 553 875
Total Republic Processing Group 4,890 2,980
Total recoveries 6,109 3,889
Net loan charge-offs (20,692) (22,587)
Provision - Core Banking 15,008 4,433
Provision - RPG 15,490 20,411
Total Provision 30,498 24,844
ACLL at end of period $ 59,891 $ 46,932 Credit Quality Ratios -
ACLL to total loans 1.20 % 1.01 % ACLL to nonperforming loans 284 226
Net loan charge-offs to average loans 0.58 0.68
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.05 % 0.73 % ACLL to nonperforming loans 245 163
Net loan charge-offs to average loans 0.01 0.08
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Noninterest Income
Total Company noninterest income increased $14.6 million , or 26%, during the
first nine months of 2020 compared to the same period in 2019. The following
were the most significant components comprising the total Company's noninterest
income by reportable segment:
Traditional Banking segment
Traditional Banking's noninterest income decreased $2.4 million , or 10%, for the
first nine months of 2020 compared to the same period in 2019. Service charges
on deposit accounts decreased $2.0 million and interchange income decreased
$712,000 from the first nine months of 2019 to the same period in 2020. Both
decreases largely reflect a change in client savings and spending patterns
during the pandemic-driven economic restrictions. In general, during the second
quarter of 2020, client spending decreased meaningfully from the same periods in
2019, while client deposit balances increased, thus producing less overdraft
activity and less interchange revenue for the Bank. Client spending patterns did
begin returning to more normalized levels during the third quarter of 2020,
however, management is uncertain at this time if this pattern will continue
given the on-going spread of COVID-19 nationally.
The Bank earns a substantial majority of its fee income related to its overdraft
service program from the per item fee it assesses its customers for each
insufficient funds check or electronic debit presented for payment. The total
per item fees, net of refunds, included in service charges on deposits for the
nine months ended September 30, 2020 and 2019 were $4.1 million and $6.5
million . The total daily overdraft charges, net of refunds, included in interest
income for the nine months ended September 30, 2020 and 2019 were $517,000 and
$1.7 million . The Bank suspended its daily overdraft charges during the first
quarter of 2020 to cushion the economic blow of the COVID-19 pandemic on its
clients. The Bank reinstituted the charging of its daily overdraft fee on
September 1, 2020 .
The Bank recognized a $353,000 net gain on sale of one of its former banking
centers during the first nine months of 2020. The now-sold property is located
in Tampa, Florida .
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased $16.9
million , or 241%, during the first nine months of 2020 compared to the same
period in 2019. Falling mortgage rates during 2020 drove strong growth in the
Company's consumer refinance activity, particularly within the Company's
relatively new Consumer Direct channel. Overall, the Company originated $548
million of secondary market mortgage loans during the first nine months of 2020
compared to $247 million for the first nine months of 2019.
In addition to the strong mortgage banking origination volume during the first
nine months of 2020, the Company's gain recognized as a percent of total sales
increased by approximately 130 basis points from period to period. The stronger
gain percentages resulted from favorable market conditions on pricing during the
first nine months of 2020. If and when consumer refinance volume begins to slow
down in the future, management believes market conditions for pricing will
become more competitive and return to a range of 2.0%-3.0%, which is more
in-line with historical averages for gains-as-a-percentage-of-loans-sold.
Tax Refund Solutions segment
TRS's noninterest income increased$106,000 during the first nine months of 2020 compared to the same period in 2019. This increase reflected a$1.3 million increase in prepaid card program fees as a result of the Company'sMay 1, 2020 acquisition of$250 million in prepaid card balances offset by a$1.2 million decrease in net RT fees. RTs processed decreased 8% from 2019 to 2020 partially due to delays in RT processing. 101 Table of Contents
Republic
RCS's noninterest income decreased$93,000 , or 2%, during the first nine months of 2020 compared to the same period in 2019 with a$566,000 increase in program fees offset by a$659,000 decrease in other income resulting from a one-time gain recorded on discontinuation of RCS's credit card product during 2019. As illustrated in Table 10 below, RCS program fees increased primarily from$1.4 million in fees from RCS's new installment loan product launched inDecember 2019 partially offset by a$1.0 million reduction in fees for RCS's line-of-credit product. The Company reduced marketing for RCS's installment loan and line-of-credit products during 2020 in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2020.
The following table presents RCS program fees by product:
Table 10 - RCS Program Fees by Product
Nine Months Ended Sep. 30,
(in thousands) 2020 2019 $ Change % Change
Product:
Line of credit $ 2,199 $ 3,219 $ (1,020) (32) %
Hospital receivables 53 172 (119) (69)
Installment loans* 1,424 (281) 1,705 NM
Total $ 3,676 $ 3,110 $ 566 18 %
* 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
Traditional Banking segment
Traditional Banking noninterest expense increased
? Salaries and employee benefits expense increased
primarily by annual merit increases.
Data Processing expense increased
? increased investment in technology since
part of this investment related to systems to facilitate processing for PPP
clients.
Offsetting the above were decreases in Marketing and Development, Interchange,
? and Travel and Entertainment expenses, with each of these expenses driven
downward as a direct result of pandemic-related influences. Warehouse Lending segment Noninterest expense at the Warehouse segment increased$1.1 million during the first nine months of 2020 compared to the same period in 2019, primarily due to higher incentive compensation expense recorded during 2020. Mortgage Banking segment
Noninterest expense at the Mortgage Banking segment increased$3.2 million , or 74%, during the first nine months of 2020 compared to the same period in 2019, primarily due to higher mortgage commissions recorded during 2020. 102 Table of Contents
COMPARISON OF FINANCIAL CONDITION AT
Table 11 - Loan Portfolio Composition
(in thousands) September 30, 2020 December 31, 2019 $ Change % Change Traditional Banking: Residential real estate: Owner occupied $ 885,011 $ 949,568$ (64,557) (7) % Nonowner occupied 256,319 258,803 (2,484) (1) Commercial real estate 1,308,867 1,303,000 5,867 0 Construction & land development 142,465 159,702 (17,237) (11) Commercial & industrial 337,925 468,209 (130,284) (28) Paycheck Protection Program 514,550 - 514,550 NA Lease financing receivables 11,204
14,040 (2,836) (20) Aircraft 87,555 58,941 28,614 49 Home equity 252,839 293,186 (40,347) (14) Consumer: Credit cards 14,373 17,836 (3,463) (19) Overdrafts 705 1,522 (817) (54) Automobile loans 35,683 52,923 (17,240) (33) Other consumer 9,008 18,201 (9,193) (51)
Total Traditional Banking 3,856,504 3,595,931 260,573 7 Warehouse lines of credit* 1,028,675 717,458 311,217 43 Total Core Banking 4,885,179 4,313,389 571,790 13 Republic Processing Group*: Tax Refund Solutions: Easy Advances - - - NA Other TRS loans 233 14,365 (14,132) (98) Republic Credit Solutions 108,962 105,397 3,565 3Total Republic Processing Group 109,195 119,762 (10,567) (9) Total loans** 4,994,374 4,433,151 561,223 13 Allowance for credit losses (59,891) (43,351) (16,540) 38 Total loans, net $ 4,934,483 $ 4,389,800$ 544,683 12 %
*Identifies loans to borrowers located primarily outside of the Bank's market footprint.
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans increased by
Traditional Banking segment Period-end balances for Traditional Banking loans increased$261 million , or 7%, fromDecember 31, 2019 toSeptember 30, 2020 . The following primarily drove the change in loan balances during the first nine months of 2020:
? The Bank originated
in Table 11 above net of$13 million in unamortized origination fees. 103 Table of Contents
The C&I category decreased
The Company's strategic wind down of its auto dealer floor plan program drove
? approximately
paydowns and payoffs of C&I loans during the period. C&I loan production to
offset these paydowns has been negatively impacted by pandemic driven credit
conditions.
The owner-occupied residential real estate and home equity categories decreased
? long-term market interest rates during the first nine months of 2020 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.
Regarding the Company's PPP loans, these loans have a stated maturity of two years, an annualized fixed coupon rate of 1.0% to the client, are 100% guaranteed by the SBA, and 100% forgivable to the client if certain program metrics are met. The Bank earns an origination fee of 1%, 3%, or 5% based on the size of the loan. Republic carried approximately$13 million in unaccreted PPP loan fees as ofSeptember 30, 2020 , which it expects to accrete into income over the life of the loans. While no guarantee can be made as to the overall life of these loans, management believes the loans are likely to remain on the Company's balance sheet less than one year, as it expects the substantial majority of its clients to request forgiveness for their loans at the earliest possible time, presuming these clients achieve the required program metrics. Warehouse Lending segmentOutstanding Warehouse period end balances increased$311 million fromDecember 31, 2019 toSeptember 30, 2020 . A sharp decline in long-term fixed mortgage rates during the first nine months of 2020 drove the increase in Warehouse balances. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank's Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on 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 59% during 2019. Tax Refund Solutions segment Outstanding TRS loans decreased$14 million fromDecember 31, 2019 toSeptember 30, 2020 primarily reflecting a$14 million reduction in other TRS loans. Other TRS loans atDecember 31, 2019 were primarily commercial loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first quarter of the following year.
Republic
Outstanding RCS loans increased$4 million fromDecember 31, 2019 toSeptember 30, 2020 primarily reflecting a$11 million decrease in outstanding balances for RCS's line-of-credit product partially offset by a$15 million increase in hospital receivables. As previously mentioned, the decrease in balances for RCS's line-of-credit product was the direct result of a reduction in marketing for the product in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2020.
See additional detail regarding the impact of COVID-19 under:
? Part I Item 1 "Financial Statements"
o Footnote 2 "
o Footnote 4 "Loans and Allowance for Credit Losses"
o Footnote 9 "Off Balance Sheet Risks, Commitments, and Contingent Liabilities"
? Part II Item 1A "Risk Factors"
Allowance for Credit Losses AtSeptember 30, 2020 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its 104
Table of Contents
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. EffectiveJanuary 1, 2020 , the Company adopted ASC 326 Financial Instruments - Credit Losses, which replaces the pre-January 1, 2020 "probable-incurred" method for calculating the Company's ACL with the CECL method. CECL is applicable to financial assets measured at amortized cost, including loan and lease receivables and held-to-maturity debt securities. CECL also applies to certain off-balance sheet credit exposures. When measuring an ACL, CECL primarily differs from the probable-incurred method by: a) incorporating a lower "expected" threshold for loss recognition versus a higher "probable" threshold; b) requiring life-of-loan considerations; and c) requiring reasonable and supportable forecasts. The Company's CECL method is a "static-pool" method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use theU.S. national unemployment rate as its primary forecasting tool. In accordance with the adoption of ASC 326 and CECL, the Company recorded onJanuary 1, 2020 a$6.7 million , or 16%, increase in the ACLL for its loans, a$51,000 ACLS for its investment debt securities, and a$456,000 ACLC for its off-balance sheet credit exposures. Of the$6.7 million increase in ACLL, approximately$1.4 million was a gross-up reclassification of non-accretable discount on previously-PCI, now-PCD loans, and the remaining$5.3 million was a difference in ACL between CECL and the probable-incurred method. The Company also made a cumulative effect entry of$4.3 million to reduce its opening balance of retained earnings upon adoption of ASC 326, with no impact on 2020 earnings for these adoption entries. The adoption date increase in ACLL for the Company's loans primarily reflects additional ACLL for longer duration loan portfolios, such as the Company's residential real estate and consumer loan portfolios. No additional segmentation of the Bank's loan portfolios was deemed necessary upon adoption.
See additional detail regarding the Company's adoption of ASC 326 and the CECL method under Footnote 1 "Basis of Presentation and Summary of Significant Accounting Policies" of Part I Item 1 "Financial Statements."
The Company's ACLL increased$17 million from$43 million atDecember 31, 2019 to$60 million atSeptember 30, 2020 . As a percent of total loans, the total Company's ACLL increased to 1.20% atSeptember 30, 2020 compared to 0.98% atDecember 31, 2019 . An analysis of the ACL by reportable segment follows:
Traditional Banking segment
The Traditional Banking ACLL increased$20 million to$49 million atSeptember 30, 2020 , driven partially by the Company'sJanuary 1, 2020 CECL adoption entry of approximately$7 million and partially by approximately$18 million of reserves for the expected impact of the COVID-19 pandemic, which primarily included the following considerations:
o the pandemic's impact on national unemployment;
o an analysis of loans to industries more directly harmed by the pandemic, such
as the hospitality industry;
o the number and amount in loans receiving pandemic related accommodations from
the Bank; and,
o a forecasted rise in vacancy rates for CRE within the
footprint.
Offsetting the increase in the ACLL due to the pandemic was a reduction in the ACLL of approximately$3 million driven by a$254 million decrease in non-PPP Traditional Bank period-end balances fromJanuary 1, 2020 toSeptember 30, 2020 .
The Traditional Bank ACLL to total
Following the Company's$51,000 ASC 326 adoption entry onJanuary 1, 2020 establishing an ACLS for its debt securities, the Company increased its ACLS$296,000 during the first nine months of 2020 to$347,000 based on higher PD and LGD expectations on its corporate bond portfolios. These higher PD and LGD expectations generally reflect economic concerns from the COVID-19 pandemic. Following the Company's ASC 326 adoption entry onJanuary 1, 2020 for an ACLC on its off-balance sheet credit exposures of$456,000 , the Company increased its ACLC$467,000 during the first nine months of 2020 to$923,000 atSeptember 30, 2020 . The higher ACLC atSeptember 30, 2020 reflects higher assumed usage rates on outstanding lines and higher assumed loss rates on credit converted balances over their expected lives. The ACLC is recorded on the liability side of the balance sheet, with any provision for loss recorded within other noninterest expense. 105 Table of Contents Warehouse Lending segment The Warehouse ACLL increased to approximately$2.6 million , and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparingSeptember 30, 2020 toDecember 31, 2019 . As ofSeptember 30, 2020 , the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first nine months of 2020. Warehouse lines are generally short-term, sound quality facilities secured by marketable collateral; therefore, the Company made no adjustment to the Warehouse ACLL upon adoption of CECL. Additionally, the Company made no ACLL adjustment for Warehouse lines for COVID-19 concerns atSeptember 30, 2020 , as its Warehouse clients are experiencing relatively high demand for refinance transactions as borrowers take advantage of the low interest rate environment.
Republic
The RCS ACLL decreased$4 million to$9 million atSeptember 30, 2020 from$13 million atDecember 31, 2019 . The decrease in ACLL was driven by a$11 million decrease in outstanding balances for RCS's line-of-credit product partially offset by a higher estimated loss rate on this product to account for COVID-19 economic concerns. As previously mentioned, the decrease in balances for RCS's line-of-credit product was the direct result of a reduction in marketing for the product in response to the COVID-19 pandemic. RCS maintained an ACLL for two distinct credit products offered atSeptember 30, 2020 , including its line-of-credit product and its healthcare-receivables product. AtSeptember 30, 2020 , the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables product to as high as 49% for its line-of-credit product. The lower reserve percentage of 0.25% was provided for RCS's healthcare receivables, as such receivables have recourse back to the third-party providers.
See additional detail regarding the impact of COVID-19 under:
? Part I Item 1 "Financial Statements"
o Footnote 2 "
o Footnote 4 "Loans and Allowance for Credit Losses"
o Footnote 9 "Off Balance Sheet Risks, Commitments, and Contingent Liabilities"
? Part II Item 1A "Risk Factors"
106
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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 . The following table presents loan balances under COVID-19 accommodations as ofJune 30, 2020 and a rollforward of accommodated balances throughSeptember 30, 2020 . Borrowers needing additional accommodation typically receive an additional three-month deferral or forbearance period, but may receive other forms of accommodation based on facts and circumstances.
Table 12 - Rollforward of COVID-19 Loan Accommodations
Jun. 30, 2020 Three Months Ended Sep. 30, 2020 Sep. 30, 2020 COVID-19 Accommodations
COVID-19 Additional (Payments) Draws Made Out of Accommodation Still under Accommodation
(in thousands) Accm.* Accm. Net (Pay)/Draw (Payoffs) Current Past Due** Single Accm. Multiple Accm.
Traditional Banking:
Residential real estate:
Owner occupied $ 51,570 $ 6,780 $ (525) $ (3,751) $ 45,761 $ 51 $ 1,804 $ 6,458
Nonowner occupied 58,754 - (667) (536) 57,551 - - -
Commercial real estate 491,314 3,567 (5,840) (15,939) 467,447 2,739 457 2,459
Commercial & industrial 141,720 - (7,438) (3,842) 118,784 12 - 11,644Construction & land development 28,927 -
486 (9,214) 20,199 - - -
Lease financing receivables 2,443 - 409 - 2,852 - - -
Aircraft 3,215 - - (171) 3,044 - - -
Home equity 13,776 627 (173) (2,835) 11,173 - 187 35
Consumer 1,463 58 (134) (58) 1,239 - 41 49
Total Traditional Banking $ 793,182 $ 11,032 $ (13,882) $ (36,346) $ 728,050 $ 2,802 $ 2,489 $ 20,645
*Accm.= Accommodation(s)
**Loans 30-days-or-more past due on their contractual payments following exit from their accommodation period.
While less than 1% of accommodated balances out of their accommodation period were contractually past due as ofSeptember 30, 2020 , the ultimate impact of the above accommodated loan balances on the Company's Classified, Special Mention, nonperforming, and delinquent loans is currently uncertain. When evaluating its borrowers for further accommodation, the Bank considers prudent options based on the borrower's credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by the CARES Act and states and localities; and the Bank's ability to ease cash flow pressures on the affected borrowers while improving the Bank's likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank's Classified, Special Mention, nonperforming, and delinquent loans would substantially increase and negatively impact the Company's overall operating performance. 107 Table of Contents As ofSeptember 30, 2020 , 80% of the Traditional Banking segment's loans granted COVID-19 accommodations during 2020 were either within the CRE or C&I categories. Table 13 below presents by industry CRE and C&I loans that received COVID-19 accommodations during 2020, with balances as ofSeptember 30, 2020 :
Table 13 -
September 30, 2020 (dollars in thousands) Total CRE &
C&I % Concentration
Industry:
Lessors of Nonresidential Buildings (except Miniwarehouses) $ 176,510 29 % Hotels (except Casino Hotels) and Motels 66,102 11 Lessors of Residential Buildings and Dwellings 53,601 9 Limited-Service Restaurants 42,207 7 Full-Service Restaurants 38,058 6 Offices of Physicians (except Mental Health Specialists) 37,945 6 Fitness and Recreational Sports Centers 28,797 5 Offices of Dentists 13,428 2 Sports Teams and Clubs 11,644 2 Religious Organizations 11,473 2 Car Washes 9,878 2 Golf Courses and Country Clubs 6,498 1 General Freight Trucking, Long-Distance, Truckload 6,116 1 Public Relations Agencies 5,715 1 Child Day Care Services 4,557 1 All other industries 91,013 15 Total CRE and C&I $ 603,542 100 %
Classified and Special Mention Loans
The Bank applies credit quality indicators, or "ratings," to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated "Loss," "Doubtful," "Substandard," and PCI/PCD-Substandard are considered "Classified." Loans rated "Special Mention" or PCI/PCD-Special Mention are considered Special Mention. The Bank's Classified and Special Mention loans decreased approximately$1 million during the first nine months of 2020. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's Classified and Special Mention loans is currently uncertain.
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements" for additional discussion regarding Classified and Special Mention loans.
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Table 14 - Classified and Special Mention Loans
(in thousands) September 30, 2020 December 31, 2019 $ Change % Change Loss $ - $ - $ - - % Doubtful - - - - Substandard 34,066 33,297 769 2 PCI/PCD* - Substandard 1,944 1,289 655 51 Total Classified Loans 36,010 34,586 1,424 4 Special Mention 19,432 21,754 (2,322) (11)
PCI/PCD* - Special Mention 918 797 121 15 Total Special Mention Loans 20,350
22,551 (2,201) (10)
Total Classified and Special Mention Loans $ 56,360 $
57,137
The Bank's PCI loans at
Policies" of Part I Item 1 "Financial Statements" for additional discussion
regarding the Company's adoption of ASC 326. Nonperforming Loans Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately$6 million and$10 million atSeptember 30, 2020 andDecember 31, 2019 .
Nonperforming loans to total loans decreased to 0.42% atSeptember 30, 2020 from 0.53% atDecember 31, 2019 , as the total balance of nonperforming loans decreased by$2 million , or 10%, while total loans increased$561 million , or 13%, during the first nine months of 2020. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's nonperforming loans is currently uncertain.
Table 15 - Nonperforming Loans and Nonperforming Assets Summary
(in thousands) September 30, 2020 December 31, 2019 Loans on nonaccrual status* $ 20,910 $ 23,332 Loans past due 90-days-or-more and still on accrual** 175 157 Total nonperforming loans 21,085 23,489 Other real estate owned 2,056 113 Total nonperforming assets $ 23,141 $ 23,602 Credit Quality Ratios -Total Company : Nonperforming loans to total loans 0.42 % 0.53 % Nonperforming assets to total loans (including OREO) 0.46 0.53 Nonperforming assets to total assets 0.37 0.42 Credit Quality Ratios -Core Bank : Nonperforming loans to total loans 0.43 % 0.54 % Nonperforming assets to total loans (including OREO) 0.47 0.54 Nonperforming assets to total assets 0.39 0.43
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.
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Table 16 - Nonperforming Loan Composition
September 30, 2020 December 31, 2019
Percent of Percent of
Total Total
(in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 14,682 1.66 % $ 12,220 1.29 %
Nonowner occupied 116 0.05 623 0.24
Commercial real estate 3,206 0.24 6,865 0.53Construction & land development - - 143
0.09 Commercial & industrial 522 0.15 1,424 0.30 Paycheck Protection Program - - - - Lease financing receivables - - - - Aircraft - - - - Home equity 2,210 0.87 1,865 0.64 Consumer: Credit cards - - - - Overdrafts - - - - Automobile loans 161 0.45 179 0.34 Other consumer 13 0.14 13 0.07 Total Traditional Banking 20,910 0.54 23,332 0.65 Warehouse lines of credit - - - - Total Core Banking 20,910 0.43 23,332 0.54Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - Other TRS loans 140 60.09 53 0.37 Republic Credit Solutions 35 0.03 104 0.10
Total Republic Processing Group 175 0.16 157
0.13 Total nonperforming loans$ 21,085 0.42 %$ 23,489 0.53 % 110 Table of Contents
Table 17 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance
September 30, 2020 Balance >$100 & Balance Total
(dollars in thousands) No. <= $100 No. <= $500 No. >$500 No. Balance
Traditional Banking:
Residential real estate:
Owner occupied 145 $ 5,314 29 $ 5,554 4 $ 3,814 178 $ 14,682
Nonowner occupied 3 116 - - - - 3 116
Commercial real estate 2 45 3 819 1 2,342 6 3,206Construction & land development - - - - - - - - Commercial & industrial 2 57 1 465 - - 3 522 Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - -
Aircraft - - - - - - - -
Home equity 27 919 6 1,291 - - 33 2,210
Consumer:
Credit cards - - - - - - - -
Overdrafts - - - - - - - -
Automobile loans 14 161 - - - - 14 161
Other consumer 7 13 - - - - 7 13Total Traditional Banking 200 6,625 39 8,129 5 6,156 244 20,910 Warehouse lines of credit - - - - - - - - Total Core Banking 200 6,625 39 8,129
5 6,156 244 20,910
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans NM 140 - - - - NM 140
Republic Credit Solutions NM 35 - - - - NM 35Total Republic Processing Group NM 175 - -
- - NM 175
Total 200 $ 6,800 39 $ 8,129 5 $ 6,156 244 $ 21,085
Number of Nonperforming
Loans and
Balance
December 31, 2019 Balance >$100 & Balance Total
(dollars in thousands) No. <= $100 No. <= $500 No. >$500 No. Balance
Traditional Banking:
Residential real estate:
Owner occupied 137 $ 5,005 24 $ 4,525 3 $ 2,690 164 $ 12,220
Nonowner occupied 3 84 - - 1 539 4 623
Commercial real estate 2 45 2 609 4 6,211 8 6,865Construction & land development - - 1 143 - - 1 143 Commercial & industrial - - 2 397 1 1,027 3 1,424 Lease financing receivables - - - -
- - - -
Aircraft - - - - - - - -
Home equity 23 795 5 1,070 - - 28 1,865
Consumer:
Credit cards - - - - - - - -
Overdrafts - - - - - - - -
Automobile loans 13 179 - - - - 13 179
Other consumer 7 13 - - - - 7 13Total Traditional Banking 185 6,121 34 6,744 9 10,467 228 23,332 Warehouse lines of credit - - - - - - - - Total Core Banking 185 6,121 34 6,744
9 10,467 228 23,332
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans NM 53 - - - - NM 53
Republic Credit Solutions NM 104 - - - - NM 104Total Republic Processing Group NM 157 - -
- - NM 157
Total 185 $ 6,278 34 $ 6,744 9 $ 10,467 228 $ 23,489
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Table 18 - Rollforward of Nonperforming Loans
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2020 2019 2020 2019
Nonperforming loans at the beginning of
the period $ 20,419 $ 19,403 $ 23,489 $ 16,138
Loans added to nonperforming status
during the period that remained
nonperforming at the end of the period 3,721 4,441 8,169 9,955
Loans removed from nonperforming status
during the period that were
nonperforming at the beginning of the
period (see table below) (2,251) (864) (5,932) (4,257)
Principal balance paydowns of loans
nonperforming at both period ends (360) (2,240) (4,660) (1,117)
Net change in principal balance of
other loans nonperforming at both
period ends* (444) 9 19 30
Nonperforming loans at the end of the period$ 21,085 $ 20,749 $
21,085
* 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) 2020 2019 2020 2019
Loans charged off $ - $ (70) $ (2) $ (427)
Loans transferred to OREO - (18) (2,109) (1,230)Loans refinanced at other institutions (1,917) (594) (2,870) (2,515) Loans returned to accrual status (334) (182)
(951) (85)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period$ (2,251) $ (864) $ (5,932) $ (4,257)
Based on the Bank's review at
Delinquent Loans
Core Bank delinquent loans to totalCore Bank loans decreased to 0.23% atSeptember 30, 2020 from 0.30% atDecember 31, 2019 . With the exception of small-dollar consumer loans, allTraditional Bank loans past due 90-days-or-more as ofSeptember 30, 2020 andDecember 31, 2019 were on nonaccrual status. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's delinquent loans is currently uncertain. 112 Table of Contents
Table 20 - Delinquent Loan Composition*
September 30, 2020 December 31, 2019
Percent of Percent of
Total Total
(in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 3,494 0.39 % $ 4,434 0.47 %
Nonowner occupied - - 539 0.21
Commercial real estate 5,617 0.43 3,300 0.25Construction & land development - - -
-
Commercial & industrial 488 0.14 1,355 0.29
Paycheck Protection Program - - - -
Lease financing receivables - - - -
Aircraft - - - -
Home equity 1,096 0.43 2,918 1.00
Consumer:
Credit cards 125 0.87 155 0.87
Overdrafts 141 20.00 283 18.59
Automobile loans 94 0.26 49 0.09
Other consumer 14 0.16 9 0.05
Total Traditional Banking 11,069 0.29 13,042 0.36
Warehouse lines of credit - - - -
Total Core Banking 11,069 0.23 13,042 0.30
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - - - -
Other TRS loans 140 60.09 119 0.83
Republic Credit Solutions 5,844 5.36 7,643 7.25Total Republic Processing Group 5,984 5.48 7,762
6.48
Total delinquent loans $ 17,053 0.34 % $ 20,804 0.47 %
* 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) 2020 2019 2020 2019
Delinquent loans at the beginning of the
period $ 14,046 $ 19,326 $ 20,804 $ 15,962
Loans added to delinquency status during
the period and remained in delinquency
status at the end of the period 6,093 5,608 7,817 10,120
Loans removed from delinquency status
during the period that were in
delinquency status at the beginning of
the period (see table below) (2,205) (2,674) (8,488) (5,292)
Principal balance paydowns of loans
delinquent at both period ends (788) (1,930) (2,977) (251)
Net change in principal balance of other
loans delinquent at both period ends* (93) 42
(103) (167)
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) 2020 2019 2020 2019
Loans charged off $ - $ (89) $ (3) $ (429)
Loans transferred to OREO - (18) (2,109) (1,258)
Loans refinanced at other institutions (1,189) (865) (3,856) (1,803)
Loans paid current (1,016) (1,702) (2,520) (1,802)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period$ (2,205) $ (2,674) $ (8,488) $ (5,292)
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, 2020 December 31, 2019 Cashflow-dependent TDRs $ 11,873 $ 14,348 Collateral-dependent TDRs 12,295 16,433 Total TDRs 24,168 30,781
Collateral dependent loans (which are not TDRs) 22,490 19,569 Total recorded investment in TDRs and collateral-dependent loans $ 46,658 $ 50,350
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, 2020 December 31, 2019 $ Change % Change Core Bank: Demand $ 1,148,683 $ 922,972$ 225,711 24 % Money market accounts 723,798 793,950 (70,152) (9) Savings 220,106 175,588 44,518 25 Individual retirement accounts (1) 50,348 51,548 (1,200) (2) Time deposits,$250 and over (1) 99,972 104,412 (4,440) (4) Other certificates of deposit (1) 231,586 248,161 (16,575) (7) Reciprocal money market and time deposits (1) 291,077 189,774 101,303 53 Brokered deposits (1) 345,533 200,072 145,461 73Total Core Bank interest-bearing deposits 3,111,103 2,686,477 424,626 16Total Core Bank noninterest-bearing deposits 1,496,111 981,164 514,947 52Total Core Bank deposits 4,607,214 3,667,641 939,573 26Republic Processing Group : Money market accounts 4,808 66,152 (61,344) (93) Total RPG interest-bearing deposits 4,808
66,152 (61,344) (93)
Brokered prepaid card deposits 237,514 9,128 228,386 2,502 Other noninterest-bearing deposits 142,793 43,087 99,706 231 Total RPG noninterest-bearing deposits 380,307 52,215 328,092 628 Total RPG deposits 385,115 118,367 266,748 225 Total deposits $ 4,992,329 $ 3,786,008$ 1,206,321 32 % (1) Includes time deposits.
Management believes much of the growth in noninterest-bearing deposits at the
? 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.
RPG noninterest-bearing deposits increased
months of 2020, with growth driven by the Company's
? approximately
institution. The prepaid card deposit balances acquired in
ranged from a low of$238 million to a high of$266 million since their assumption, with an average of$253 million sinceMay 1, 2020 .
deposits as of
? to overnight borrowings from the FHLB. The weighted average cost of these
deposits at
borrowing from the FHLB.
Similar to growth in noninterest-bearing deposits, management believes much of
? the remaining growth in interest-bearing deposits at the
flight to safety brought about by the COVID-19 pandemic.
Offsetting the positive drivers above was a
? online money market accounts to rate-sensitive clients, as the Bank
significantly lowered its pricing during the period due to correspond with the
overall decline in market interest rates.
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In addition to the decline in MemoryBank balances, the Bank also had a
? million deposit outflow from one money-market client. At this time, management
does not anticipate this large deposit will be replaced by this particular
client in the foreseeable future.
RPG interest-bearing deposits decreased
? short-term seasonal funding used by the TRS segment during the first quarter of
2020.
Federal Reserve Paycheck Protection Program Lending Facility
Under the PPPLF program, the Bank can fully fund its PPP loans on a dollar-for-dollar basis at a borrowing rate of 0.35%, with the Bank's PPP loans serving as collateral for its PPPLF borrowings. PPPLF borrowings mature as the underlying PPP loans mature, generally within two to five years. The Bank began participating in theFederal Reserve's PPPLF onApril 24, 2020 , with$169 million of funds initially borrowed. The Bank paid these borrowings down to$0 during the third quarter of 2020 due to its excess liquidity position and its ability to borrow funds from the FHLB at a lower cost, if needed.
Federal Home Loan Bank Advances
As the overall increase in deposits outpaced the overall increase in interest-earning assets for the first nine months of 2020, FHLB advances declined by$618 million fromDecember 31, 2019 toSeptember 30, 2020 . The Bank held$25 million in overnight advances at a rate of 0.17% atSeptember 30, 2020 , compared to$200 million in overnight advances at a rate of 1.63% atDecember 31, 2019 . The usage of overnight FHLB advances is expected to continue to fluctuate based on the overall usage rates for the Bank's warehouse lines of credit, which are also tied to short-term repricing indices, as well as current favorable deposit gathering trends. Interest Rate Swaps
Interest Rate Swaps Used as Cash Flow Hedges
The Bank entered into two interest rate swap agreements during 2013 as part of its interest rate risk management strategy. The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR. The counterparty for both swaps met the Bank's credit standards and the Bank believes that the credit risk inherent in the swap contracts is not significant.
Non-hedge Interest Rate Swaps
The Bank also enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank's interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 "Interest Rate Swaps" of Part I Item 1 "Financial Statements" for additional discussion regarding the Bank's interest rate swaps.
Liquidity
The Bank had a loan to deposit ratio (excluding brokered deposits) of 107% atSeptember 30, 2020 and 126% atDecember 31, 2019 . AtSeptember 30, 2020 andDecember 31, 2019 , the Company had cash and cash equivalents on-hand of$342 million and$385 million . The Bank also had available borrowing capacity of$692 million and$259 million from the FHLB atSeptember 30, 2020 andDecember 31, 2019 . In addition, the Bank's liquidity resources included unencumbered debt securities of$375 million and$304 million as ofSeptember 30, 2020 andDecember 31, 2019 and unsecured lines of credit of$125 million available through various other financial institutions as of the same period-ends. The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage backed securities and proceeds realized from loans held for sale. The Bank's liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. AtSeptember 30, 2020 andDecember 31, 2019 , these pledged investment securities had a fair value of$230 million 116
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and$230 million . Republic's banking centers and its websites, www.republicbank.com and www.mymemorybank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs. AtSeptember 30, 2020 , the Bank had approximately$1.5 billion in deposits from 222 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . The 20 largest non-sweep deposit relationships represented approximately$663 million , or 13%, of the Company's total deposit balances atSeptember 30, 2020 . These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than theTraditional Bank deposits they replace, potentially decreasing the Bank's earnings. Due to its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached and, periodically during each quarter, has fallen short of its Board-approved minimum internal policy limits for liquidity management. Most recently, the Bank has experienced a significant increase in its outstanding Warehouse line-of-credit balances. Because management deems this increase in Warehouse balances to not be long-term in nature and the Bank is asset sensitive for its interest rate risk position, it has elected to utilize overnight sources in order to fund these outstanding balances. While the Bank was in compliance with all Board-approved liquidity policies as ofSeptember 30, 2020 , it was not always within policy parameters for each day of the quarter. The Bank will likely continue to maintain its liquidity levels near the Bank's Board-approved minimums for the foreseeable future.
In addition to its typical operations which impacts liquidity, the COVID-19 pandemic could create both substantially positive and negative impacts to the Bank's liquidity over the short-term and long-term. The overall impact to Bank's liquidity over the long-term will likely depend heavily on the length and breadth of the COVID-19 effect on the economy. A near-term positive to the Bank's liquidity is the apparent flight to safety by its clients and the increase in the Bank's deposit balances. Management is uncertain as to how long these deposit balances might stay in the Bank, however, a protracted negative impact to the economy could put a financial strain on the Banks' clients requiring them to drawdown their deposit funds in order to meet their own liquidity demands.
See additional detail regarding the impact of COVID-19 under:
? Part I Item 1 "Financial Statements"
o Footnote 2 "
o Footnote 4 "Loans and Allowance for Credit Losses"
o Footnote 9 "Off Balance Sheet Risks, Commitments, and Contingent Liabilities"
? Part II Item 1A "Risk Factors"
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Capital
Total stockholders' equity increased from$764 million atDecember 31, 2019 to$810 million atSeptember 30, 2020 . The increase in stockholders' equity was primarily attributable to net income earned during 2019 reduced by cash dividends declared.
See Part II, Item 2. "Unregistered Sales of
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. AtSeptember 30, 2020 , RB&T could, without prior approval, declare dividends of approximately$169 million . Regulatory Capital Requirements - The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define "well capitalized" as a 10.0%Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 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 exceeds the "well-capitalized" requirements as defined by the FRB and theFDIC , in addition to the Capital Conservation Buffer. Republic's average stockholders' equity to average assets ratio was 13.36% atSeptember 30, 2020 compared to 13.16% atDecember 31, 2019 . Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end. In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued$40 million in TPS. The sole asset of RBCT represents the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. The RBCT TPS are treated as part of Republic'sTier I Capital . The subordinated note and related interest expense are included in Republic's consolidated financial statements. The subordinated note paid a fixed interest rate of 6.015% throughSeptember 30, 2015 and adjusted to 3-month LIBOR plus 1.42% on a quarterly basis thereafter. The subordinated note matures onDecember 31, 2035 and is redeemable at the Company's option on a quarterly basis. The Company chose not to redeem the subordinated note onJuly 1, 2020 and is currently carrying the note at a cost of LIBOR plus 1.42%. 118 Table of Contents
Table 25 - Capital Ratios (1)
As of September 30, 2020 As of December 31, 2019
(dollars in thousands) Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Republic Bancorp, Inc. $ 883,336 17.98 % $ 825,987 17.01 %
Republic Bank & Trust Company 780,475 15.91 723,248 14.91
Common equity tier 1 capital to risk-weighted assets Republic Bancorp, Inc.$ 791,815 16.12 %$ 742,636 15.29 % Republic Bank & Trust Company 728,954 14.86
679,897 14.01
Tier 1 (core) capital to risk-weighted assets Republic Bancorp, Inc.$ 831,815 16.94 %$ 782,636 16.11 % Republic Bank & Trust Company 728,954 14.86
679,897 14.01
Tier 1 leverage capital to average assets Republic Bancorp, Inc.$ 831,815 13.56 %$ 782,636 13.93 % Republic Bank & Trust Company 728,954 11.90
679,897 12.11
The Company and the Bank elected to defer the impact of CECL on regulatory
capital. The deferral period is five years, with the total estimated CECL (1) 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, 2020 .
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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, 2020 , a dynamic simulation model was run for interest rate changes from "Down 100" basis points to "Up 400" basis points. The following table illustrates the Bank's projected percent change from its Base net interest income over the period beginningOctober 1, 2020 and endingSeptember 30, 2021 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank's dynamic earnings simulation model includes secondary market loan fees and excludesTraditional Bank loan fees.
Table 26 - Bank Interest Rate Sensitivity
Change in Rates
(100) +100 +200 +300 +400
Basis Points Basis Points Basis Points Basis Points Basis Points
% Change from base net interest income
at September 30, 2020 3.0 % (6.5) % (11.1) % (12.3) % (7.8) %
% Change from base net interest income
at December 31, 2019 (4.3) % 0.9 % 1.6 % 1.9 % 2.5 %
The Bank's dynamic simulation model run for September 2020 projected a decrease
in the Bank's net interest income plus secondary market loan fees for all
Up-rate scenarios, with an increase in the Down-100 scenario. The projections as
of December 2019 reflected a decrease in the Down-100 scenario and an increase
in all Up-rate scenarios. As compared to December 2019 , the deterioration in the
Up-rate scenarios for September 2020 was generally due to the impact of an
expected reduction in secondary market loan fees as interest rates rise from
their current historic lows. The improvement in the Down-100 scenario is
primarily related to the number of loans that have reached or are expected to
reach their interest rate floors, and therefore not subject to further rate
reductions. Additionally, the improvement in the Down-100 scenario was due to an
estimated rise in secondary market loan fees in a falling rate environment.
The Company's interest rate risk projections generally assume parallel shifts in
the yield curve across all points on the yield curve. A flattening or inverting
of the yield curve, causing the spread between long-term interest rates and
short-term interest rates to decrease or invert, would likely have a further
negative impact on the Company's net interest income and net interest
margin. Under any interest rate scenario, however, if the Core Bank is unable to
reasonably maintain its deposit balances and the cost of those deposits at
acceptable levels, it will likely have a negative impact to the Core Bank's net
interest income and net interest margin.
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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, 2020 Compared to Three Months EndedSeptember 30, 2019 )" and RESULTS OF OPERATIONS (Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 )."
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