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 the Company's operations and credit
losses;
? the ability of borrowers who received COVID-19 loan accommodations to resume
repaying their loans upon maturity of such accommodations;
? natural disasters impacting the Company's operations;
? changes in political and economic conditions;
? the magnitude and frequency of changes to the FFTR implemented by the
the FRB;
? long-term and short-term interest rate fluctuations as well as the overall
steepness of the
? competitive product and pricing pressures in each of the Company's five
reportable segments;
? equity and fixed income market fluctuations;
? client bankruptcies and loan defaults;
? inflation;
? recession;
63
Table of Contents
? 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, 2020 . Management continually evaluates the Company's accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management's estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management. Critical accounting policies are those that management believes are the most important to the portrayal of the Company's financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.
Republic believes its critical accounting policies and estimates relate to its ACLL and Provision.
64
Table of Contents
ACLL and Provision - At March 31, 2021 , the Bank maintained an ACLL for expected
credit losses inherent in the Bank's loan portfolio, which includes overdrawn
deposit accounts. Management evaluates the adequacy of the ACLL monthly and
presents and discusses the ACLL with the Audit Committee and the Board of
Directors quarterly.
Effective January 1, 2020 , the Company adopted ASC 326 Financial Instruments -
Credit Losses, which replaced the pre-January 1, 2020 "probable-incurred" method
for calculating the Company's ACL with the CECL method. CECL is applicable to
financial assets measured at amortized cost, including loan and lease
receivables and held-to-maturity debt securities. CECL also applies to certain
off-balance sheet credit exposures.
When measuring an ACL, CECL primarily differs from the probable-incurred method
by: a) incorporating a lower "expected" threshold for loss recognition versus a
higher "probable" threshold; b) requiring life-of-loan considerations; and c)
requiring reasonable and supportable forecasts. The Company's CECL method is a
"static-pool" method that analyzes historical closed pools of loans over their
expected lives to attain a loss rate, which is then adjusted for current
conditions and reasonable, supportable forecasts prior to being applied to the
current balance of the analyzed pools. Due to its reasonably strong correlation
to the Company's historical net loan losses, the Company has chosen to use the
U.S. national unemployment rate as its primary forecasting tool. For its CRE
loan pool, the Company also uses one-year forecasts of vacancy rates for CRE in
the Company's market footprint.
Management's evaluation of the appropriateness of the ACLL is often the most
critical accounting estimate for a financial institution, as the ACLL requires
significant reliance on the use of estimates and significant judgment as to the
reliance on historical loss rates, consideration of quantitative and qualitative
economic factors, and the reliance on a reasonable and supportable forecast.
Adjustments to the historical loss rate for current conditions include
differences in underwriting standards, portfolio mix or term, delinquency level,
as well as for changes in environmental conditions, such as changes in property
values or other relevant factors. One-year forecast adjustments to the
historical loss rate are based on the U.S. national unemployment rate and
vacancy rates for CRE in the Company's market footprint. Subsequent to the
one-year forecasts, loss rates are assumed to immediately revert back to
long-term historical averages.
The impact of utilizing the CECL approach to calculate the ACLL is significantly
influenced by the composition, characteristics and quality of the Company's loan
portfolio, as well as the prevailing economic conditions and forecasts utilized.
Material changes to these and other relevant factors may result in greater
volatility to the ACLL, and therefore, greater volatility to the Company's
reported earnings.
See additional detail regarding the Company's adoption of ASC 326 and the CECL
method under Footnote 1"Summary of Significant Accounting Policies" of Part II
Item 8 "Financial Statements and Supplementary Data" of the Company's Annual
Report on Form 10-K for the year ended December 31, 2020 .
65
Table of Contents
BUSINESS SEGMENT COMPOSITION
As of March 31, 2021 , the Company was divided into five reportable segments:
Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management
considers the first three segments to collectively constitute "Core Bank " or
"Core Banking" operations, while the last two segments collectively constitute
RPG operations.
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company's market footprint. As ofMarch 31, 2021 , Republic had 42 full-service banking centers with locations as follows: ?Kentucky - 28
? Metropolitan
?Central Kentucky - 7 ?Georgetown - 1 ?Lexington - 5 ?Shelbyville - 1 ?Northern Kentucky - 3 ?Covington - 1 ?Crestview Hills - 1 ? Florence - 1 ?Southern Indiana - 3 ?Floyds Knobs - 1 ?Jeffersonville - 1 ?New Albany - 1
?
?
? Metropolitan
Republic's headquarters are in
The Bank's principal lending activities consist of the following:
Retail Mortgage Lending - Through its retail banking centers and its online Consumer Direct channel, the Bank originates single-family, residential real estate loans. In addition, the Bank originates HEALs and HELOCs through its retail banking centers. Such loans are generally collateralized by owner-occupied, residential real estate properties. For those loans originated through the Bank's retail banking centers, the collateral is predominately located in the Bank's market footprint, while loans originated through the Consumer Direct channel are generally secured by owner occupied-collateral located outside of the Bank's market footprint.
Commercial Lending - The Bank conducts commercial lending activities primarily through Corporate Banking, Commercial Banking, Business Banking, and Retail Banking channels.
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank'sCommercial Credit Administration Department . Clients are generally located within the Bank's market footprint or in areas nearby the market footprint. Construction and Land Development Lending - The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots. Consumer Lending - Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank's markets. 66 Table of Contents Aircraft Lending - InOctober 2017 , the Bank created an Aircraft Lending division. Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. The aircraft loan program is open to all states, except forAlaska andHawaii . The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank's other Traditional Banking activities generally consist of the following:
Private Banking - The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank's Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele. Treasury Management Services - The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank's Treasury Management department. Internet Banking - The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking - The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services - The Bank also provides title insurance and other financial institution related products and services.
Bank Acquisitions - The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements."
(II) Warehouse Lending segment
TheCore Bank provides short-term, revolving credit facilities to mortgage bankers acrossthe United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. TheCore Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
See additional detail regarding the Warehouse Lending segment under Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements."
(III) Mortgage Banking segment Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and theFNMA . The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions. See additional detail regarding the Mortgage Banking segment under Footnote 11 "Mortgage Banking Activities" and Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements." 67 Table of Contents
(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 next year's tax season. RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item "Net refund transfer fees."
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2021 and 2020:
? Offered only during the first two months of each year;
? The taxpayer was given the option to choose from multiple loan-amount tiers,
subject to underwriting, up to a maximum advance amount of
? No requirement that the taxpayer pays for another bank product, such as an RT;
? Multiple funds disbursement methods, including direct deposit, prepaid card, or
check, based on the taxpayer-customer's election;
? Repayment of the EA to the Bank is deducted from the taxpayer's tax refund
proceeds; and
? If an insufficient refund to repay the EA occurs:
o there is no recourse to the taxpayer,
o no negative credit reporting on the taxpayer, and
o no collection efforts against the taxpayer.
The Company reports fees paid for the EA product as interest income on loans. During 2020, EAs were generally repaid within 35 days after the taxpayer's tax return was submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considered an EA delinquent if it remained unpaid 21 days in 2020 and 35 days in 2021 after the taxpayer's tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management's annual analysis of tax return processing times. Provisions on EAs are estimated when advances are made. Unpaid EAs are charged-off 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.
68
Table of Contents
(V) Republic Credit Solutions segment
Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans that are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
RCS line-of-credit products - Using separate third-party service providers, the
Bank originates two line-of-credit products to generally subprime borrowers in
? multiple states. The first of these two products (the "LOC I") has been
originated by the Bank since 2014. The second (the "LOC II") was introduced in
January 2021 . RCS's LOC I represents the substantial majority of RCS activity. Elastic
providers for the product and are subject to the Bank's oversight and
supervision. Together, these companies provide the Bank with certain marketing,
o servicing, technology, and support services, while a separate third party
provides customer support, servicing, and other services on the Bank's
behalf. The Bank is the lender for this product and is marketed as such.
Further, the Bank controls the loan terms and underwriting guidelines, and the
Bank exercises consumer compliance oversight of the product.
The Bank sells participation interests in this product. These participation interests are a 90% interest in advances made to borrowers under the borrower's line-of-credit account, and the participation interests are generally sold three business days following the Bank's funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
In
third-party service provider subject to the Bank's oversight and supervision
o provides the Bank with marketing services and loan servicing for the LOC II
product. The Bank is the lender for this product and is marketed as such.
Furthermore, the Bank controls the loan terms and underwriting guidelines, and
the Bank exercises consumer compliance oversight of this product.
The Bank sells participation interests in this product. These participation interests are a 95% interest in advances made to borrowers under the borrower's line-of-credit account, and the participation interests are generally sold three business days following the Bank's funding of the associated advances. Although the Bank retains a 5% participation interest in each advance, it maintains 100% ownership of the underlyingLOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
RCS installment loan product - In
offering installment loans with terms ranging from 12 to 60 months to borrowers
in multiple states. 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. Furthermore, the Bank controls the
? loan terms and underwriting guidelines, and the Bank exercises consumer
compliance oversight of this RCS installment loan product. Currently, all loan
balances originated under this RCS installment loan program are carried as
"held for sale" on the Bank's balance sheet, with the intention to sell these
loans to its third-party service provider generally within sixteen days
following the Bank's origination of the loans. Loans originated under this RCS
installment loan program are carried at fair value under a fair-value option,
with the portfolio marked to market monthly. RCS healthcare receivables products - The Bank originates healthcare-receivables products across theU.S. through two different
third-party service providers. In one program, the Bank retains 100% of the
? receivables originated. In the other program, the Bank retains 100% of the
receivables originated in some instances, and in other instances, sells 100% of
the receivables within one month of origination. Loan balances held for sale
through this program are carried at the lower of cost or fair value.
The Company reports interest income and loan origination fees earned on RCS loans under "Loans, including fees," while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under "Program fees."
69
Table of Contents
OVERVIEW (Three Months Ended
Total Company net income for the first quarter of 2021 was$26.1 million , a$644,000 , or 2%, decrease from the same period in 2020. Diluted EPS decreased to$1.25 for the three months endedMarch 31, 2021 compared to$1.28 for the same period in 2020. The Company's TRS segment, which traditionally provides a first quarter lift to net income with its seasonal tax business, drove the year-over-year decline, contributing a$6.0 million decrease in net income as a result of an unusual and delayed tax season. Net income from Core Banking was$16.5 million for the first quarter of 2021, an increase of$6.5 million , or 65%, over the first quarter of 2020. Primarily driving the rise in net income within Core Banking was a solid increase in net interest income, strong growth in Mortgage Banking income, and a meaningful, positive reduction in the Provision, as theCore Bank made a substantial Provision during the first quarter of 2020 after the onset of the COVID-19 pandemic.
The following are general highlights by reportable segment:
Traditional Banking segment
? Net income increased
compared to the same period in 2020.
Net interest income increased
? compared to the same period in 2020. The increase was driven primarily by
million in PPP lender fees recognized during the first quarter of 2021.
? Provision decreased
2021 compared to a charge of
? Noninterest income decreased
compared to the same period in 2020.
? Total noninterest expense increased
2021 compared to same period in 2020.
?
quarter of 2021, driven by generally soft non-PPP loan demand.
? Total nonperforming loans to total loans for the Traditional Banking segment
was 0.60% as of
? Delinquent loans to total loans for the Traditional Banking segment was 0.23%
as of
? As of
under a COVID-19 hardship accommodation.
?
quarter of 2021. Warehouse Lending segment
? Net income increased
compared to the same period in 2020.
? Net interest income increased
2021 compared to the same period in 2020.
? The Warehouse Provision was a net credit of
2021 compared to a net charge of
? Average committed Warehouse lines increased to
quarter of 2021 from
? Average line usage was 54% during the first quarter of 2021 compared to 56%
during the same period in 2020.
70
Table of Contents
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased
? million, or 50%, during the first quarter of 2021 compared to the same period
in 2020.
Overall, Republic's originations of secondary market loans totaled
? during the first quarter of 2021 compared to
period in 2020, with the Company's gain-as-a-percent-of-loans-sold increasing
from 2.80% to 3.95% from period to period. Tax Refund Solutions segment
? Net income decreased
same period in 2020.
? Net interest income decreased
compared to the same period in 2020.
? Total EA originations were
compared to
Overall, TRS recorded a net charge to the Provision of
? first quarter of 2021 compared to a net charge to the Provision of
million for the same period in 2020.
? Noninterest income decreased
2021 compared to the same period in 2020.
? Net RT revenue decreased
compared to the same period in 2020.
? Noninterest expense was
$6.6 million for the same period in 2020.
Republic
? Net income decreased
compared to the same period in 2020.
? Net interest income decreased
2021 compared to the same period in 2020.
Overall, RCS recorded a net credit to the Provision of
? first quarter of 2021 compared to a net charge of
period in 2020.
? Noninterest income decreased
to the first quarter of 2021.
? Noninterest expense was
? Total nonperforming loans to total loans for the RCS segment was 0.48% as of
? Delinquent loans to total loans for the RCS segment was 5.84% as of
2021 compared to 9.23% as ofDecember 31, 2020 .
RESULTS OF OPERATIONS (Three Months Ended
Net Interest Income Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market
interest rates.
71
Table of Contents
See the section titled "Asset/Liability Management and Market Risk" in this section of the filing regarding the Bank's interest rate sensitivity.
A large amount of the Company's financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended lower since the onset of COVID-19 pandemic, as theFOMC reduced the FFTR to approximately 25 basis points during 2020. TheFOMC has provided on-going guidance that it is more likely than not that the FFTR will not be increased in the near term.
Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Bank's net interest income and net interest margin in the near term, while additional decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Bank's net interest income and net interest margin in the near term. Increases in short-term interest rates, however, could have a negative impact on net interest income and net interest margin if the Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Company's net interest income and net interest margin. Unknown variables, which may impact the Company's net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank's financial products and the Bank's overall future liquidity needs.
Total Company net interest income decreased 7% during the first quarter of 2021 compared to the same period in 2020.Total Company net interest margin decreased to 4.66% during the first quarter of 2021 compared to 5.57% for the same period in 2020.
The following were the most significant components affecting the Company's net interest income by reportable segment:
Traditional Banking segment The Traditional Banking's net interest income increased$482,000 , or 1%, for the first quarter of 2021 compared to the same period in 2020. Traditional Banking's net interest margin was 3.47% for the first quarter of 2021, a decrease of 33 basis points from the same period in 2020. The increase in theTraditional Bank's net interest income and decrease in net interest margin during the first quarter of 2021 was primarily attributable
to the following factors:
During the first quarter of 2021, the
of fee income on its PPP portfolio, driven significantly by the forgiveness and
payoff of
net PPP loans of
? including
loan balances originated during the first quarter of 2021, and
unaccreted PPP lender fees reported as a credit offset to these originated
balances. Unaccreted PPP lender fees will generally be recognized into income
over the estimated remaining life of the PPP portfolio, with fee recognition
accelerated if loans are forgiven or repaid earlier than estimated.
Offsetting the above, net interest income from Traditional Banking, excluding
accreted PPP lender fees, decreased
quarter 2020, as the
for the first quarter of 2020 to 3.47% for the first quarter of 2021. The
? decline in the net interest margin was substantially driven by a 71-basis point
decline in the
from the first quarter of 2020 to the first quarter of 2021, as the majority of
the
months was in lower-yielding cash and investment securities instead of loans.
Warehouse Lending segment
Net interest income increased
Average committed Warehouse lines increased to$1.5 billion during the first quarter of 2021 from$1.1 billion during the same period in 2020, while overall usage rates on Warehouse lines of credit were 54% and 56%, respectively for the same periods. In addition, the Warehouse net interest margin increased to 3.43% for the first quarter of 2021 compared to 2.68% for the first quarter of 2020, as many of 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. 72 Table of Contents Tax Refund Solutions segment TRS's net interest income decreased$5.8 million for the first quarter of 2021 compared to the same period in 2020. TRS's EA product earned$12.8 million in interest income during the first quarter of 2021, a$6.5 million decrease resulting primarily from a$138 million decrease in EA originations from period to period. Management believes that economic impact (stimulus) payments, pandemic health risks, and a two-week delay in the start to the 2021 tax season, all, in varying degrees, negatively impacted demand for its EA product during the first quarter of 2021.
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$2.3 million , or 32%, from the first quarter of 2020 to the first quarter of 2021. The decrease was driven primarily by a decline in fee income from RCS's LOC I product. Loan fees on this product, recorded as interest income on loans, decreased to$3.8 million during the first quarter of 2021 compared to$6.0 million during the same period in 2020 and accounted for 76% and 80% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in outstanding line-of-credit balances following a reduction of marketing for this product during the first quarter of 2020. In addition, while marketing for the product was reinstated during the third quarter of 2020, management believes that economic impact (stimulus) payments during the first quarter of 2021 further reduced demand for its line-of-credit products during the current period.
Future loan fee income from RCS's LOC I product will likely continue to be negatively impacted by the on-going COVID-19 pandemic.
73
Table of Contents
Table 1 - Total Company Average Balance Sheets and Interest Rates
Three Months Ended March 31, 2021 Three Months Ended March 31, 2020
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 $ 510,433 $ 154 0.12 % $ 207,335 $ 637 1.23 %
Investment securities, including
FHLB stock (1) 563,985 2,017 1.43 519,726 3,009 2.32
TRS Easy Advance loans (2) 89,732 12,789 57.01 135,307 19,261 56.94
RCS LOC I product (2) 16,284 3,770 92.61 26,603 6,050 90.97
Other RPG loans (3) (7) 139,729 2,789 7.98 119,190 2,713 9.10
Outstanding Warehouse lines of
credit(4) (7) 790,244 7,370 3.73 643,182 7,045 4.38
Paycheck Protection Program loans
(5) (7) 288,115 6,698 9.30 - - -
All other Core Bank loans (6) (7) 3,421,552 33,970 3.97 3,568,855 42,444 4.76
Total interest-earning assets 5,820,074 69,557 4.78 5,220,198 81,159 6.22
Allowance for credit loss (66,561) (53,818)
Noninterest-earning assets:
Noninterest-earning cash and cash
equivalents 249,842 199,511
Premises and equipment, net 39,185 45,628
Bank owned life insurance 68,257 66,654
Other assets (1) 191,497 148,773
Total assets $ 6,302,294 $ 5,626,946 LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities: Transaction accounts$ 1,485,015 $ 82
0.02 %
732,328 103 0.06 761,975 1,242 0.65
Time deposits 314,904 1,105 1.40 418,323 2,156 2.06
Reciprocal money market and time
deposits 313,445 255 0.33 207,970 618 1.19
Brokered deposits 63,325 20 0.13 338,283 1,604 1.90
Total interest-bearing deposits 2,909,017 1,565 0.22 2,855,332 6,302 0.88 Securities sold under agreements to repurchase and other short-term borrowings 192,669 9 0.02 208,969 119 0.23 Federal Home Loan Bank advances 43,167 31 0.29 371,319 1,648 1.78 Subordinated note 41,240 172 1.67 41,240 352 3.41 Total interest-bearing liabilities 3,186,093 1,777 0.22 3,476,860 8,421 0.97 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,146,036 1,249,025 Other liabilities 133,953 122,161 Stockholders' equity 836,212 778,900 Total liabilities and stock-holders' equity$ 6,302,294 $ 5,626,946 Net interest income$ 67,780 $ 72,738 Net interest spread 4.56 % 5.25 % Net interest margin 4.66 % 5.57 %
(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 is composed entirely of loan fees.
(3) Interest income includes loan fees of
quarters ended
(4) Interest income includes loan fees of
ended
(5) Interest income includes loan fees of
(6) Interest income includes loan fees of
quarters ended
Average balances for loans include the principal balance of nonaccrual loans (7) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees and costs.
74
Table of Contents
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 March 31, 2021
Compared to
Three Months Ended March 31, 2020
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ (483) $ 412 $ (895)
Investment securities, including
FHLB stock (992) 239 (1,231)
TRS Easy Advance loans* (6,472) (8,923) 2,451
RCS LOC I product (2,280) (2,388) 108
Other RPG loans 76 434 (358)
Outstanding Warehouse lines of
credit 325 1,466 (1,141)
Paycheck Protection Program loans 6,698 6,698
-
All other Core Bank loans (8,474) (1,694) (6,780)
Net change in interest income (11,602) (3,756) (7,846)
Interest expense:
Transaction accounts (600) 165 (765)
Money market accounts (1,139) (46) (1,093)
Time deposits (1,051) (459) (592)
Reciprocal money market and time
deposits (363) 220 (583)
Brokered deposits (1,584) (737)
(847)
Securities sold under agreements to repurchase and other short-term borrowings (110) (8)
(102)
Federal Home Loan Bank advances (1,617) (830)
(787)
Subordinated note (180) -
(180)
Net change in interest expense (6,644) (1,695)
(4,949)
Net change in net interest income
* Volume for Easy Advances is based on total loans originated during the period
presented.
75
Table of Contents
Provision
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 quarter of 2021 was a credit of$5,000 , compared to a charge of$5.6 million for the first quarter of 2020. An analysis of the Provision for the first quarter of 2021 compared to the
same period in 2020 follows:
For the first quarter of 2021, there was a minimal net credit to the
? Traditional Bank Provision during the quarter as the
loan balances declined by approximately
March 31, 2021 .
During the first quarter of 2020, the
additional Provision due to the expected economic impact of the COVID-19
? pandemic. Offsetting the increase in Provision due to the impact of the
COVID-19 pandemic during the first quarter of 2020 was a reduction in Provision
of
balances fromDecember 31, 2019 toMarch 31, 2020 .
Related to loans rated Substandard, Special Mention, or PCD, the Bank recorded
a net credit of
? the first quarter of 2020 was driven by a
payoff of a large CRE relationship that had been partially charged-off in a
prior period.
Related to the Bank's corporate bonds held within its investment securities
portfolio, the Bank recorded a net credit to the Provision of
? the first quarter of 2021 compared to a net charge of
quarter of 2020. The credit during 2021 and the charge during 2020 were both
driven by changes in PD and LGD assumptions from period to period, as the
economy improved during 2021 from its pandemic-driven lows during 2020. As a percentage of total loans, the Traditional Banking ACLL was 1.35% as ofMarch 31, 2021 compared to 1.34% as ofDecember 31, 2020 and 1.15% as ofMarch 31, 2020 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of March
31, 2021.
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in this section of the filing under "Comparison of Financial Condition" for additional discussion regarding the Provision and the Bank's credit quality.
Warehouse Lending segment
Warehouse recorded a net credit to the Provision of
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofMarch 31, 2021 ,December 31, 2020 andMarch 31, 2020 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofMarch 31, 2021 . Tax Refund Solutions segment TRS recorded a net charge to the Provision of$15.9 million during the first quarter of 2021 compared to a net charge of$15.1 million for the same period in 2020. Substantially all TRS Provision in both periods was related to its EA product. TRS's Provision for EA loan losses was$16.0 million , or 6.4% of its$250 million in EAs originated during the first quarter of 2021, compared to a Provision of$15.2 million , or 3.9% of its$388 million in EAs originated during the first quarter of 2020. The increased Provision for the first quarter of 2021 was due to a significantly lower amount of refund payments received from theU.S. Treasury as a percentage of total EAs originated for the first quarter of 2021 as compared to the first quarter of 2020. While the Company is uncertain how much the COVID-19 pandemic and theU.S. government's stimulus program may have contributed to the 76 Table of Contents slower refund payments for 2021, management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this release.
EAs are only originated during the first two months of each year, with all uncollected EAs charged off byJune 30th of each year. EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans. TRS's EA loss rate as ofJune 30, 2020 was 5.04% of total 2020 EA originations and it finished 2020 with an EA loss rate of 3.36% of total EAs originated.
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$375,000 during the first quarter of 2021 compared to a charge to the Provision of$1.7 million for the same period in 2020. The decrease in the Provision was driven by a reduction in both net charge-offs and outstanding balances for RCS's LOC I product, as the Company reduced marketing for this product in response to the COVID-19 pandemic. RCS began incrementally increasing its marketing for its line-of-credit product during the third quarter of 2021. While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 7.16% as ofMarch 31, 2021 , 7.94% as ofDecember 31, 2020 and 12.18% as ofMarch 31, 2020 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as
ofMarch 31, 2021 .
The following table presents net charges to the RCS Provision by product:
Table 3 - RCS Provision by Product
Three Months Ended Mar. 31,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ (374) $ 1,707 $ (2,081) (122) %
Hospital receivables (1) (1) - -
Total $ (375) $ 1,706 $ (2,081) (122) %
77
Table of Contents
Table 4 - Summary of Loan and Lease Loss Experience
Three Months Ended
March 31,
(dollars in thousands) 2021 2020
ACLL at beginning of period $ 61,067 $ 43,351
Adoption of ASC 326 - 6,734
Charge-offs:
Traditional Banking:
Residential real estate - (27)
Commercial real estate (428) -
Consumer (209) (495)
Total Traditional Banking (637) (522)
Warehouse lines of credit - -
Total Core Banking (637) (522)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - -
Commercial & industrial (22) (44)
Republic Credit Solutions (766) (2,709)
Total Republic Processing Group (788) (2,753)
Total charge-offs (1,425) (3,275)
Recoveries:
Traditional Banking:
Residential real estate 27 41
Commercial real estate 68 471
Commercial & industrial 7 3
Home equity 7 75
Consumer 146 204
Total Traditional Banking 255 794
Warehouse lines of credit - -
Total Core Banking 255 794
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - 42
Commercial & industrial 9 -
Republic Credit Solutions 93 271
Total Republic Processing Group 102 313
Total recoveries 357 1,107
Net loan charge-offs (1,068) (2,168)
Provision - Core Banking (172) 5,675
Provision - RPG 15,509 16,839
Total Provision 15,337 22,514
ACLL at end of period $ 75,336 $ 70,431 Credit Quality Ratios -
ACLL to total loans 1.61 % 1.56 % ACLL to nonperforming loans 335 338
Net loan charge-offs to average loans 0.09 0.19
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.14 % 0.97 % ACLL to nonperforming loans 234 210
Net loan charge-offs to average loans 0.03 (0.03)
78
Table of Contents
Noninterest Income
Total Company noninterest income decreased$1.5 million , or 5%, during the first quarter of 2021 compared to the same period in 2020. The following were the most significant components comprising the total Company's noninterest income by
reportable segment: Traditional Banking segment
Traditional Banking's noninterest income decreased$451,000 , or 6%, for the first quarter of 2021 compared to the same period in 2020. Interchange Fee Income increased$476,000 from the first quarter of 2020 to the same period in 2021, while Service Charges on Deposit Accounts decreased$273,000 comparing the same periods. Service Charges on Deposit Accounts remained below normal levels as consumer savings rates rose meaningfully over the last year, resulting in a reduction in the Bank's overdraft-related fees. Management believes that two rounds of government stimulus payments and a reduction in pandemic-related economic restrictions during the first quarter of 2021 were the significant drivers of the increase in theTraditional Bank's debit card interchange income. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months endedMarch 31, 2021 and 2020 were$1.2 million and$1.9 million . The total daily overdraft charges, net of refunds, included in interest income for the three months endedMarch 31, 2021 and 2020 were$249,000 and$426,000 . The Bank suspended its daily overdraft charges during the first quarter of 2020 to soften the economic hardship of the COVID-19 pandemic on its clients. The Bank reinstituted the charging of its daily overdraft fee onSeptember 1, 2020 . Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased$2.4 million , or 50%, during the first quarter of 2021 compared to the same period in 2020. For the first quarter of 2021, theCore Bank originated$214 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 3.95%, with comparable originations of$125 million and comparable gains of 2.80% during the first quarter of 2020. Favorable market conditions drove a higher gain percentage for theCore Bank during the last nine months of 2020 and for a portion of the first quarter of 2021, with these favorable conditions normalizing moderately duringFebruary 2021 and through the end of the quarter. Management believes these favorable conditions could continue to normalize during the remainder of 2021 potentially bringing theCore Bank's gain-as-a-percent-of-loans-sold closer to normal historical levels near 2.50%. Tax Refund Solutions segment
TRS's noninterest income decreased$2.5 million during the first quarter of 2021 compared to the same period in 2020. This decrease reflected a$3.1 million decrease in net RT fees partially offset by a$584,000 increase in program fees. RTs processed decreased 20% from 2020 to 2021 due to a two-week delay to the start of the current tax season and pandemic-related restrictions that have decreased foot traffic for brick-and-mortar tax preparers. The increase in program fees resulted from the Company'sMay 1, 2020 acquisition of$250 million in prepaid card balances. 79 Table of Contents
Republic
RCS's noninterest income decreased$983,000 , or 43%, during the first quarter of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS's noninterest income. Management believes the reduced fee income was directly related to economic impact (stimulus) payments made during the first quarter of 2021, which reduced demand for its line-of-credit products during the period.
The following table presents RCS program fees by product:
Table 5 - RCS Program Fees by Product
Three Months Ended Mar. 31,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 768 $ 919 $ (151) (16) %Hospital receivables 48 18 30
167 Installment loans* 513 1,375 (862) NM Total $ 1,329 $ 2,312$ (983) (43) %
* The Company has elected the fair value option for this product, with
mark-to-market adjustments recorded as a component of program fees.
Noninterest ExpenseTotal Company noninterest expense increased$842,000 , or 2%, during the first quarter of 2021 compared to the same period in 2020. The following were the most significant components comprising the increase in noninterest expense by reportable segment: Traditional Banking segment Traditional Banking noninterest expense increased$681,000 for the first quarter of 2021 compared to the same period in 2020. The following primarily drove the change in noninterest expense:
Salaries and benefits expense increased approximately
? primarily driven by annual merit increases and increases in contract labor,
equity compensation, payroll taxes, and health benefits from period to period.
? Occupancy expense increased
snow removal and janitorial costs from period to period.
? because the
during the first quarter of 2020.
Partially offsetting the increases above, Bank Franchise Tax expense decreased
?
result, the Bank transitioned from a capital-based bank franchise tax to the
Additionally, meals, entertainment, mileage, and travel costs decreased
?
activities. Mortgage Banking segment
Noninterest expense at the Mortgage Banking segment increased
80
Table of Contents
COMPARISON OF FINANCIAL CONDITION AS OF
Cash and Cash Equivalents Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days and federal funds sold. Republic had$985 million in cash and cash equivalents as ofMarch 31, 2021 compared to$486 million as ofDecember 31, 2020 . The Company continues to maintain a relatively high cash balance on its balance sheet as deposit balances have continued to grow and loan balances have continued to generally decline.
For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This yield was 0.10% for the first quarter of 2021. For cash held within the Bank's banking center and ATM networks, the Bank does not earn interest.
Table 6 - Loan Portfolio Composition
(in thousands) March 31, 2021 December 31, 2020 $ Change % Change Traditional Banking: Residential real estate: Owner occupied$ 851,869 $ 879,800$ (27,931) (3) % Nonowner occupied 271,829 264,780 7,049 3 Commercial real estate 1,344,394 1,349,085 (4,691) (0) Construction & land development 102,113 98,674 3,439 3 Commercial & industrial 312,537 325,596 (13,059) (4) Paycheck Protection Program 383,311 392,319 (9,008) (2) Lease financing receivables 9,930 10,130 (200) (2) Aircraft 106,081 101,375 4,706 5 Home equity 226,280 240,640 (14,360) (6) Consumer: Credit cards 14,200 14,196 4 0 Overdrafts 474 587 (113) (19) Automobile loans 25,624 30,300 (4,676) (15) Other consumer 7,325 8,167 (842) (10) Total Traditional Banking 3,655,967 3,715,649 (59,682) (2) Warehouse lines of credit* 865,844 962,796 (96,952) (10) Total Core Banking 4,521,811 4,678,445 (156,634) (3) Republic Processing Group*: Tax Refund Solutions: Easy Advances 30,703 - 30,703 NA Other TRS loans 5,770 23,765 (17,995) (76) Republic Credit Solutions 108,309 110,893 (2,584) (2)Total Republic Processing Group 144,782 134,658 10,124 8 Total loans** 4,666,593 4,813,103 (146,510) (3) Allowance for credit losses (75,336) (61,067) (14,269) 23 Total loans, net$ 4,591,257 $ 4,752,036$ (160,779) (3) %
*Identifies loans to borrowers located primarily outside of the Bank's market footprint.
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans decreased by$147 million , or 3%, during the first quarter of 2021 to$4.7 billion as ofMarch 31, 2021 . The most significant components comprising the change in loans by reportable segment follow: 81 Table of Contents Traditional Banking segment
Period-end balances for Traditional Banking loans decreased
The owner-occupied residential real estate and home equity categories decreased
? long-term market interest rates during the previous 12 months that drove an
increase in refinance volume for residential mortgages, with much of the
refinance activity going into fixed-rate products sold on the secondary market.
The C&I category decreased
? reflecting 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.
During the first quarter of 2021, the
million, reflecting the forgiveness and payoff of
? originations, the origination of
quarter of 2021, and the net increase in unaccreted PPP loan fees of$3 million . The CARES Act was enacted inMarch 2020 and provided for the SBA's PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID-19 pandemic. The Economic Aid Act was enacted inDecember 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As ofMarch 31, 2021 , net PPP loans of$383 million remained on theCore Bank's balance sheet, including$218 million in loan balances originated during 2020,$176 million in loan balances originated during the first quarter of 2021, and$11 million of unaccreted PPP lender fees reported as a credit offset to these originated balances. Unaccreted PPP lender fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated. While no guarantee can be made as to the overall remaining life of these loans, management believes the loans are likely to remain on the Company's balance sheet less than one year, as it expects the substantial majority of its clients to request forgiveness for their loans at the earliest possible time, presuming these clients achieve the required program metrics.
PPP loans have a stated maturity of two to five years, an annualized fixed coupon rate of 1.0% to the client, are 100% guaranteed by the SBA, and 100% forgivable to the client if certain program metrics are met. The Bank earns an origination fee of 1%, 3%, or 5% based on the size of the loan.
Warehouse Lending segment
Outstanding Warehouse period end balances decreased$97 million fromDecember 31, 2020 toMarch 31, 2021 . Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank's Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on theBank's Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on theBank's Warehouse lines have ranged from a low of 40% during 2013 to a high of 66% during 2020. Tax Refund Solutions segment
Outstanding TRS loans increased$13 million fromDecember 31, 2020 toMarch 31, 2021 primarily reflecting$31 million of unpaid EAs partially offset by a$18 million reduction in other TRS loans. EAs are only made during the first two months of each year, with all unpaid EAs charged off byJune 30th of each year. Other TRS loans as ofDecember 31, 2020 were primarily commercial loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first quarter of the following year. 82 Table of Contents
Republic
Outstanding RCS loans decreased$3 million fromDecember 31, 2020 toMarch 31, 2021 primarily reflecting a$2 million decrease in outstanding balances for RCS's LOC I product. As previously mentioned, the decrease in balances for RCS's LOC I product during the first quarter of 2021 was attributable to economic impact (stimulus) payments during the period which further reduced demand for its line-of-credit products. Allowance for Credit Losses As ofMarch 31, 2021 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly. The Company's ACLL increased$14 million from$61 million as ofDecember 31, 2020 to$75 million as ofMarch 31, 2021 . As a percent of total loans, the total Company's ACLL increased to 1.61% as ofMarch 31, 2021 compared to 1.27% as ofDecember 31, 2020 . An analysis of the ACL by reportable segment follows: Traditional Banking segment
The Traditional Banking ACLL decreased approximately
? of
of 2021 and a$51 million decrease in non-PPP loan balances.
? 2021 to
bond portfolios. Warehouse Lending segment The Warehouse ACLL decreased to approximately$2.2 million , and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparingMarch 31, 2021 toDecember 31, 2020 . As ofMarch 31, 2021 , the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first quarter of 2021.
Tax Refund Solutions segment
The TRS ACLL increased to$16 million as ofMarch 31, 2021 from$158,000 as ofDecember 31, 2020 , driven primarily by estimated losses on TRS's EA product. Due to the seasonal nature of the EA, estimated reserves are generally made during the first two months of the year when the product is offered, with losses charged against those reserves in the second quarter of each year. Based on the timing of EA reserves versus charge-offs, the ACLL for EAs to total remaining outstanding EAs is relatively substantial at the end of the first quarter, or 52% and 58% as ofMarch 31, 2021 andMarch 31, 2020 . The Company provided an ACLL for expected losses equal to 6.4% of total originations during the first quarter of 2021 as compared to 3.9% during the first quarter of 2020 because a higher percentage of EAs remained outstanding as ofMarch 31, 2021 compared toMarch 31, 2020 . Management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this filing.
Republic
The RCS ACLL decreased$1 million to$8 million as ofMarch 31, 2021 from$9 million as ofDecember 31, 2020 . The decrease in ACLL was driven by a$2 million decrease in outstanding balances for RCS's LOC I product. RCS maintained an ACLL for two distinct credit products offered as ofMarch 31, 2021 , including its line-of-credit products and its healthcare-receivables products. As ofMarch 31, 2021 , the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 49% for its line-of-credit products. The lower reserve percentage of 0.25% was provided for RCS's healthcare receivables, as such receivables have recourse back to the third-party providers. 83 Table of Contents Asset Quality COVID-19 Loan Accommodations
The CARES Act provided several forms of economic relief designed to defray the impact of COVID-19. InApril 2020 , through its own independent relief efforts and CARES Act provisions, the Company began offering loan accommodations through deferrals and forbearances. These accommodations were generally under three-month terms for commercial clients, with residential and consumer accommodations in line with prevailing regulatory and legal parameters. Loans that received an accommodation were generally not considered troubled debt restructurings by the Company if such loans were not greater than 30 days past due as ofDecember 31, 2019 .
As of
The ultimate impact of the above accommodated loan balances on the Company's Classified, Special Mention, nonperforming, and delinquent loans is currently uncertain. When evaluating its borrowers for further accommodation, the Bank considers prudent options based on the borrower's credit risk; applicable federal and state laws and regulations, including COVID-related accommodations provided by applicable federal, state, and local laws; and the Bank's ability to ease cash flow pressures on the affected borrowers while improving the Bank's likelihood of collection on its loans. If enough borrowers were unable to meet their loan payment obligations at the end of their accommodation periods and were also unable to further extend their accommodation arrangements with the Bank, the Bank's Classified, Special Mention, nonperforming, and delinquent loans would increase and negatively impact the Company's overall operating performance.
Classified and Special Mention Loans
The Bank applies credit quality indicators, or "ratings," to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated "Loss," "Doubtful," "Substandard," and PCI/PCD-Substandard are considered "Classified." Loans rated "Special Mention" or PCI/PCD-Special Mention are considered Special Mention. The Bank's Classified and Special Mention loans increased approximately$21 million during the first quarter of 2021, driven primarily by commercial-purpose loans within the hospitality and leisure industry downgraded to Special Mention during the first quarter of 2021. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's Classified and Special Mention loans is currently uncertain.
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements" for additional discussion regarding Classified and Special Mention loans.
Table 7 - Classified and Special Mention Loans
(in thousands) March 31, 2021 December 31, 2020 $ Change % Change Loss $ - $ - $ - - Doubtful - - - - Substandard 27,540 30,193 (2,653) (9) % PCD - Substandard 1,835 1,887 (52) (3) Total Classified Loans 29,375 32,080 (2,705) (8) Special Mention 112,685 89,206 23,479 26 PCD - Special Mention 874 895 (21) (2) Total Special Mention Loans 113,559
90,101 23,458 26
Total Classified and Special Mention Loans$ 142,934 $ 122,181$ 20,753 17 84 Table of Contents Nonperforming Loans Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately$7 million and$7 million as ofMarch 31, 2021
andDecember 31, 2020 .
Nonperforming loans to total loans decreased to 0.48% as ofMarch 31, 2021 from 0.49% as ofDecember 31, 2020 , as the total balance of nonperforming loans decreased by$1 million , or 5%, while total loans decreased$147 million , or 3%, during the first quarter of 2021. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's nonperforming loans
is currently uncertain.
Table 8 - Nonperforming Loans and Nonperforming Assets Summary
(in thousands) March 31, 2021 December 31, 2020 Loans on nonaccrual status* $ 22,004 $ 23,548 Loans past due 90-days-or-more and still on accrual** 517 47 Total nonperforming loans 22,521 23,595 Other real estate owned 2,015 2,499 Total nonperforming assets $ 24,536 $ 26,094 Credit Quality Ratios -Total Company : Nonperforming loans to total loans 0.48 % 0.49 % Nonperforming assets to total loans (including OREO) 0.53
0.54
Nonperforming assets to total assets 0.38
0.42
Credit Quality Ratios -Core Bank : Nonperforming loans to total loans 0.49 % 0.50 % Nonperforming assets to total loans (including OREO) 0.53
0.56
Nonperforming assets to total assets 0.42
0.45
Loans on nonaccrual status include collateral-dependent loans. See Footnote 4 * "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements"
for additional discussion regarding collateral-dependent loans.
** Loans past due 90-days-or-more and still accruing consist of smaller balance
consumer loans.
85
Table of Contents
Table 9 - Nonperforming Loan Composition
March 31, 2021 December 31, 2020
Percent of Percent of
Total Total
(in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 13,194 1.55 % $ 14,328 1.63 %
Nonowner occupied 106 0.04 81 0.03
Commercial real estate 6,669 0.50 6,762 0.50Construction & land development - - -
-
Commercial & industrial 40 0.01 55 0.02
Paycheck Protection Program - - - -
Lease financing receivables - - - -
Aircraft - - - -
Home equity 1,855 0.82 2,141 0.89
Consumer:
Credit cards - - 5 0.04
Overdrafts - - - -
Automobile loans 132 0.52 170 0.56
Other consumer 8 0.11 11 0.13
Total Traditional Banking 22,004 0.60 23,553 0.63
Warehouse lines of credit - - - -
Total Core Banking 22,004 0.49 23,553 0.50
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - - - -
Other TRS loans - - - -
Republic Credit Solutions 517 0.48 42 0.04Total Republic Processing Group 517 0.36 42
0.03 Total nonperforming loans$ 22,521 0.48 %$ 23,595 0.49 % 86 Table of Contents
Table 10 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance
March 31, 2021 Balance >$100 & Balance Total
(dollars in thousands) No. <= $100 No. <= $500 No. >$500 No. Balance
Traditional Banking:
Residential real estate:
Owner occupied 147 $ 4,905 27 $ 4,648 4 $ 3,641 178 $ 13,194
Nonowner occupied 3 106 - - - - 3 106
Commercial real estate - - 3 903 3 5,766 6 6,669Construction & land development - - - - - - - - Commercial & industrial 1 40 - - - - 1 40 Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - -
Aircraft - - - - - - - -
Home equity 28 739 5 1,116 - - 33 1,855
Consumer:
Credit cards - - - - - - NM -
Overdrafts - - - - - - - -
Automobile loans 12 132 - - - - 12 132
Other consumer 9 8 - - - - 9 8Total Traditional Banking 200 5,930 35 6,667 7 9,407 242 22,004 Warehouse lines of credit - - - - - - - - Total Core Banking 200 5,930 35 6,667
7 9,407 242 22,004
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans - - - - - - NM -
Republic Credit Solutions - - - - NM 517 NM 517Total Republic Processing Group NM - - -
- 517 NM 517
Total 200 $ 5,930 35 $ 6,667 7 $ 9,924 242 $ 22,521
Number of Nonperforming
Loans and
Balance
December 31, 2020 Balance >$100 & Balance Total
(dollars in thousands) No. <= $100 No. <= $500 No. >$500 No. Balance
Traditional Banking:
Residential real estate:
Owner occupied 146 $ 5,110 27 $ 4,966 5 $ 4,252 178 $ 14,328
Nonowner occupied 3 81 - - - - 3 81
Commercial real estate 2 45 3 925 3 5,792 8 6,762Construction & land development - - - -
- - - -
Commercial & industrial 2 55 - - - - 2 55
- - - - - -Lease financing receivables - - - -
- - - -
Aircraft - - - - - - - -
Home equity 26 867 6 1,274 - - 32 2,141
Consumer:
Credit cards NM 5 - - - - NM 5
Overdrafts - - - - - - - -
Automobile loans 14 170 - - - - 14 170
Other consumer 7 11 - - - - 7 11Total Traditional Banking 200 6,344 36 7,165 8 10,044 244 23,553 Warehouse lines of credit - - - - - - - - Total Core Banking 200 6,344 36 7,165
8 10,044 244 23,553
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans NM - - - - - NM -
Republic Credit Solutions NM 42 - - - - NM 42Total Republic Processing Group NM 42 - -
- - NM 42
Total 200 $ 6,386 36 $ 7,165 8 $ 10,044 244 $ 23,595
87
Table of Contents
Table 11 - Rollforward of Nonperforming Loans
Three Months Ended
March 31,
(in thousands) 2021 2020
Nonperforming loans at the beginning of the period$ 23,595 $ 23,489 Loans added to nonperforming status during the period that remained nonperforming at the end of the period 846
2,629
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)
(1,891) (4,975)
Principal balance paydowns of loans nonperforming at both period ends (499)
(628)
Net change in principal balance of other loans nonperforming at both period ends* 470
338
Nonperforming loans at the end of the period$ 22,521
* Includes relatively small consumer portfolios, e.g., RCS loans.
Table 12 - Detail of Loans Removed from Nonperforming Status
Three Months Ended
March 31,
(in thousands) 2021 2020
Loans charged off $ - $ (43)
Loans transferred to OREO - -Loans refinanced at other institutions (1,891)
(4,907)
Loans returned to accrual status -
(25)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period
$ (1,891) $ (4,975)
Based on the Bank's review as of
Delinquent LoansTotal Company delinquent loans to total loans decreased to 0.32% as ofMarch 31, 2021 , from 0.41% as ofDecember 31, 2020 , primarily due to a$5 million , or 25%, decrease in delinquent loans and a$147 million , or 3%, decrease in total loans during the first quarter of 2021.Core Bank delinquent loans to totalCore Bank loans decreased to 0.19% as ofMarch 31, 2021 from 0.21% as ofDecember 31, 2020 . With the exception of small-dollar consumer loans, allTraditional Bank loans past due 90-days-or-more as ofMarch 31, 2021 andDecember 31, 2020 were on nonaccrual status. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's delinquent loans is currently uncertain. 88 Table of Contents
Table 13 - Delinquent Loan Composition*
March 31, 2021 December 31, 2020
Percent of Percent of
Total Total
(in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 2,526 0.30 % $ 3,260 0.37 %
Nonowner occupied - - - -
Commercial real estate 5,402 0.40 5,457 0.40Construction & land development - - -
-
Commercial & industrial - - 12 0.00
Paycheck Protection Program - - - -
Lease financing receivables - - - -
Aircraft - - - -
Home equity 484 0.21 702 0.29
Consumer:
Credit cards 27 0.19 73 0.51
Overdrafts 94 19.83 147 25.04
Automobile loans 25 0.10 56 0.18
Other consumer 2 0.03 6 0.07
Total Traditional Banking 8,560 0.23 9,713 0.26
Warehouse lines of credit - - - -
Total Core Banking 8,560 0.19 9,713 0.21
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - - - -
Other TRS loans 104 1.80 - -
Republic Credit Solutions 6,322 5.84 10,234 9.237.60 Total delinquent loans$ 14,986 0.32 %$ 19,947 0.41 %
* Represents total loans 30-days-or-more past due. Delinquent status may be
determined by either the number of days past due or number of payments past due.
EAs do not have a contractual due date but during 2021 the Company considered an
EA delinquent if it remained unpaid 35 days after the taxpayer's tax return is
submitted to the applicable taxing authority.
89
Table of Contents
Table 14 - Rollforward of Delinquent Loans
Three Months Ended
March 31,
(in thousands) 2021 2020
Delinquent loans at the beginning of the period$ 19,947 $
20,804
Loans that became delinquent during the period - Easy Advances* -
23,467
Loans added to delinquency status during the period and remained in delinquency status at the end of the period
992 3,950
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below) (2,017)
(4,702)
Principal balance paydowns of loans delinquent at both period ends (29)
(95)
Net change in principal balance of other loans delinquent at both period ends* (3,907)
(797)
Delinquent loans at the end of period$ 14,986 $
42,627
* Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 15 - Detail of Loans Removed from Delinquent Status
Three Months Ended
March 31,
(in thousands) 2021 2020
Loans charged off $ - $ -Easy Advances paid-off or charged-off -
-
Loans transferred to OREO -
-
Loans refinanced at other institutions (1,270)
(2,442)
Loans paid current (747)
(2,260)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period
$ (2,017) $ (4,702)
Collateral Dependent Loans and Troubled Debt Restructurings
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. The Bank's policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected. A TDR is a situation where, due to a borrower's financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank's TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan's interest rate and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower's financial condition and ability and willingness to service the modified debt.
Table 16 - Collateral-Dependent Loans and Troubled Debt Restructurings
(in thousands) March 31, 2021 December 31, 2020 $ Change % Change Cashflow-dependent TDRs$ 10,754 $ 10,938$ (184) (2) % Collateral-dependent TDRs 9,521 9,840 (319) (3) Total TDRs 20,275 20,778 (503) (2) Collateral dependent loans (which are not TDRs) 20,701 20,806 (105) (1) Total recorded investment in TDRs and collateral-dependent loans$ 40,976 $ 41,584$ (608) (1) %
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements" for additional discussion regarding collateral-dependent loans and TDRs.
90
Table of Contents
Deposits
Table 17 - Deposit Composition
(in thousands) March 31, 2021 December 31, 2020 $ Change % Change Core Bank: Demand$ 1,312,103 $ 1,217,263$ 94,840 8 % Money market accounts 742,823 712,824 29,999 4 Savings 273,117 236,335 36,782 16 Individual retirement accounts (1) 47,113 47,889 (776) (2) Time deposits,$250 and over (1) 77,014 83,448 (6,434) (8) Other certificates of deposit (1) 182,333 199,214 (16,881) (8) Reciprocal money market and time deposits (1) 317,173 314,109 3,064 1 Brokered deposits (1) 40,504 25,010 15,494 62Total Core Bank interest-bearing deposits 2,992,180 2,836,092 156,088 6Total Core Bank noninterest-bearing deposits 1,588,647 1,503,662 84,985 6Total Core Bank deposits 4,580,827 4,339,754 241,073 6Republic Processing Group : Money market accounts 2,964 6,673 (3,709) (56) Total RPG interest-bearing deposits 2,964 6,673 (3,709) (56)
Brokered prepaid card deposits 504,224 257,856 246,368 96 Other noninterest-bearing deposits 183,477 128,898 54,579 42 Total RPG noninterest-bearing deposits 687,701 386,754 300,947 78 Total RPG deposits 690,665 393,427 297,238 76 Total deposits$ 5,271,492 $ 4,733,181$ 538,311 11 % (1) Includes time deposits.
Management believes its deposit balances continue to be the beneficiary of
Federal government stimulus brought about by the COVID-19 pandemic. During the
? first quarter of 2021, the Federal government issued two rounds of economic
stimulus payments. At this time, management is uncertain how long these stimulus funds may remain at the Bank.
The
? 2021, with PPP borrowers generally retaining their loan proceeds within a
deposit account at the Bank.
Management believes that much of the growth in noninterest-bearing and
interest-bearing deposits at the
? flight to safety brought about by the COVID-19 pandemic. At this time,
management is unable to predict how long these funds might remain at the Bank
due to the uncertain economic environment for many of the depositors, including
the depositors' short-term and long-term cash needs.
Total RPG deposits increased
? RPG noninterest-bearing deposits growth was primarily driven by the following:
? TRS deposits increased
These deposits are expected to exit the Bank during the next quarter.
TRS prepaid card balances within its RPS division increased
? driven by government stimulus funds applied to prepaid card deposit balances.
At this time, management is uncertain how long these stimulus funds may remain
at the Bank.
91
Table of Contents
Federal Home Loan Bank Advances
FHLB advances declined by$210 million fromDecember 31, 2020 toMarch 31, 2021 , as the Bank continued to maintain sufficient deposit balances to meet its current liquidity needs. The Bank held$25 million in overnight advances at a rate of 0.14% as ofMarch 31, 2021 , compared to$225 million in overnight advances at a rate of 0.16% as ofDecember 31, 2020 . Given the overall amount of liquidity on the Company's balance sheet as ofMarch 31, 2021 , management does not anticipate that FHLB term or overnight advances will likely be utilized to any material extent over the near term. Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank's interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 "Interest Rate Swaps" of Part I Item 1 "Financial Statements" for additional discussion regarding the Bank's interest rate swaps.
Liquidity The Company had a loan to deposit ratio (excluding brokered deposits) of 99% as ofMarch 31, 2021 and 108% as ofDecember 31, 2020 . As ofMarch 31, 2021 andDecember 31, 2020 , the Company had cash and cash equivalents on-hand of$985 million and$486 million . The Bank also had available borrowing capacity of$871 million and$683 million from the FHLB as ofMarch 31, 2021 andDecember 31, 2020 . In addition, the Bank's liquidity resources included unencumbered debt securities of$257 million and$274 million as ofMarch 31, 2021 andDecember 31, 2020 and unsecured lines of credit of$125 million available through various other financial institutions as of the same period-ends. The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage-backed securities and proceeds realized from loans held for sale. The Bank's liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. As ofMarch 31, 2021 andDecember 31, 2020 , these pledged investment securities had a fair value of$273 million and$304 million . Republic's banking centers and its website, www.republicbank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs. As ofMarch 31, 2021 , the Bank had approximately$1.6 billion in deposits from 239 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . The 20 largest non-sweep deposit relationships represented approximately$666 million , or 13%, of the Company's total deposit balances as ofMarch 31, 2021 . These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than 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.
92
Table of Contents
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. Capital Total stockholders' equity increased from$823 million as ofDecember 31, 2020 to$838 million as ofMarch 31, 2021 . The increase in stockholders' equity was primarily attributable to net income earned during 2021 reduced primarily by cash dividends declared and Class A common stock repurchased.
See Part II, Item 2. "Unregistered Sales of
Common Stock - The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and ClassB Common shares have ten votes per share. ClassB Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic's capital stock. Dividend Restrictions -The Parent Company's principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states' banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years. As ofMarch 31, 2021 , RB&T could, without prior approval, declare dividends of approximately$146 million . Any payment of dividends in the future will depend, in large part, on the Company's earnings, capital requirements, financial condition, and other factors considered relevant by the Company's Board of Directors. Regulatory Capital Requirements - The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define "well capitalized" as a 10.0%Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 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 13.27% as ofMarch 31, 2021 compared to 13.35% as ofDecember 31, 2020 . Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end. 93 Table of Contents 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 onApril 1, 2021 and is currently carrying the note at a cost of LIBOR plus 1.42%.
Table 18 - Capital Ratios (1)
As of March 31, 2021 As of December 31, 2020
(dollars in thousands) Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Republic Bancorp, Inc. $ 924,665 19.15 % $ 896,053 18.52 %
Republic Bank & Trust Company 827,393 17.16 796,114 16.46
Common equity tier 1 capital to risk-weighted assets Republic Bancorp, Inc.$ 824,280 17.07 %$ 803,682 16.61 % Republic Bank & Trust Company 767,079 15.91 743,743 15.38 Tier 1 (core) capital to risk-weighted assets Republic Bancorp, Inc.$ 864,280 17.90 %$ 843,682 17.43 % Republic Bank & Trust Company 767,079 15.91 743,743 15.38 Tier 1 leverage capital to average assets Republic Bancorp, Inc.$ 864,280 13.73 %$ 843,682 13.70 % Republic Bank & Trust Company 767,079 12.20 743,743 12.11 The Company and the Bank elected in 2020 to defer the impact of CECL on
regulatory capital. The deferral period is five years, with the total (1) estimated CECL impact 100% deferred for the first two years, then phased in
over the next three years. If not for this election, the Company's regulatory
capital ratios would have been approximately 20 basis points lower than those
presented in the table above as of March 31, 2021 .
94
Table of Contents
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 ofMarch 31, 2021 , a dynamic simulation model was run for interest rate changes from "Down 100" basis points to "Up 400" basis points. The following table illustrates the Bank's projected percent change from its Base net interest income over the period beginningApril 1, 2021 and endingMarch 31, 2022 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank's dynamic earnings simulation model includes secondary market loan fees and excludesTraditional Bank loan fees.
Table 19 - 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 as of March 31, 2021 (1.1) % (2.0) % (0.6) % 3.6 % 8.4 % % Change from base net interest income as of December 31, 2020 0.4 % (4.5) %
(7.0) % (5.7) % (4.2) %
The Bank's dynamic simulation model run forMarch 2021 projected a decrease in the Bank's net interest income plus secondary market loan fees for the "Down-100", "Up-100" and "Up-200" scenarios, while the "Up-300" and "Up-400" rate scenarios projected increases. The projections as ofDecember 2020 reflected a modest increase in the Down-100 scenario and decreases in all Up-rate scenarios. As compared toDecember 2020 , the deterioration in the Down-100 rate scenario forMarch 2021 was generally because the Bank had less ability inMarch 2021 than December to reprice its liabilities downward. The improvement in the Up scenarios was due partially to growth in interest-earning assets and partially to a smaller projected falloff in secondary market fees for theMarch 2021 simulation than previously projected for theDecember 2020 simulation.
For additional discussion regarding the Bank's net interest income, see the
sections titled "Net Interest Income" in this section of the filing under
"RESULTS OF OPERATIONS (Three Months Ended
95
Table of Contents© Edgar Online, source
