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;
? statements relating to the completion of the Sale Transaction and the potential
timing thereof; and
? descriptions of assumptions underlying or relating to any of the foregoing.
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:
? the impact of the COVID-19 pandemic on the Company's operations and credit
losses;
? the ability of borrowers who received COVID-19 loan accommodations to resume
repaying their loans upon maturity of such accommodations;
? natural disasters impacting the Company's operations;
? changes in political and economic conditions;
? the magnitude and frequency of changes to the FFTR implemented by the
the FRB;
? long-term and short-term interest rate fluctuations as well as the overall
steepness of the
? competitive product and pricing pressures in each of the Company's five
reportable segments;
? equity and fixed income market fluctuations;
? client bankruptcies and loan defaults;
? inflation;
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? recession;
? future acquisitions;
? integrations of acquired businesses;
? changes in technology;
? changes in applicable laws and regulations or the interpretation and
enforcement thereof;
? changes in fiscal, monetary, regulatory and tax policies;
? changes in accounting standards;
? monetary fluctuations;
? changes to the Company's overall internal control environment;
? success in gaining regulatory approvals when required;
? the Company's ability to qualify for future R&D federal tax credits;
? risks related to the completion of the proposed Sale Transaction and the
potential timing thereof?
? the occurrence of any event, change or other circumstances that could give rise
to the termination of the Purchase Agreement?
disruption from the proposed Sale Transaction making it difficult to maintain
? business and operational relationships, including retaining and hiring key
personnel and maintaining relationships with the Bank's customers, vendors and
others with whom the Bank does business?
? the risk of litigation and/or regulatory actions related to the proposed Sale
Transaction?
? information security breaches or cyber security attacks involving either the
Company or one of the Company's third-party service providers; and
other risks and uncertainties reported from time to time in the Company's
? filings with the
Annual Report on Form 10-K for the year ended
Item 1A "Risk Factors" of the current filing. Accounting Standards Update
For disclosure regarding the impact to the Company's financial statements of ASUs, see Footnote 1 "Basis of Presentation and Summary of Significant Accounting Policies" of Part I Item 1 "Financial Statements."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic's consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. A summary of the Company's significant accounting policies is set forth in Part II "Item 8. Financial Statements and Supplementary Data" of its Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Management continually evaluates the Company's accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management's estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management. Critical accounting policies are those that management believes are the most important to the portrayal of the Company's financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.
Republic believes its critical accounting policies and estimates relate to its ACLL and Provision.
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ACLL and Provision - As of June 30, 2021 , the Bank maintained an ACLL for
expected credit losses inherent in the Bank's loan portfolio, which includes
overdrawn deposit accounts. Management evaluates the adequacy of the ACLL
monthly and presents and discusses the ACLL with the Audit Committee and the
Board of Directors quarterly.
Effective January 1, 2020 , the Company adopted ASC 326 Financial Instruments -
Credit Losses, which replaced the pre-January 1, 2020 "probable-incurred" method
for calculating the Company's ACL with the CECL method. CECL is applicable to
financial assets measured at amortized cost, including loan and lease
receivables and held-to-maturity debt securities. CECL also applies to certain
off-balance sheet credit exposures.
When measuring an ACL, CECL primarily differs from the probable-incurred method
by: a) incorporating a lower "expected" threshold for loss recognition versus a
higher "probable" threshold; b) requiring life-of-loan considerations; and c)
requiring reasonable and supportable forecasts. The Company's CECL method is a
"static-pool" method that analyzes historical closed pools of loans over their
expected lives to attain a loss rate, which is then adjusted for current
conditions and reasonable, supportable forecasts prior to being applied to the
current balance of the analyzed pools. Due to its reasonably strong correlation
to the Company's historical net loan losses, the Company has chosen to use the
U.S. national unemployment rate as its primary forecasting tool. For its CRE
loan pool, the Company employed a one-year forecast of CRE vacancy rates through
March 31, 2021 but discontinued use of this forecast during the second quarter
of 2021 in favor of a one-year forecast of general CRE values. This change in
forecast method had no material impact on the Company's ACLL.
Management's evaluation of the appropriateness of the ACLL is often the most
critical accounting estimate for a financial institution, as the ACLL requires
significant reliance on the use of estimates and significant judgment as to the
reliance on historical loss rates, consideration of quantitative and qualitative
economic factors, and the reliance on a reasonable and supportable forecast.
Adjustments to the historical loss rate for current conditions include
differences in underwriting standards, portfolio mix or term, delinquency level,
as well as for changes in environmental conditions, such as changes in property
values or other relevant factors. One-year forecast adjustments to the
historical loss rate are based on the U.S. national unemployment rate and CRE
values. Subsequent to the one-year forecasts, loss rates are assumed to
immediately revert back to long-term historical averages.
The impact of utilizing the CECL approach to calculate the ACLL is significantly
influenced by the composition, characteristics and quality of the Company's loan
portfolio, as well as the prevailing economic conditions and forecasts utilized.
Material changes to these and other relevant factors may result in greater
volatility to the ACLL, and therefore, greater volatility to the Company's
reported earnings.
See additional detail regarding the Company's adoption of ASC 326 and the CECL
method under Footnote 1"Summary of Significant Accounting Policies" of Part II
Item 8 "Financial Statements and Supplementary Data" of the Company's Annual
Report on Form 10-K for the year ended December 31, 2020 .
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BUSINESS SEGMENT COMPOSITION
As ofJune 30, 2021 , the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute "Core Bank " or "Core Banking" operations, while the last two segments collectively constitute RPG operations.
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company's market footprint. As ofJune 30, 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. 74 Table of Contents Aircraft Lending - InOctober 2017 , the Bank created an Aircraft Lending division. Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. The aircraft loan program is open to all states, except forAlaska andHawaii . The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank's other Traditional Banking activities generally consist of the following:
Private Banking - The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank's Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele. Treasury Management Services - The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank's Treasury Management department. Internet Banking - The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking - The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services - The Bank also provides title insurance and other financial institution related products and services.
Bank Acquisitions - The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements."
(II) Warehouse Lending segment
TheCore Bank provides short-term, revolving credit facilities to mortgage bankers acrossthe United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. TheCore Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
See additional detail regarding the Warehouse Lending segment under Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements."
(III) Mortgage Banking segment Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and theFNMA . The Bank typically retains servicing on loans sold into the secondary market for loans generated in states within its footprint and generally sells servicing for loans generated in states outside of its footprint. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions. See additional detail regarding the Mortgage Banking segment under Footnote 11 "Mortgage Banking Activities" and Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements." 75 Table of Contents (IV) Tax Refund Solutions segment
Tax Refund Solutions segment - On
As a result of the Purchase Agreement, the results of operations for the Company and its TRS segment are presented within this filing to reflect continuing versus discontinued operations. TRS's continuing operations include its immaterial RPS division and certain overhead costs previously allocated to TRS that will remain with the Bank. Discontinued operations are those sold to Green Dot.
See additional detail regarding the Bank's agreement to sell TRS under Footnote 17 "Discontinued Operations" of Part I Item 1 "Financial Statements."
Republic Payment Solutions division - RPS is currently managed and operated within the TRS segment's continuing operations. The RPS division offers general-purpose reloadable prepaid cards as an issuing bank through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company's overall results of operations and will be reported as part of the TRS segment's continuing operations. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees. Additionally, the Company's portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under "Interchange fee income."
(V) Republic Credit Solutions segment
Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans that are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
RCS line-of-credit products - Using separate third-party service providers, the
Bank originates two line-of-credit products to generally subprime borrowers in
? multiple states. The first of these two products (the "LOC I") has been
originated by the Bank since 2014. The second (the "LOC II") was introduced in
January 2021 . 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
RCS's existing third-party service providers, subject to the Bank's oversight
and supervision, provides the Bank with marketing services and loan servicing
o for the LOC II product. The Bank is the lender for this product and is marketed
as such. Furthermore, the Bank controls the loan terms and underwriting
guidelines, and the Bank exercises consumer compliance oversight of this
product.
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The Bank sells participation interests in this product. These participation interests are a 95% interest in advances made to borrowers under the borrower's line-of-credit account, and the participation interests are generally sold three business days following the Bank's funding of the associated advances. Although the Bank retains a 5% participation interest in each advance, it maintains 100% ownership of the underlyingLOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
RCS installment loan product - In
offering installment loans with terms ranging from 12 to 60 months to borrowers
in multiple states. The same third-party service provider for RCS's
the third-party provider for the installment loans. This third-party provider
is subject to the Bank's oversight and supervision and provides the Bank with
marketing services and loan servicing for these RCS installment loans. The Bank
is the lender for these RCS installment loans and is marketed as such.
? Furthermore, the Bank controls the loan terms and underwriting guidelines, and
the Bank exercises consumer compliance oversight of this RCS installment loan
product. Currently, all loan balances originated under this RCS installment
loan program are carried as "held for sale" on the Bank's balance sheet, with
the intention to sell these loans to its third-party service provider generally
within sixteen days following the Bank's origination of the loans. Loans
originated under this RCS installment loan program are carried at fair value
under a fair-value option, with the portfolio marked to market monthly. RCS healthcare receivables products - The Bank originates healthcare-receivables products across theU.S. through two different
third-party service providers. In one program, the Bank retains 100% of the
? receivables originated. In the other program, the Bank retains 100% of the
receivables originated in some instances, and in other instances, sells 100% of
the receivables within one month of origination. Loan balances held for sale
through this program are carried at the lower of cost or fair value.
The Company reports interest income and loan origination fees earned on RCS loans under "Loans, including fees," while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under "Program fees."
OVERVIEW (Three Months Ended
Total Company net income for the second quarter of 2021 was$23.9 million , an$8.1 million , or 51%, increase from the same period in 2020. Diluted EPS increased to$1.16 for the three months endedJune 30, 2021 compared to$0.76 for the same period in 2020. The increase in net income reflected a$9.4 million increase in net income from discontinued operations, driven by a$10.2 million positive swing in Provision resulting from significantly higher Easy Advance repayments during the second quarter of 2021 compared to the same period in 2020. Net income from continuing operations was$16.5 million for the second quarter of 2021, a$1.3 million decrease from the same period in 2020. Diluted EPS from continuing operations were$0.80 for the three months endedJune 30, 2021 compared to$0.86 for the same period in 2020. The decrease in net income from continuing operations generally reflected a decrease in net interest income partially offset by a positive reduction in Provision.
The following are general highlights by reportable segment. Discontinued operations for the periods discussed relate entirely to the TRS segment.
See additional detail regarding the Bank's agreement to sell TRS under Footnote 17 "Discontinued Operations" of Part I Item 1 "Financial Statements."
Traditional Banking segment
? Net income increased
compared to the same period in 2020.
Net interest income decreased
? compared to the same period in 2020.
decreased 29 basis points to 2.97% for the second quarter of 2021.
Provision decreased
? quarter of 2021 compared to a net charge of
2020.
? Noninterest income increased
2021 compared to the same period in 2020.
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? Total noninterest expense increased
2021 compared to same period in 2020. Warehouse Lending segment
? Net income increased
to the same period in 2020.
? Net interest income increased
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 51% during the second quarter of 2021 compared to 68%
during the same period in 2020. Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 50%, during the second quarter of 2021 compared to the same period
in 2020.
Overall, Republic's originations of secondary market loans totaled
? during the second quarter of 2021 compared to
period in 2020, with the Company's gain-as-a-percent-of-loans-sold decreasing
from 3.98% to 2.84% from period to period. Tax Refund Solutions segment Continuing Operations
Net loss from continuing operations was
compared to a net loss of
during the second quarter of 2020 primarily reflected general operating losses
? related to TRS's prepaid card division, with such losses substantially
occurring prior to
depository relationship that significantly improved profitability on a subsequent basis. Discontinued Operations
? Net income from discontinued operations increased
quarter of 2021 compared to the same period in 2020.
Overall, TRS recorded a net credit to the Provision from discontinued
? operations of
charge to the Provision of$4.4 million for the same period in 2020.
? Noninterest income from discontinued operations increased
for the second quarter of 2021 compared to the same period in 2020.
? Net RT revenue from discontinued operations increased
for the second quarter of 2021 compared to the same period in 2020.
? Noninterest expense from discontinued operations was
second quarter of 2021 compared to
Republic
? Net income decreased
compared to the same period in 2020.
? Net interest income decreased
compared to the same period in 2020.
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Overall, RCS recorded a net charge to the Provision of
? second quarter of 2021 compared to a net credit of
period in 2020.
? Noninterest income increased
the second quarter of 2021.
? Noninterest expense was
$903,000 for the same period in 2020.
RESULTS OF OPERATIONS (Three Months Ended
Net Interest Income Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
See the section titled "Asset/Liability Management and Market Risk" in this section of the filing regarding the Bank's interest rate sensitivity.
A large amount of the Company's financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended lower since the first quarter of 2020 and the onset of COVID-19 pandemic, as theFOMC reduced the FFTR to approximately 25 basis points during 2020. TheFOMC has provided on-going guidance that it is unlikely the FFTR will be increased in the near term. Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Bank's net interest income and net interest margin in the near term, while additional decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Bank's net interest income and net interest margin in the near term. Increases in short-term interest rates, however, could have a negative impact on net interest income and net interest margin if the Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Company's net interest income and net interest margin. Unknown variables, which may impact the Company's net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank's financial products and the Bank's overall future liquidity needs.
Total Company net interest income from continuing operations decreased$2.2 million , or 4%, during the second quarter of 2021 compared to the same period in 2020.Total Company net interest margin from continuing operations decreased to 3.27% during the second quarter of 2021 compared to 3.58% for the same period in 2020. Net interest income from discontinued operations was$403,000 during the second quarter of 2021 compared to$393,000 during the second quarter of 2020.
The following were the most significant components affecting the Company's net interest income by reportable segment:
Traditional Banking segment
The Traditional Banking's net interest income decreased
Table 1 - Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
Due to the short-term nature of the PPP, management believesTraditional Bank net interest income excluding PPP lender fees is a more appropriate measure to analyze theTraditional Bank's net interest income and net interest margin. The following table reconcilesTraditional Bank net interest income and net interest margin toTraditional Bank net interest income and net interest margin excluding PPP lender fees, a non-GAAP measure. Net interest margin excluding PPP lender fees presented below also excludes average PPP loans of$350 million and$387 million for the quarters endedJune 30, 2021 and 2020. 79 Table of Contents Net Interest Income Net Interest Margin Three Months Ended Jun. 30, Three Months Ended Jun. 30, (dollars in thousands) 2021 2020 $ Change % Change 2021 2020
Change
Traditional Banking - GAAP$ 38,278 $ 39,035 $ (757) (2) % 2.97 % 3.26 % (0.29) % Less: PPP lender fees 3,676 1,599 2,077 130 0.16 (0.05)
0.21
Traditional Banking ex PPP lender fees - non-GAAP
3.31 (0.50)
The decrease in the
Excluding accreted PPP lender fees, net interest income decreased
or 8%, from the second quarter 2020, as the
margin, excluding PPP loans and related fees, declined from 3.31% for the
second quarter of 2020 to 2.81% for the second quarter of 2021. The decline in
? the net interest margin was substantially driven by a 56-basis point decline in
the
second quarter of 2020 to the second quarter of 2021, as the majority of the
months was in lower-yielding cash or cash equivalent investments instead of
loans.
Partially offsetting the
Bank recognized
second quarter of 2021 compared to
period in 2020. The
significantly by the forgiveness, payoff, and paydown of
loans during the second quarter of 2021. As of
?
in loan balances originated during 2020,
originated during 2021, and
as a credit offset to these originated balances. Unaccreted PPP lender fees
will generally be recognized into income over the estimated remaining life of
the PPP portfolio, with fee recognition accelerated if loans are forgiven or
repaid earlier than estimated. Warehouse Lending segment Net interest income from the Warehouse segment increased$261,000 , or 4%, from the second quarter of 2020 to the second quarter of 2021 driven by an improved net interest margin. Overall the net interest margin for the Warehouse segment improved from 3.01% during the second quarter of 2020 to 3.48% during the second quarter of 2021, as many of theBank's Warehouse clients reached contractual interest rate floors on their lines-of-credit during the second quarter of 2020 preventing further declines in the segment's loan yields, while the segment's cost of funds continued to decline. The improved margin overcame a decrease in average outstanding balances, which declined from$807 million during the second quarter of 2020 to$727 million for the second quarter of 2021, as home-mortgage refinancing dipped from record highs during 2020.Committed Warehouse lines-of-credit grew to$1.4 billion as ofJune 30, 2021 from$1.2 billion as ofJune 30, 2020 , while average usage rates for Warehouse lines were 51% and 68%, respectively, during the second quarters of 2021 and 2020.
Republic
RCS's net interest income decreased$931,000 , or 17%, from the second quarter of 2020 to the second quarter of 2021. The decrease was driven primarily by a decline in fee income from RCS's LOC I product. Loan fees on this product, recorded as interest income on loans, decreased to$3.6 million during the second quarter of 2021 compared to$4.6 million during the same period in 2020 and accounted for 74% and 79% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in balances for RCS's LOC I product following a reduction of marketing for this product during the second and third quarters of 2020. While the marketing for this product was reinstated during the fourth quarter of 2020, management believes the ongoing impact of government stimulus payments continued to reduce demand for this product during the current period.
Future loan fee income from RCS's LOC I product will likely continue to be negatively impacted by the on-going COVID-19 pandemic.
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Table 2 - Total Company Average Balance Sheets and Interest Rates from
Continuing Operations
Three Months Ended June 30, 2021 Three Months Ended June 30, 2020
Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate
ASSETS (1)
Interest-earning assets:
Federal funds sold and other
interest-earning deposits $ 938,728 $ 262 0.11 %
562,509 1,912 1.36 605,776 2,819 1.86
Intercompany funds loaned to
discontinued operations 49,443 31 0.25 31,584 20 0.25
RCS LOC I product (3) (7) 15,107 3,569 94.50 19,971 4,647 93.07
Other RPG loans (7) 105,685 1,190 4.50 92,488 1,046 4.52
Outstanding Warehouse lines of
credit (4) (7) 727,091 6,824 3.75 806,771 7,294 3.62
Paycheck Protection Program loans
(5) (7) 349,643 4,582 5.24 386,664 2,652 2.74
All other Core Bank loans (6) (7) 3,331,114 32,914 3.95 3,539,379 38,339 4.33
Total interest-earning assets 6,079,320 51,284 3.37 5,782,393 56,904 3.94
Allowance for credit losses (59,555) (55,310)
Noninterest-earning assets:
Noninterest-earning cash and cash
equivalents 112,928 103,390
Premises and equipment, net 39,117 43,733
Bank owned life insurance 97,257
67,079
Other assets (2) 166,355 146,867
Total assets $ 6,435,422 $ 6,088,152
LIABILITIES AND STOCKHOLDERS' EQUITY
(1)
Interest-bearing liabilities:
Transaction accounts $ 1,599,721 $ 93 0.02 %
773,838 93 0.05 727,516 248 0.14
Time deposits 303,468 930 1.23 424,190 2,188 2.06
Reciprocal money market and time
deposits 319,509 206 0.26 289,804 435 0.60
Brokered deposits 23,632 2 0.03 121,333 380 1.25
Total interest-bearing deposits 3,020,168 1,324 0.18 2,827,424 3,410 0.48 SSUARs 169,888 8 0.02 176,541 17 0.04 Intercompany funds borrowed from discontinued operations 84,015 135 0.64 140,141 443 1.26 Federal Reserve PPP Liquidity Facility - - - 122,769 105 0.34
Federal Home Loan Bank advances 25,000 10 0.16 263,296 822 1.25 Subordinated note 41,240 169 1.64 41,240 295 2.86 Total interest-bearing liabilities 3,340,311 1,646 0.20 3,571,411 5,092 0.57 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,142,055 1,611,026 Other liabilities 103,751 108,488 Stockholders' equity 849,305 797,227 Total liabilities and stockholders' equity$ 6,435,422 $ 6,088,152 Net interest income$ 49,638 $ 51,812 Net interest spread 3.17 % 3.37 % Net interest margin 3.27 % 3.58 % The table above excludes average assets, average liabilities, interest
income, and interest expense for discontinued operations; however, loans to
and borrowings from discontinued operations are included above based on the (1) Company's funds transfer pricing methodology. Net interest income would be
3.62% for the quarters ended
discontinued operations were consolidated above.
(2) For the purpose of this calculation, the fair market value adjustment on debt
securities is included as a component of other assets.
(3) Interest income is entirely composed of loan fees.
(4) Interest income includes loan fees of
ended
(5) Interest income includes loan fees of
quarters ended
(6) Interest income includes loan fees of
ended
Average balances for loans include the principal balance of nonaccrual loans (7) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees and costs.
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Table 3 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities impacted
Republic's interest income and interest expense from continuing operations
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Table 3 - Total Company Volume/Rate Variance Analysis from Continuing Operations
Three Months Ended June 30, 2021
Compared to
Three Months Ended June 30, 2020
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ 175 $ 179 $ (4)
Investment securities, including
FHLB stock (907) (190) (717)
Intercompany funds loaned to
discontinued operations 11 11 -
RCS LOC I product (1,078) (1,148) 70
Other RPG loans 144 149 (5)
Outstanding Warehouse lines of
credit (470) (740) 270
Paycheck Protection Program loans 1,930 (276)
2,206
All other Core Bank loans (5,425) (2,176) (3,249)
Net change in interest income (5,620) (4,191) (1,429)
Interest expense:
Transaction accounts (66) 35 (101)
Money market accounts (155) 15 (170)
Time deposits (1,258) (518) (740)
Reciprocal money market and time
deposits (229) 41 (270)
Brokered deposits (379) (172) (207)
SSUARs (9) (1) (8)
Intercompany funds borrowed from
discontinued operations (309) (139) (170)
Federal Reserve PPP Liquidity
Facility (105) (105) -Federal Home Loan Bank advances (813) (414)
(399)
Subordinated note (123) -
(123)
Net change in interest expense (3,446) (1,258)
(2,188)
Net change in net interest income
* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.
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Provision
Total Company Provision from continuing operations was a net charge of$1.5 million for the second quarter of 2021 compared to a net charge of$2.1 million for the same period in 2020. Provision from discontinued operations was a net credit of$5.8 million for the second quarter of 2021 compared to a net charge of$4.4 million for the same period in 2020.
The following were the most significant components comprising the Company's Provision by reportable segment:
Traditional Banking segment The Traditional Banking Provision during the second quarter of 2021 was a net credit of$77,000 compared to a net charge of$3.1 million for the second quarter of 2020. An analysis of the Provision for the second quarter of 2021 compared to the same period in 2020 follows:
For the second quarter of 2021, the Traditional Bank Provision was a net
credit, generally based on an improving economic outlook in conjunction with
limited charge-offs incurred by the
? life-of-loan reserves during 2020 following the onset of the pandemic. The net
credit recorded during the second quarter of 2021 primarily included ACLL
releases for the residential real estate, CRE, and HELOC portfolios offset by
additional reserves for certain Special Mention loans with continued signs of
pandemic-related hardship throughJune 30, 2021 .
During the second quarter of 2020, the
of additional Provision due to the expected economic impact of the COVID-19
? pandemic. Offsetting the increase in Provision due to the impact of the
COVID-19 pandemic during the second quarter of 2020 was a reduction in
Provision of
As a percentage of total loans, the Traditional Banking ACLL was 1.37% as ofJune 30, 2021 compared to 1.34% as ofDecember 31, 2020 and 1.10% as ofJune 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofJune 30, 2021 .
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in this section of the filing under "Comparison of Financial Condition" for additional discussion regarding the Provision and the Bank's credit quality.
Warehouse Lending segment
Warehouse recorded a net credit to the Provision of
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofJune 30, 2021 ,December 31, 2020 , andJune 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofJune 30, 2021 . Tax Refund Solutions segment Discontinued Operations
TRS recorded a net credit to the Provision from discontinued operations of
The TRS Provision from discontinued operations swung from a net charge of$4.4 million during the second quarter of 2020 to a net credit of$5.8 million during the second quarter of 2021. The credit to the Provision during the second quarter of 2021 resulted from repayment rates on EA loans from theU.S. Treasury that significantly exceeded those during the second quarter of 2020. Management believes the slower repayment rate from theU.S. Treasury during the second quarter of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax-return processing by theIRS for certain types of tax returns that require further taxpayer communication and verification. 83 Table of Contents
The Company completely charged-off all remaining unpaid EAs as ofJune 30, 2021 , in-line with its customaryJune 30th charge-off policy for EA loans. Any EA payments received afterJune 30th will be credited as a direct recovery to the Provision in the period it is received for the remainder of 2021.
See additional detail regarding the EA product under Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
As illustrated in Table 4 below, RCS recorded a net charge to the Provision of$1.6 million during the second quarter of 2021 compared to a net credit to the Provision of$1.4 million for the same period in 2020. The negative swing in the Provision was driven by an increase in outstanding balances for RCS's lines of credit during the second quarter of 2021 compared to a decrease in similar balances during the second quarter of 2020. The Company reduced marketing for its LOC I product during the second and third quarters of 2020, then began incrementally increasing such marketing during the fourth quarter of 2020. The Company began offering itsLOC II product during the first quarter of 2021. While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 7.68% as ofJune 30, 2021 , 7.94% as ofDecember 31, 2020 and 9.21% as ofJune 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as
ofJune 30, 2021 .
The following table presents net charges to the RCS Provision from continuing operations by product:
Table 4 - RCS Provision by Product
Three Months Ended Jun. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 1,581 $ (1,454) $ 3,035 (209) %
Hospital receivables 11 11 - -
Total $ 1,592 $ (1,443) $ 3,035 (210) %
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Table 5 - Summary of Loan and Lease Loss Experience
Three Months Ended
June 30,
(dollars in thousands) 2021 2020
ACLL at beginning of period $ 75,336 $ 70,431
Charge-offs:
Traditional Banking:
Commercial real estate - (270)
Commercial & industrial - (192)
Consumer (161) (238)
Total Traditional Banking (161) (700)
Warehouse lines of credit - -
Total Core Banking (161) (700)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances (10,256) (19,575)
Other TRS loans (30) (28)
Republic Credit Solutions (597) (2,008)Total Republic Processing Group (10,883)
(21,611) Total charge-offs (11,044) (22,311) Recoveries: Traditional Banking: Residential real estate 19 45 Commercial real estate 12 2 Commercial & industrial 4 41 Home equity 34 12 Consumer 97 119 Total Traditional Banking 166 219 Warehouse lines of credit - - Total Core Banking 166 219Republic Processing Group : Tax Refund Solutions: Easy Advances 30 - Other TRS loans - 1 Republic Credit Solutions 79 199
Total Republic Processing Group 109
200
Total recoveries 275 419
Net loan recoveries (charge-offs) (10,769)
(21,892)
Provision from continuing operations- Core Banking (95)
3,553
Provision from continuing operations - RPG 1,592
(1,443)
Provision from discontinued operations - RPG (5,773)
4,448 Total Provision (4,276) 6,558 ACLL at end of period$ 60,291 $ 55,097
Credit Quality Ratios -
ACLL to total loans 1.32 % 1.09 % ACLL to nonperforming loans 270
270
Net loan charge-offs to average loans 0.95
1.80
Net loan charge-offs from continuing operations to average loans 0.05
0.19
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.16 % 0.92 % ACLL to nonperforming loans 238
230
Net loan charge-offs to average loans -
0.04
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Noninterest Income
Total Company noninterest income from continuing operations increased $78,000
during the second quarter of 2021 compared to the same period in 2020.
Noninterest income from discontinued operations increased $3.0 million , or99% comparing the same periods.
The following were the most significant components comprising the total Company's noninterest income by reportable segment:
Traditional Banking segment Traditional Banking's noninterest income increased$1.8 million , or 30%, for the second quarter of 2021 compared to the same period in 2020. Interchange Fee Income increased$643,000 from the second quarter of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased$623,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the second quarter of 2020, as a pandemic-driven rise in the consumer savings rates drove a reduction in the Bank's overdraft-related fees. Both Interchange Fee Income and Service Charges on Deposits began to rise towards normal levels during the first quarter of 2021 following the removal of many pandemic-related restrictions. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in Service Charges on Deposits Accounts for the three months endedJune 30, 2021 and 2020 were$1.3 million and$893,000 . The total daily overdraft charges, net of refunds, included in interest income for the three months endedJune 30, 2021 and 2020 were$257,000 and$0 . The Bank suspended its daily overdraft charges during 2020 to soften the economic hardship of the COVID-19 pandemic on its clients. The Bank reinstituted the charging of its daily overdraft fee onSeptember 1, 2020 . Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased$4.2 million , or 50%, during the second quarter of 2021 compared to the same period in 2020. For the second quarter of 2021, theCore Bank originated$141 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 2.84%, with comparable originations of$219 million and comparable gains of 3.98% during the second quarter of 2020. Favorable market conditions drove a higher gain percentage for theCore Bank during the last nine months of 2020 and for a portion of the first quarter of 2021, with these favorable conditions beginning to normalize duringFebruary 2021 . 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 at, or below, 2.50%.
Tax Refund Solutions segment
Discontinued Operations TRS's noninterest income from discontinued operations increased$3.0 million during the second quarter of 2021 compared to the same period in 2020. This increase reflected a$3.0 million increase in net RT fees, as delays in the 2021 tax season drove a larger share of RT volume into the second quarter of the year.
Republic
RCS's noninterest income increased$2.3 million during the second quarter of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS's noninterest income. Pandemic-driven restrictions negatively impacted RCS program fees during the second quarter of 2020, with those program fees beginning to normalize during 2021 following the removal of restrictions. 86 Table of Contents
The following table presents RCS program fees by product:
Table 6 - RCS Program Fees by Product
Three Months Ended Jun. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 1,354 $ 529 $ 825 156 %
Hospital receivables 63 (10) 73 (730)
Installment loans* 1,417 1 1,416 NM
Total $ 2,834 $ 520 $ 2,314 445 %
* The Company has elected the fair value option for this product, with
mark-to-market adjustments recorded as a component of program fees.
Noninterest ExpenseTotal Company noninterest expense from continuing operations increased$89,000 during the second quarter of 2021 compared to the same period in 2020. Noninterest expense from discontinued operations increased$742,000 , or 46%, comparing the same periods.
The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking segment
Traditional Banking noninterest expense increased
Technology, Equipment, and Communication expense increased
?
previous 12 months, bringing its ITM fleet to over 70 ITMs as of
Partially offsetting the increase above, Bank Franchise Tax expense decreased
?
result, the Bank transitioned from a capital-based bank franchise tax to corporate income tax onJanuary 1, 2021 forKentucky state taxes. Tax Refund Solutions segment Discontinued Operations TRS's noninterest expense from discontinued operations increased$742,000 during the second quarter of 2021 compared to the same period in 2020. This increase reflected approximately$1.0 million in legal costs associated with the Bank's sale of its TRS operations. 87 Table of Contents
OVERVIEW (Six Months Ended
Total Company net income for the first six months of 2021 was$50.0 million , a$7.5 million , or 18%, increase from the same period in 2020. Diluted EPS increased to$2.41 for the six months ofJune 30, 2021 compared to$2.04 for the same period in 2020. Net income from continuing operations was$36.8 million for the first six months of 2021, a$4.8 million increase from the same period in 2020. Diluted EPS from continuing operations were$1.78 for the six months endedJune 30, 2021 compared to$1.54 for the same period in 2020. The increase in net income and net income from continuing operations primarily reflected a positive reduction in Provision partially offset by a decrease in net interest income.
The following are general highlights by reportable segment. Discontinued operations for the periods discussed relate entirely to the TRS segment.
See additional detail regarding the Bank's agreement to sell TRS under Footnote 17 "Discontinued Operations" of Part I Item 1 "Financial Statements."
Traditional Banking segment
? Net income increased
compared to the same period in 2020.
? Net interest income decreased
compared to the same period in 2020.
Provision decreased
? months of 2021 compared to a net charge of
2020.
? Noninterest income increased
2021 compared to the same period in 2020.
? Total noninterest expense increased
of 2021 compared to same period in 2020.
?
six months of 2021, driven by a
? 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 0.28%
as of
? As of
under a COVID-19 hardship accommodation.
?
six months of 2021. Warehouse Lending segment
? Net income increased
compared to the same period in 2020.
? Net interest income increased
2021 compared to the same period in 2020.
? The Warehouse Provision was a net credit of
of 2021 compared to a net charge of
? Average committed Warehouse lines increased to
six months of 2021 from$1.1 billion during the same period in 2020.
? Average line usage was 52% during the first six months of 2021 compared to 63%
during the same period in 2020.
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Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 14%, during the first six months of 2021 compared to the same
period in 2020.
Overall, Republic's originations of secondary market loans totaled
? during the first six months of 2021 compared to
period in 2020, with the Company's gain-as-a-percent-of-loans-sold decreasing
from 3.93% to 3.10% from period to period. Tax Refund Solutions segment Continuing Operations
Net loss from continuing operations was
2021 compared to a net loss of
higher loss during the first six months of 2020 primarily reflected general
? operating losses related to TRS's prepaid card division, with such losses
substantially occurring prior to
added a large depository relationship that significantly improved profitability
on a subsequent basis. Discontinued Operations
? Net income from discontinued operations increased
six months of 2021 compared to the same period in 2020.
? Net interest income from discontinued operations decreased
first six months of 2021 compared to the same period in 2020.
? Total EA originations were
compared to
Overall, TRS recorded a net charge to the Provision from discontinued
? operations of
net charge to the Provision of
? Noninterest income from discontinued operations decreased
six months of 2021 compared to the same period in 2020.
? Net RT revenue decreased
the same period in 2020.
? Noninterest expense from discontinued operations was
six months of 2021 compared to$6.5 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 charge to the Provision of
? first six months of 2021 compared to a net charge of
period in 2020.
? Noninterest income increased
2020 to the first six months of 2021.
? Noninterest expense was
to
? Total nonperforming loans to total loans for the RCS segment was 0.63% as of
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? Delinquent loans to total loans for the RCS segment was 7.66% as of
2021 compared to 9.23% as ofDecember 31, 2020 .
RESULTS OF OPERATIONS (Six Months Ended
Net Interest Income Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
See the section titled "Asset/Liability Management and Market Risk" in this section of the filing regarding the Bank's interest rate sensitivity.
A large amount of the Company's financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended lower since the first quarter of 2020 and the onset of COVID-19 pandemic, as theFOMC reduced the FFTR to approximately 25 basis points during 2020. TheFOMC has provided on-going guidance that it is unlikely the FFTR will be increased in the near term. Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Bank's net interest income and net interest margin in the near term, while additional decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Bank's net interest income and net interest margin in the near term. Increases in short-term interest rates, however, could have a negative impact on net interest income and net interest margin if the Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Company's net interest income and net interest margin. Unknown variables, which may impact the Company's net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future demand for the Bank's financial products and the Bank's overall future liquidity needs.
Total Company net interest income from continuing operations decreased$1.3 million , or 1%, during the first six months of 2021 compared to the same period in 2020.Total Company net interest margin from continuing operations decreased to 3.42% during the first six months of 2021 compared to 3.75% for the same period in 2020. Net interest income from discontinued operations was$14.8 million during the first six months of 2021 compared to$20.7 million during the same period in 2020.
The following were the most significant components affecting the Company's net interest income by reportable segment:
Traditional Banking segment The Traditional Banking's net interest income decreased$276,000 for the first six months of 2021 compared to the same period in 2020. Traditional Banking's net interest margin was 3.21% for the first six months of 2021, a decrease of 31 basis points from the same period in 2020.
Table 7 - Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
Due to the short-term nature of the PPP, management believesTraditional Bank net interest income excluding PPP lender fees is a more appropriate measure to analyze theTraditional Bank's net interest income and net interest margin. The following table reconcilesTraditional Bank net interest income and net interest margin toTraditional Bank net interest income and net interest margin excluding PPP lender fees, a non-GAAP measure. Net interest margin excluding PPP lender fees presented below also excludes average PPP loans of$357 million and$193 million for the six months endedJune 30, 2021 and 2020. 90 Table of Contents Net Interest Income Net Interest Margin Six Months Ended Jun. 30, Six Months Ended Jun. 30, (dollars in thousands) 2021 2020 $ Change % Change 2021 2020 Change Traditional Banking - GAAP$ 79,380 $ 79,656 $ (276) (0) % 3.21 % 3.52 % (0.31) % Less: PPP lender fees 9,433 1,599 7,834 490 0.24 (0.03) 0.27
Traditional Banking ex PPP lender fees - non-GAAP
78,057 $ (8,110) (10) % 2.97 3.55 (0.58)
The decrease in the
Excluding accreted PPP lender fees, net interest income decreased
or 10%, from the first six months of 2020, as the
interest margin, excluding PPP loans and related fees, declined from 3.55% for
the first six months of 2020 to 2.97% for the first six months of 2021. The
? decline in the net interest margin was substantially driven by a 22-basis point
decline in the
from the first six months of 2020 to the first six months of 2021, as the
majority of the
previous 12 months was in lower-yielding cash or cash equivalents instead of
loans.
Partially offsetting the
Bank recognized
first six months of 2021 compared to
same period in 2020. The
significantly by the forgiveness, payoff, and paydown of
loans during the first six months of 2021. As of
? of
million in loan balances originated during 2020,
originated during 2021, and
as a credit offset to these originated balances. Unaccreted PPP lender fees
will generally be recognized into income over the estimated remaining life of
the PPP portfolio, with fee recognition accelerated if loans are forgiven or
repaid earlier than estimated. Warehouse Lending segment
Net interest income increased
Average committed Warehouse lines increased to$1.4 billion during the first six months of 2021 from$1.2 billion during the same period in 2020, while overall usage rates on Warehouse lines of credit were 52% and 63%, respectively for the same periods. In addition, the Warehouse net interest margin increased to 3.45% for the first six months of 2021 compared to 2.86% for the first six months of 2020, as many of theBank's Warehouse client reached contractual interest rate floors on their lines-of-credit during the first six months of 2020 preventing further declines in the segment's loan yields, while the segment's cost of
funds continued to decline. Tax Refund Solutions segment Discontinued Operations TRS's net interest income from discontinued operations decreased$5.9 million for the first six months of 2021 compared to the same period in 2020. TRS's EA product earned$13.1 million in interest income during the first six months of 2021, a$6.4 million decrease from the first six months of 2020 resulting primarily from a$138 million decrease in EA originations from period to period. Management believes that economic impact (stimulus) payments, pandemic health risks, and a two-week delay in the start to the 2021 tax season, all, in varying degrees, negatively impacted demand for its EA product during the first six months of 2021.
See additional detail regarding the EA product under Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
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Republic
RCS's net interest income decreased$3.2 million , or 25%, from the first six months of 2020 to the first six months of 2021. The decrease was driven primarily by a decline in fee income from RCS's LOC I product. Loan fees on this product, recorded as interest income on loans, decreased to$7.3 million during the first six months of 2021 compared to$10.7 million during the same period in 2020 and accounted for 75% and 79% of all RCS interest income on loans during the periods. The decrease in loan fees was the direct result of a decline in balances for RCS's LOC I product following a reduction of marketing for this product during the second and third quarters of 2020. While the marketing for this product was reinstated during the fourth quarter of 2020, management believes the ongoing impact of government stimulus payments continued to reduce demand for this product during the current period.
Future loan fee income from RCS's LOC I product will likely continue to be negatively impacted by the on-going COVID-19 pandemic.
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Table 8 - Total Company Average Balance Sheets and Interest Rates
Six Months Ended June 30, 2021 Six Months Ended June 30, 2020
Average Average Average Average(dollars in thousands) Balance Interest Rate
Balance Interest Rate
ASSETS (1) Interest-earning assets: Federal funds sold and other interest-earning deposits$ 725,764 $ 416 0.11 %$ 253,548 $ 724 0.57 % Investment securities, including FHLB stock (2) 563,243 3,931 1.40 562,751 5,828 2.07 Intercompany funds loaned to discontinued operations 160,208 195 0.24 154,561 1,130 1.46 RCS LOC I product (3) (7) 15,692 7,338 93.53 23,287 10,697 91.87 Other RPG loans (7) 103,247 2,328 4.51 90,511 2,383 5.27Outstanding Warehouse lines of credit (4) (7) 758,493 14,194 3.74 724,977 14,339 3.96 Paycheck Protection Program loans (5) (7) 357,163 11,280 6.32 193,332 2,650 2.74
All other
3,554,117 80,786 4.55
Total interest-earning assets 6,021,779 106,566 3.54
5,557,084 118,537 4.27
Allowance for credit loss (60,235)
(51,357)
Noninterest-earning assets: Noninterest-earning cash and cash equivalents 109,641 95,663 Premises and equipment, net 39,151 44,680 Bank owned life insurance 82,837 66,866 Other assets (2) 167,361 132,861 Total assets$ 6,360,534 $ 5,845,797 LIABILITIES AND STOCKHOLDERS' EQUITY (1) Interest-bearing liabilities: Transaction accounts$ 1,542,685 $ 175 0.02 %$ 1,196,681 $ 841 0.14 % Money market accounts 753,198 196 0.05 744,745 1,490 0.40 Time deposits 309,155 2,035 1.32 421,257 4,345 2.06 Reciprocal money market and time deposits 316,493 461 0.29 248,887 1,053 0.85 Brokered deposits 43,369 22 0.10 196,414 1,693 1.72
Total interest-bearing deposits 2,964,900 2,889 0.19
2,807,984 9,422 0.67
Securities sold under agreements to repurchase and other short-term borrowings 181,216 17 0.02 192,755 136 0.14 Intercompany funds borrowed from discontinued operations 132,144 262 0.40 184,950 1,473 1.59 Federal Reserve PPP Liquidity Facility - - - 61,384 105 0.34 Federal Home Loan Bank advances 34,033 41 0.24 317,307 2,470 1.56 Subordinated note 41,240 341 1.65 41,240 647 3.14
Total interest-bearing liabilities 3,353,533 3,550 0.21
3,605,620 14,253 0.79
Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,054,131 1,348,541 Other liabilities 110,044 103,572 Stockholders' equity 842,826 788,064 Total liabilities and stock-holders' equity$ 6,360,534 $ 5,845,797 Net interest income$ 103,016 $ 104,284 Net interest spread 3.33 % 3.48 % Net interest margin 3.42 % 3.75 % The table above excludes average assets, average liabilities, interest
income, and interest expense for discontinued operations; however, loans to
and borrowings from discontinued operations are included above based on the (1) Company's funds transfer pricing methodology. Net interest income would be
4.55% for the six months ended
discontinued operations were consolidated above.
(2) For the purpose of this calculation, the fair market value adjustment on debt
securities is included as a component of other assets.
(3) Interest income is composed entirely of loan fees.
(4) Interest income includes loan fees of
six months ended
(5) Interest income includes loan fees of
six months ended
(6) Interest income includes loan fees of
six months ended
Average balances for loans include the principal balance of nonaccrual loans (7) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees and costs.
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Table 9 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities impacted
Republic's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
Table 9 - Total Company Volume/Rate Variance Analysis
Six Months Ended June 30, 2021
Compared to
Six Months Ended June 30, 2020
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ (308) $ 595 $ (903)
Investment securities, including
FHLB stock (1,897) 5 (1,902)
Intercompany funds loaned to
discontinued operations (935) 40 (975)
RCS LOC I product (3,359) (5,045) 1,686
Other RPG loans (55) 312 (367)
Outstanding Warehouse lines of
credit (145) 647 (792)
Paycheck Protection Program loans 8,630 3,399
5,231
All other Core Bank loans (13,902) (4,716) (9,186)
Net change in interest income (11,971) (4,763) (7,208)
Interest expense:
Transaction accounts (666) 191 (857)
Money market accounts (1,294) 17 (1,311)
Time deposits (2,310) (979) (1,331)
Reciprocal money market and time
deposits (592) 231 (823)
Brokered deposits (1,671) (757)
(914)
Securities sold under agreements to repurchase and other short-term borrowings (119) (7)
(112)
Intercompany funds borrowed from discontinued operations (1,211) (334) (877) Federal Reserve PPP Liquidity Facility (105) (105) -
Federal Home Loan Bank advances (2,429) (1,247)
(1,182)
Subordinated note (306) -
(306)
Net change in interest expense (10,703) (2,990)
(7,713)
Net change in net interest income
* The table above does not consider average assets, average liabilities, interest income, and interest expense for discontinued operations.
94
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Provision
Total Company Provision from continuing operations was a net charge of $828,000
for the first six months of 2021 compared to a net charge of $9.7 million for
the same period in 2020. Total Company Provision from discontinued operations
was a net charge of $10.1 million for the first six months of 2021 compared to a
net charge of $19.6 million for the same period in 2020.
The following were the most significant components comprising the Company's Provision by reportable segment:
Traditional Banking segment
The Traditional Banking Provision during the first six months of 2021 was a net credit of$82,000 compared to an$8.7 million net charge for the first six months of 2020. An analysis of the Provision for the first six months of 2021 compared to the same period in 2020 follows:
For the first six months of 2021, there was a minimal net credit to the
Traditional Bank Provision, generally based on an improving economic outlook in
conjunction with limited charge-offs incurred by the
? making significant life-of-loan reserves during 2020 following the onset of the
pandemic. The net credit recorded during the first six months of 2021 primarily
included ACLL releases for the residential real estate, CRE, and HELOC
portfolios offset by additional reserves for certain Special Mention loans with
continued signs of pandemic-related hardship throughJune 30, 2021 . During the first six months of 2020, theTraditional Bank recorded$10.9
million of additional Provision due to the expected economic impact of the
? COVID-19 pandemic. Offsetting the increase in Provision due to the impact of
the COVID-19 pandemic during the first six months of 2020 was a reduction in
Provision of
As a percentage of total loans, the Traditional Banking ACLL was 1.37% as ofJune 30, 2021 compared to 1.34% as ofDecember 31, 2020 and 1.10% as ofJune 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofJune 30, 2021 .
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in this section of the filing under "Comparison of Financial Condition" for additional discussion regarding the Provision and the Bank's credit quality.
Warehouse Lending segment Warehouse recorded a net credit to the Provision of$307,000 for the first six months of 2021 compared to a net charge of$781,000 for the same period in 2020. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances.Outstanding Warehouse period-end balances decreased$123 million during the first six months of 2021 compared to an increase of$312 million during the first six months of 2020. As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofJune 30, 2021 ,December 31, 2020 , andJune 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofJune 30, 2021 . Tax Refund Solutions segment Discontinued Operations
TRS recorded a net charge to the Provision from discontinued operations of$10.1 million during the first six months of 2021 compared to a net charge of$19.6 million for the same period in 2020. Substantially all TRS Provision in both periods was related to its EA product. TRS's Provision for EA loan losses was$10.2 million , or 4.1% of its$250 million in EAs originated during the first six months of 2021, compared to a Provision of$19.5 million , or 5.0% of its$388 million in EAs originated during the first six months of 2020. The lower Provision during the first six months of 2021 resulted from repayment rates on EA loans from theU.S. Treasury that exceeded those during the first six months of 2020. Management believes the slower repayment rates from theU.S. Treasury during the first six months of 2020 was directly related to the impact of the COVID-19 pandemic and the resulting delay in tax-return processing by theIRS for certain types of tax returns that required further taxpayer communication and verification. 95 Table of Contents
EAs are only originated during the first two months of each year, with all uncollected EAs charged off byJune 30th of each year. EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans.
See additional detail regarding the EA product under Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
As illustrated in Table 10 below, RCS recorded a net charge to the Provision of$1.2 million during the first six months of 2021 compared to a net charge to the Provision of$263,000 for the same period in 2020. The increase in the Provision was driven by an increase in outstanding balances for RCS's lines of credit during the first six months of 2021 compared to a decrease in similar balances during the same period in 2020. The Company reduced marketing for its LOC I product during the second and third quarters of 2020, then began incrementally increasing such marketing during the fourth quarter of 2020. The Company began offering itsLOC II product during the first quarter of 2021. While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 7.68% as ofJune 30, 2021 , 7.94% as ofDecember 31, 2020 , and 9.21% as ofJune 30, 2020 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as
ofJune 30, 2021 .
The following table presents net charges to the RCS Provision by product:
Table 10 - RCS Provision by Product
Six Months Ended Jun. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 1,207 $ 253 $ 954 377 %
Hospital receivables 10 10 - -
Total $ 1,217 $ 263 $ 954 363 %
96
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Table 11 - Summary of Loan and Lease Loss Experience
Six Months Ended
June 30,
(dollars in thousands) 2021 2020
ACLL at beginning of period $ 61,067 $ 43,351
Adoption of ASC 326 - 6,734
Charge-offs:
Traditional Banking:
Residential real estate - (27)
Commercial real estate (428) (270)
Commercial & industrial - (192)
Consumer (370) (733)
Total Traditional Banking (798) (1,222)
Warehouse lines of credit - -
Total Core Banking (798) (1,222)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances (10,256) (19,575)
Commercial & industrial (51) (72)
Republic Credit Solutions (1,362) (4,717)Total Republic Processing Group (11,669)
(24,364) Total charge-offs (12,467) (25,586) Recoveries: Traditional Banking: Residential real estate 46 86 Commercial real estate 80 473 Commercial & industrial 11 44 Home equity 41 87 Consumer 243 323 Total Traditional Banking 421 1,013 Warehouse lines of credit - - Total Core Banking 421 1,013Republic Processing Group : Tax Refund Solutions: Easy Advances 30 42 Commercial & industrial 8 1 Republic Credit Solutions 171 470
Total Republic Processing Group 209
513
Total recoveries 630 1,526
Net loan charge-offs (11,837) (24,060)
Provision from continuing operations- Core Banking (267)
9,228
Provision from continuing operations - RPG 1,217
263
Provision from discontinued operations - RPG 10,111
19,581 Total Provision 11,061 29,072 ACLL at end of period$ 60,291 $ 55,097
Credit Quality Ratios -
ACLL to total loans 1.32 % 1.09 % ACLL to nonperforming loans 270
270
Net loan charge-offs to average loans 0.51
1.03
Net loan charge-offs from continuing operations to average loans 0.07
0.20
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.16 % 0.92 % ACLL to nonperforming loans 238
230
Net loan charge-offs to average loans 0.02
0.01
97
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Noninterest Income
Total Company noninterest income from continuing operations increased$1.6 million , or 5%, during the first six months of 2021 compared to the same period in 2020.Total Company noninterest income from discontinued operations decreased$71,000 during the first six months of 2021 compared to the same period in 2020.
The following were the most significant components comprising the total Company's noninterest income by reportable segment:
Traditional Banking segment Traditional Banking's noninterest income increased$1.4 million , or 10%, for the first six months of 2021 compared to the same period in 2020. Interchange Fee Income increased$1.1 million from the first six months of 2020 to the same period in 2021, while Service Charges on Deposit Accounts increased$350,000 comparing the same periods. Service Charges on Deposit Accounts were below normal levels during the first six months of 2020, as a pandemic-driven rise in the consumer savings rate drove a reduction in the Bank's overdraft-related fees. Both Interchange Fee Income and Service Charges on Deposits began to rise towards normal levels during the first quarter of 2021 following the removal of pandemic-related restrictions. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the six months endedJune 30, 2021 and 2020 were$2.5 million and$2.7 million . The total daily overdraft charges, net of refunds, included in interest income for the six months endedJune 30, 2021 and 2020 were$506,000 and$417,000 . The Bank suspended its daily overdraft charges during the first six months of 2020 to soften the economic hardship of the COVID-19 pandemic on its clients. The Bank reinstituted the charging of its daily overdraft fee onSeptember 1, 2020 .
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased$1.8 million , or 14%, during the first six months of 2021 compared to the same period in 2020. For the first six months of 2021, theCore Bank originated$355 million in secondary market loans and achieved an average gain-as-a-percent-of-loans-sold during the period of 3.10%, with comparable originations of$344 million and comparable gains of 3.93% during the first six months of 2020. Favorable market conditions drove a higher gain percentage for theCore Bank during the last nine months of 2020 and for a portion of the first six months of 2021, with these favorable conditions beginning to normalize duringFebruary 2021 . 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%. 98 Table of Contents
Republic
RCS's noninterest income increased$1.3 million , or 47%, during the first six months of 2021 compared to the same period in 2020, with program fees representing the entirety of RCS's noninterest income. Pandemic-driven restrictions negatively impacted RCS program fees during the first six months of 2020, with those program fees beginning to normalize during 2021 following
the removal of restrictions.
The following table presents RCS program fees by product:
Table 12 - RCS Program Fees by Product
Six Months Ended Jun. 30,
(in thousands) 2021 2020 $ Change % Change
Product:
Lines of credit $ 2,122 $ 1,448 $ 674 47 %
Hospital receivables 111 8 103 1,288
Installment loans* 1,930 1,376 554 NM
Total $ 4,163 $ 2,832 $ 1,331 47 %
* The Company has elected the fair value option for this product, with
mark-to-market adjustments recorded as a component of program fees.
Noninterest Expense
The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking segment
Traditional Banking noninterest expense increased
Salaries and benefits expense increased approximately
? primarily driven by annual merit increases and increases in contract labor,
equity compensation, payroll taxes, and health benefits from period to period.
Technology, Equipment, and Communication expense increased
?
previous 12 months, bringing its ITM fleet to over 70 ITMs as of
Occupancy expense increased
? snow removal and pandemic-driven janitorial and cleaning costs from period to
period.
Partially offsetting the increases above, Bank Franchise Tax expense decreased
?
result, the Bank transitioned from a capital-based bank franchise tax to the
Legal and professional fees decreased
? pandemic-related costs during 2020, including consumer compliance
consultations.
Supplies, meals, entertainment, mileage, and travel costs decreased
? in total, resulting from continuing pandemic-driven restrictions on these
activities. Mortgage Banking segment Noninterest expense at the Mortgage Banking segment increased$1.4 million , or 31%, during the first six months of 2021 compared to the same period in 2020, primarily due to higher mortgage commissions recorded during 2021. 99
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COMPARISON OF FINANCIAL CONDITION AS OF
Cash and Cash Equivalents Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days and federal funds sold. Republic had$747 million in cash and cash equivalents as ofJune 30, 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 a weighted-average 0.11% for the first six months of 2021. For cash held within the Bank's banking center and ATM networks, the
Bank does not earn interest.
Table 13 - Loan Portfolio Composition
(in thousands) June 30, 2021 December 31, 2020 $ Change % Change Traditional Banking: Residential real estate: Owner occupied$ 852,947 $ 879,800$ (26,853) (3) % Nonowner occupied 289,290 264,780 24,510 9 Commercial real estate 1,389,003 1,349,085 39,918 3 Construction & land development 95,180 98,674 (3,494) (4) Commercial & industrial 330,302 325,596 4,706 1 Paycheck Protection Program 250,933 392,319 (141,386) (36) Lease financing receivables 9,249 10,130 (881) (9) Aircraft 121,112 101,375 19,737 19 Home equity 217,621 240,640 (23,019) (10) Consumer: Credit cards 14,754 14,196 558 4 Overdrafts 717 587 130 22 Automobile loans 21,190 30,300 (9,110) (30) Other consumer 6,796 8,167 (1,371) (17) Total Traditional Banking 3,599,094 3,715,649 (116,555) (3) Warehouse lines of credit* 840,155 962,796 (122,641) (13) Total Core Banking 4,439,249 4,678,445 (239,196) (5) Republic Processing Group*: Tax Refund Solutions: Easy Advances - - - NA Other TRS loans - - - NA Republic Credit Solutions 114,949 110,893 4,056 4Total Republic Processing Group 114,949 110,893 4,056 4 Total loans** 4,554,198 4,789,338 (235,140) (5) Allowance for credit losses (60,291) (61,067) 776 (1) Total loans, net$ 4,493,907 $ 4,728,271$ (234,364) (5) %
*Identifies loans to borrowers located primarily outside of the Bank's market footprint.
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans decreased by
100
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Traditional Banking segment
Period-end balances for Traditional Banking loans decreased
During the first six months of 2021, the
?
of 2020 PPP originations and the origination of
during the first six months of 2021. The CARES Act was enacted inMarch 2020 and provided for the SBA's PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID-19 pandemic. The Economic Aid Act was enacted inDecember 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As ofJune 30, 2021 , net PPP loans of$251 million remained on theCore Bank's balance sheet, including$53 million in loan balances originated during 2020,$207 million in loan balances originated during the first six months of 2021, and$9 million of unaccreted PPP lender fees reported as a credit offset to these originated balances. Unaccreted PPP lender fees will generally be recognized into income over the estimated remaining life of the PPP portfolio, with fee recognition accelerated if loans are forgiven or repaid earlier than estimated. While no guarantee can be made as to the overall remaining life of these loans, management believes the loans are likely to remain on the Company's balance sheet less than one year, as it expects the substantial majority of its clients to request forgiveness for their loans at the earliest possible time, presuming these clients achieve the required program metrics.
PPP loans have a stated maturity of two to five years, an annualized fixed coupon rate of 1.0% to the client, are 100% guaranteed by the SBA, and 100% forgivable to the client if certain program metrics are met. The Bank earns an origination fee of 1%, 3%, or 5% based on the size of the loan.
The owner-occupied residential real estate and home equity categories decreased
? long-term market interest rates during the previous 12 months that drove an
increase in refinance volume for residential mortgages, with much of the
refinance activity going into fixed-rate products sold on the secondary market.
Offsetting the decreases above, the CRE category increased
? Aircraft category increased
following the removal of pandemic-driven restrictions during the first six
months of 2021. Warehouse Lending segmentOutstanding Warehouse period end balances decreased$123 million fromDecember 31, 2020 toJune 30, 2021 . Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank's Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on theBank's Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on theBank's Warehouse lines have ranged from a low of 40% during 2013 to a high of 66% during 2020.
Allowance for Credit Losses
As ofJune 30, 2021 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly. The Company's ACLL decreased$1 million from$61 million as ofDecember 31, 2020 to$60 million as ofJune 30, 2021 . As a percent of total loans, the total Company's ACLL increased to 1.32% as ofJune 30, 2021 compared to 1.27% as ofDecember 31, 2020 . An analysis of the ACL by reportable segment follows: 101 Table of Contents Traditional Banking segment
The Traditional Banking ACLL decreased approximately
? of
months of 2021.
? 2021 to
portfolios.
?
2021 to$934,000 based on improving economic outlook. Warehouse Lending segment The Warehouse ACLL decreased to approximately$2.1 million , and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparingJune 30, 2021 toDecember 31, 2020 . As ofJune 30, 2021 , the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first six months of 2021.
Republic
The RCS ACLL remained at
RCS maintained an ACLL for two distinct credit products offered as ofJune 30, 2021 , including its line-of-credit products and its healthcare-receivables products. As ofJune 30, 2021 , the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 49% for its line-of-credit products. The lower reserve percentage of 0.25% was provided for RCS's healthcare receivables, as such receivables have recourse back to the third-party providers. 102 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 PCD-Substandard are considered "Classified." Loans rated "Special Mention" or PCD-Special Mention are considered Special Mention. The Bank's Classified and Special Mention loans increased approximately$20 million during the first six months of 2021, driven primarily by commercial-purpose loans within the hospitality and leisure industry downgraded to Special Mention during the first six months of 2021. As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's Classified and Special Mention loans is currently uncertain.
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements" for additional discussion regarding Classified and Special Mention loans.
Table 14 - Classified and Special Mention Loans
(in thousands) June 30, 2021 December 31, 2020 $ Change % Change Loss $ - $ - $ - - Doubtful - - - - Substandard 26,426 30,193 (3,767) (12) % PCD - Substandard 1,788 1,887 (99) (5) Total Classified Loans 28,214 32,080 (3,866) (12) Special Mention 113,137 89,206 23,931 27 PCD - Special Mention 853 895 (42) (5) Total Special Mention Loans 113,990 90,101 23,889 27 Total Classified and Special Mention Loans$ 142,204 $ 122,181$ 20,023 16 103 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 ofJune 30, 2021 andDecember 31, 2020 .
Nonperforming loans to total loans remained at 0.49% fromDecember 31, 2020 toJune 30, 2021 . As previously mentioned, the ultimate impact of loans accommodated due to COVID-19 on the Company's nonperforming loans is currently uncertain.
Table 15 - Nonperforming Loans and Nonperforming Assets Summary
(in thousands) June 30, 2021 December 31, 2020 Loans on nonaccrual status* $ 21,621 $ 23,548 Loans past due 90-days-or-more and still on accrual** 723 47 Total nonperforming loans 22,344 23,595 Other real estate owned 1,898 2,499 Total nonperforming assets $ 24,242 $ 26,094 Credit Quality Ratios -Total Company : Nonperforming loans to total loans 0.49 % 0.49 % Nonperforming assets to total loans (including OREO) 0.53
0.54
Nonperforming assets to total assets 0.39
0.42
Credit Quality Ratios -Core Bank : Nonperforming loans to total loans 0.49 % 0.50 % Nonperforming assets to total loans (including OREO) 0.53
0.56
Nonperforming assets to total assets 0.42
0.45
Loans on nonaccrual status include collateral-dependent loans. See Footnote 4 * "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements"
for additional discussion regarding collateral-dependent loans.
** Loans past due 90-days-or-more and still accruing consist of smaller balance
consumer loans.
104
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Table 16 - Nonperforming Loan Composition
June 30, 2021 December 31, 2020
Percent of Percent of
Total Total
(in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 13,181 1.55 % $ 14,328 1.63 %
Nonowner occupied 102 0.04 81 0.03
Commercial real estate 6,548 0.47 6,762 0.50Construction & land development - - -
-
Commercial & industrial 50 0.02 55 0.02
Paycheck Protection Program - - - -
Lease financing receivables - - - -
Aircraft - - - -
Home equity 1,626 0.75 2,141 0.89
Consumer:
Credit cards - - 5 0.04
Overdrafts - - - -
Automobile loans 108 0.51 170 0.56
Other consumer 6 0.09 11 0.13
Total Traditional Banking 21,621 0.60 23,553 0.63
Warehouse lines of credit - - - -
Total Core Banking 21,621 0.49 23,553 0.50
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - - - -
Other TRS loans - - - -
Republic Credit Solutions 723 0.63 42 0.04Total Republic Processing Group 723 0.63 42
0.04 Total nonperforming loans$ 22,344 0.49 %$ 23,595 0.49 % 105 Table of Contents
Table 17 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance
June 30, 2021 Balance >$100 & Balance Total
(dollars in thousands) No. <= $100 No. <= $500 No. >$500 No. Balance
Traditional Banking:
Residential real estate:
Owner occupied 144 $ 4,738 28 $ 4,889 4 $ 3,554 176 $ 13,181
Nonowner occupied 3 102 - - - - 3 102
Commercial real estate - - 4 809 3 5,739 7 6,548Construction & land development - - - - - - - - Commercial & industrial 1 50 - - - - 1 50 Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - -
Aircraft - - - - - - - -
Home equity 27 693 4 933 - - 31 1,626
Consumer:
Credit cards - - - - - - NM -
Overdrafts - - - - - - - -
Automobile loans 12 108 - - - - 12 108
Other consumer 7 6 - - - - 7 6Total Traditional Banking 194 5,697 36 6,631 7 9,293 237 21,621 Warehouse lines of credit - - - - - - - - Total Core Banking 194 5,697 36 6,631
7 9,293 237 21,621
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans - - - - - - - -
Republic Credit Solutions NM 723 - - - - NM 723Total Republic Processing Group NM 723 - -
- - NM 723
Total 194 $ 6,420 36 $ 6,631 7 $ 9,293 237 $ 22,344
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 - - - - - - - -
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
106
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Table 18 - Rollforward of Nonperforming Loans
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Nonperforming loans at the beginning
of the period $ 22,520 $ 20,853 $ 23,595 $ 23,489
Loans added to nonperforming status
during the period that remained
nonperforming at the end of the period 1,042 3,069 1,772 4,658
Loans removed from nonperforming
status during the period that were
nonperforming at the beginning of the
period (see table below) (934) (2,981) (2,838) (7,898)
Principal balance paydowns of loans
nonperforming at both period ends (490) (561) (860) (208)
Net change in principal balance of
other loans nonperforming at both
period ends* 206 39 675 378
Nonperforming loans at the end of the period$ 22,344 $ 20,419 $
22,344
* Includes relatively small consumer portfolios, e.g., RCS loans.
Table 19 - Detail of Loans Removed from Nonperforming Status
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Loans charged off $ - $ (273) $ - $ (2)
Loans transferred to OREO - (2,109) - (2,109)
Loans refinanced at other institutions (752) (490) (2,650) (2,445)
Loans returned to accrual status (182) (109) (188) (3,342)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period$ (934) $ (2,981) $ (2,838) $ (7,898)
Based on the Bank's review as of
Delinquent LoansTotal Company delinquent loans to total loans remained at 0.41% fromDecember 31, 2020 toJune 30, 2021 .Core Bank delinquent loans to totalCore Bank loans increased to 0.22% as ofJune 30, 2021 from 0.21% as ofDecember 31, 2020 . With the exception of small-dollar consumer loans, allTraditional Bank loans past due 90-days-or-more as ofJune 30, 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. 107 Table of Contents
Table 20 - Delinquent Loan Composition*
June 30, 2021 December 31, 2020
Percent of Percent of
Total Total
(in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 2,608 0.31 % $ 3,260 0.37 %
Nonowner occupied - - - -
Commercial real estate 6,816 0.49 5,457 0.40Construction & land development - - -
-
Commercial & industrial 12 0.00 12 0.00
Paycheck Protection Program - - - -
Lease financing receivables - - - -
Aircraft - - - -
Home equity 249 0.11 702 0.29
Consumer:
Credit cards 64 0.43 73 0.51
Overdrafts 145 20.22 147 25.04
Automobile loans 11 0.05 56 0.18
Other consumer 4 0.06 6 0.07
Total Traditional Banking 9,909 0.28 9,713 0.26
Warehouse lines of credit - - - -
Total Core Banking 9,909 0.22 9,713 0.21
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - - - -
Other TRS loans - - - -
Republic Credit Solutions 8,809 7.66 10,234 9.239.23 Total delinquent loans$ 18,718 0.41 %$ 19,947 0.42 %
* Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due.
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Table 21 - Rollforward of Delinquent Loans
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Delinquent loans at the beginning of the
period $ 14,986 $ 42,627 $ 19,947 $ 20,804
Loans added to delinquency status during
the period and remained in delinquency
status at the end of the period 2,717 2,823 3,276 3,080
Loans removed from delinquency status
during the period that were in
delinquency status at the beginning of
the period (see table below) (1,425) (29,901) (3,016) (7,513)
Principal balance paydowns of loans
delinquent at both period ends (31) (1,394) (54) (2,189)
Net change in principal balance of other
loans delinquent at both period ends* 2,471 (109)
(1,435) (136)
Delinquent loans at the end of period
* Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 22 - Detail of Loans Removed from Delinquent Status
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Loans charged off $ (2) $ (2) $ (1) $ (2) Easy Advances paid-off or charged-off - (23,467) - - Loans transferred to OREO - (2,109) - (2,109) Loans refinanced at other institutions (667) (1,270) (1,796) (3,012) Loans paid current (756) (3,053)
(1,219) (2,390)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period$ (1,425) $ (29,901) $ (3,016) $ (7,513)
Collateral Dependent Loans and Troubled Debt Restructurings
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. The Bank's policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected. A TDR is a situation where, due to a borrower's financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank's TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan's interest rate and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower's financial condition and ability and willingness to service the modified debt.
Table 23 - Collateral-Dependent Loans and Troubled Debt Restructurings
(in thousands) June 30, 2021 December 31, 2020 $ Change % Change Cashflow-dependent TDRs $ 8,807 $ 10,938$ (2,131) (19) % Collateral-dependent TDRs 9,506 9,840 (334) (3) Total TDRs 18,313 20,778 (2,465) (12) Collateral dependent loans (which are not TDRs) 15,468 20,806 (5,338) (26) Total recorded investment in TDRs and collateral-dependent loans$ 33,781 $ 41,584$ (7,803) (19) %
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements" for additional discussion regarding collateral-dependent loans and TDRs.
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Deposits
Table 24 - Deposit Composition
(in thousands) June 30, 2021 December 31, 2020 $ Change % Change Core Bank: Demand$ 1,231,449 $ 1,217,263$ 14,186 1 % Money market accounts 810,307 712,824 97,483 14 Savings 281,164 236,335 44,829 19 Individual retirement accounts (1) 46,694 47,889 (1,195) (2) Time deposits,$250 and over (1) 78,702 83,448 (4,746) (6) Other certificates of deposit (1) 171,995 199,214 (27,219) (14) Reciprocal money market and time deposits (1) 301,384 314,109 (12,725) (4) Brokered deposits (1) 30,000 25,010 4,990 20Total Core Bank interest-bearing deposits 2,951,695 2,836,092 115,603 4Total Core Bank noninterest-bearing deposits 1,622,279 1,503,662 118,617 8Total Core Bank deposits 4,573,974 4,339,754 234,220 5Republic Processing Group : Money market accounts 3,450 6,673 (3,223) (48) Total RPG interest-bearing deposits 3,450 6,673 (3,223) (48)
Brokered prepaid card deposits 334,967 257,856 77,111 30 Other noninterest-bearing deposits 58,203 110,021 (51,818) (47) Total RPG noninterest-bearing deposits 393,170 367,877 25,293 7 Total RPG deposits 396,620 374,550 22,070 6 Deposits of discontinued operations (2) 46,984 18,877 28,107 149 Total deposits$ 5,017,578 $ 4,733,181$ 284,397 6 % (1) Includes time deposit
(2) See additional detail regarding the Bank's agreement to sell TRS under
Footnote 17 "Discontinued Operations" in this section of the filing.
Management believes its deposit balances continue to be the beneficiary of
Federal government stimulus brought about by the COVID-19 pandemic. During the
? first six months of 2021, the Federal government issued two rounds of economic
stimulus payments. At this time, management is uncertain how long these stimulus funds may remain at the Bank.
The
? of 2021, with PPP borrowers generally retaining their loan proceeds within a
deposit account at the Bank. Management believes that much of the growth in noninterest-bearing and
interest-bearing deposits at the
? flight to safety brought about by the COVID-19 pandemic. At this time,
management is unable to predict how long these funds might remain at the Bank
due to the uncertain economic environment for many of the depositors, including
the depositors' short-term and long-term cash needs.
Total RPG deposits from continuing operations increased
? RPG noninterest-bearing deposits growth was primarily driven by the following:
RPG prepaid card balances within its RPS division increased
? by government stimulus funds applied to prepaid card deposit balances. At this
time, management is uncertain how long these stimulus funds may remain at the
Bank.
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? RPG other noninterest-bearing deposits decreased
outflow of funds associated with the RCS segment's line-of-credit products.
Federal Home Loan Bank Advances
FHLB advances declined by$210 million fromDecember 31, 2020 toJune 30, 2021 , as the Bank continued to maintain sufficient deposit balances to meet its current liquidity needs. The Bank held$25 million in overnight advances at a rate of 0.15% as ofJune 30, 2021 , compared to$225 million in overnight advances at a rate of 0.16% as ofDecember 31, 2020 . Given the overall amount of liquidity on the Company's balance sheet as ofJune 30, 2021 , management does not anticipate that FHLB term or overnight advances will likely be utilized to any material extent over the near term. Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank's interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 "Interest Rate Swaps" of Part I Item 1 "Financial Statements" for additional discussion regarding the Bank's interest rate swaps.
Liquidity The Company had a loan to deposit ratio (excluding brokered deposits) of 98% as ofJune 30, 2021 and 108% as ofDecember 31, 2020 . As ofJune 30, 2021 andDecember 31, 2020 , the Company had cash and cash equivalents on-hand of$747 million and$486 million . The Bank also had available borrowing capacity of$909 million and$683 million from the FHLB as ofJune 30, 2021 andDecember 31, 2020 . In addition, the Bank's liquidity resources included unencumbered debt securities of$280 million and$274 million as ofJune 30, 2021 andDecember 31, 2020 and unsecured lines of credit of$125 million available through various other financial institutions as of the same period-ends. The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets in the form of investment securities. Funding and cash flows can also be realized by the sale of AFS debt securities, principal paydowns on loans and mortgage-backed securities, and proceeds realized from loans held for sale. The Bank's liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. As ofJune 30, 2021 andDecember 31, 2020 , these pledged investment securities had a fair value of$291 million and$304 million . Republic's banking centers and its website, www.republicbank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs. As ofJune 30, 2021 , the Bank had approximately$1.5 billion in deposits from 242 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . The 20 largest non-sweep deposit relationships represented approximately$637 million , or 13%, of the Company's total deposit balances as ofJune 30, 2021 . These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than theTraditional Bank deposits they replace, potentially decreasing the Bank's earnings. 111 Table of Contents Capital Total stockholders' equity increased from$823 million as ofDecember 31, 2020 to$845 million as ofJune 30, 2021 . The increase in stockholders' equity was primarily attributable to net income earned during 2021 reduced primarily by cash dividends declared and Class A common stock repurchased.
See Part II, Item 2. "Unregistered Sales of
Common Stock - The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and ClassB Common shares have ten votes per share. ClassB Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic's capital stock. Dividend Restrictions -The Parent Company's principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states' banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years. As ofJune 30, 2021 , RB&T could, without prior approval, declare dividends of approximately$163 million . Any payment of dividends in the future will depend, in large part, on the Company's earnings, capital requirements, financial condition, and other factors considered relevant by the Company's Board of Directors. Regulatory Capital Requirements - The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define "well capitalized" as a 10.0%Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 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 13.25% as ofJune 30, 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. 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. InJuly 2021 , the Company's board approved the redemption of the RBCT TPS and the repayment of the subordinated note for the end of the third quarter
of
2021.
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Table 25 - Capital Ratios (1)
As of June 30, 2021 As of December 31, 2020
(dollars in thousands) Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Republic Bancorp, Inc. $ 920,201 18.93 % $ 896,053 18.52 %
Republic Bank & Trust Company 833,178 17.15 796,114 16.46
Common equity tier 1 capital to risk-weighted assets Republic Bancorp, Inc.$ 868,526 17.04 %$ 803,682 16.61 % Republic Bank & Trust Company 781,503 16.09 743,743 15.38 Tier 1 (core) capital to risk-weighted assets Republic Bancorp, Inc.$ 828,526 17.86 %$ 843,682 17.43 % Republic Bank & Trust Company 781,503 16.09 743,743 15.38 Tier 1 leverage capital to average assets Republic Bancorp, Inc.$ 828,526 13.51 %$ 843,682 13.70 % Republic Bank & Trust Company 781,503 12.17 743,743 12.11 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 15 basis points lower than those
presented in the table above as of June 30, 2021 .
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Asset/Liability Management and Market Risk
Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards, and achieve acceptable net interest income based on the Bank's risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank's overall earnings and balance sheet.
The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances, and other factors.
The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a "Base" case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank's deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve. As ofJune 30, 2021 , a dynamic simulation model was run for interest rate changes from "Down 100" basis points to "Up 400" basis points. The following table illustrates the Bank's projected percent change from its Base net interest income over the period beginningJuly 1, 2021 and endingJune 30, 2022 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank's dynamic earnings simulation model includes secondary market loan fees and excludesTraditional Bank loan fees.
Table 26 - Bank Interest Rate Sensitivity (Continuing Operations)
Change in Rates
-100 +100 +200 +300 +400
Basis Points Basis Points Basis Points Basis Points Basis Points
% Change from base net interest income as of June 30, 2021 (1.0) % (1.7) % (1.4) % 2.4 % 6.5 % % Change from base net interest income as of December 31, 2020 0.4 % (4.5) %
(7.0) % (5.7) % (4.2) %
The Bank's dynamic simulation model run forJune 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 forJune 2021 was generally because the Bank had less ability inJune 2021 than December to reprice its liabilities downward. The improvement in the Up-rate scenarios was due partially to growth in interest-earning assets and partially to a smaller projected falloff in secondary market fees for theJune 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
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