2016 ANNUAL REPORT
Valued Shareholders,
I am delighted to report to you that Republic Bancorp, Inc. (“Republic”
or the “Company”) had another successful performance in 2016. As was
the case in 2015, the Company showed a nice year-over-year increase in
its operating results, as we continued with positive momentum toward
the achievement of our long-term goals. First and foremost among
these goals is to become one of the highest performing financial
institutions in the country. As a company, we continue to aim high, and
our road to success will always be one that leads us uphill. Our motto
inside the Company is “Let’s go from good to great!”
STEVE TRAGER
Chairman and Chief Executive Officer
In addition to our strong performance during 2016, I am
also personally proud of the ongoing cultural change that is
occurring in the Company. It is our mission to make Republic
one of the best places to work, period. We firmly believe
that happy associates translate into happy clients, and
ultimately, happy shareholders. We have worked very hard
over the last year to flatten the bureaucracy in our company,
opening management’s doors, including my own, to all levels
of associates so that they can provide direct input, criticism,
feedback, and ideas to the decision making process. With
those ideas we have made a host of changes to improve the
overall work environment for our associates and to make
banking easier for our clients. We firmly believe that we are
well on our way to moving from “good to great.”
While I am looking forward to 2017 with great optimism, I want
to take a moment of your time to look back at a few of our
highlights from our successful 2016.
2016 Financial Highlights
NET INCOME ($)
DILUTED EARNINGS PER SHARE ($)
$45.9
2016
$35.2
2015
$28.8
2014
S
N
O
I
L
L
I
M
$50.0
$45.0
$40.0
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$2.50
$2.00
$1.50
$1.00
$0.50
$2.22
2016
$1.70
2015
$1.38
2014
• We achieved a solid year-over-year increase in Total Company
earnings, ending 2016 with net income of $45.9 million, a 31%
increase over 2015. The strong earnings resulted in Diluted
Earnings per Class A Common Share of $2.22 for 2016. Return
on Average Assets (“ROA”) was 1.02% for the year compared
to 0.88% in 2015.
• Our Core Banking operations also produced solid results for the
year with net income of $34.9 million, a 17% increase over 2015.
• Exclusive of acquisitions, we grew our loan portfolio $284
million, or 9%, during 2016.
RETURN ON AVERAGE ASSETS (%)
0.81%
0.88%
2014
2015
1.02%
2016
1.10%
0.90%
0.70%
0.50%
0.30%
0.10%
• Exclusive of acquisitions, we grew our organic, non-brokered
deposits by $312 million, or 14%, during 2016. The robust
deposit growth helped reduce our use of higher-cost
borrowings and pushed down our cost of funds from 0.55% in
2015 to 0.46% in 2016.
• Within our Republic Processing Group (“RPG”) segment,
we launched the Easy Advance (“EA”) loan product during
the first-quarter-2016 tax season. The EA, whose fees are
paid by the tax providers and not the end borrower, helped
to generate $123 million in loans during the first quarter of
2016 and produce $2.2 million of net revenue after loan loss
provisions.
• Our Warehouse Lending segment contributed another
successful year during 2016, with net income of $8.1 million
and loan growth of $199 million, representing 41% of
Republic’s total loan growth for 2016.
• Our noninterest income grew 20% during 2016 driven by the
following:
o mortgage banking revenue increased 56% due to a 35%
increase in origination volume along with the bulk sale of
a $71 million portion of our correspondent loan portfolio;
o debit and credit card interchange income increased nicely
thanks to increased usage combined with year-over-year
increases of 14% and 1% in active debit and credit cards;
and
o within our RPG segment, refund transfer (“RT”) fees
increased 11% during 2016 consistent with growth in
RT volume.
“We firmly believe that we are well on
our way to moving from good to great.”
CORE BANK - LOANS ($)
CORE BANK - DEPOSITS ($)
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
S
N
O
I
L
L
I
B
$3.0
$3.3
$3.7
DEC 2014
DEC 2015
DEC 2016
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
S
N
O
I
L
L
I
B
$3.1
$2.4
$2.0
DEC 2014
DEC 2015
DEC 2016
TRADITIONAL NETWORK
AND OTHER
CORRESPONDENT
LENDING PORTFOLIO
WAREHOUSE LENDING
PORTFOLIO
FROM 2016 CORNERSTONE
ACQUISITION
TRADITIONAL NETWORK
BROKERED DEPOSITS
FROM 2016 CORNERSTONE
ACQUISITION
2016 Strategic Highlights
• In May, we officially completed our acquisition of Cornerstone
Bancorp, Inc. (“Cornerstone”) in the St. Petersburg/Tampa,
Florida market. As expected, the acquisition was accretive to
earnings in 2016, adding $491,000 to the Company’s overall net
income despite $1.2 million in acquisition-related expenses.
• After a year of planning and hard work from multiple areas of
the Company, we launched our all-digital, separately-branded,
branchless banking platform, MemoryBank®, on October
24, 2016. Located at www.mymemorybank.com, we believe
that MemoryBank® will open the door for us to efficiently
reach clients outside of our traditional footprint, providing
an excellent complement to our existing brick-and-mortar
strategies without the fixed costs of additional locations.
• In 2017, we were named one of Kentucky’s “Best Places to
Work,” a designation of which I am very proud. In the early
part of 2016, we began our “Suggestion for Steve” initiative
in an effort to cut corporate red tape. Now, all associates at
all levels of the organization have a direct channel to me, and
I, along with the rest of the senior management team, review
all of our associates’ suggestions on a regular basis. These
changes have helped ensure that all voices within Republic
are heard. As a result, numerous improvements to help our
associates and clients have been implemented throughout the
organization, making us a better, more efficient company.
• We believe that investing in new talent is fundamental to
achieving our long-term goals. As a result of this philosophy,
we increased our full-time-equivalent (“FTE”) associates,
excluding those from the Cornerstone acquisition, by 117
during 2016, driving a $11.8 million increase in personnel
expenses. The growth in personnel was across many areas
of the Company, with a particular focus on information
technology and operations, as these areas will play a major
role in achieving the Company’s long-term strategic growth
initiatives.
• Within RPG, not only did we grow our net income once again
in 2016, but more importantly we continued to expand and
diversify our business lines in order to take advantage of the
abundance of talent contained within RPG. As of the close of
2016, the RPG segment comprised:
o a mature, but still-growing
tax business through the
Tax Refund Solutions
(“TRS”) division;
o a pilot prepaid card
program within
the Republic Payment
Solutions (“RPS”)
division; and
“Now all associates, at all levels of the
organization, have a direct channel to me.”
o two profitable, and still-growing small dollar loan programs,
as well as, two additional pilot small-dollar loan programs
within the Republic Credit Solutions (“RCS”) division.
Looking ahead to 2017, I believe we will face many challenges. While short-term interest rates
have risen slightly the past couple of years, the ongoing low interest rate environment has made
the lending landscape ultra-competitive, as banks with excess deposits continue to aggressively
chase credits that offer a spread above other low-yielding investment options. Additionally, while
whole-bank acquisitions have been a high priority for us in the past, we believe our chances of such
an acquisition in 2017 have diminished somewhat, as the offering prices for these deals have risen
dramatically. Even so, we will continue to look for opportunities, both traditional whole-bank and
non-bank deals, that are priced appropriately to maximize shareholder value and provide synergies to
our current markets and business lines.
Everyone within our Company is proud of our 2016
accomplishments, but as is always the case, we see room for
improvement. We have made significant investments of time
and resources in several exciting initiatives that will attract much
focus in 2017 including MemoryBank®, further expanding our
RPG prepaid card program, continuing to grow our small-dollar
pilot loan programs at RCS, and expanding our mortgage
banking volume.
In conclusion, thank you for being a loyal shareholder of
Republic, as we are honored to earn your investment in our
Company. We are excited about our future and we will work
hard to reward your investment through our proven long-term
business strategies that have stood the test of time.
Steve Trager
Chairman and Chief Executive Officer
It’s just easier here.®
RepublicBank.com Member FDIC
REPUBLIC BANKING CENTERS
Louisville, KY
Lexington, KY
Owensboro, KY
Covington, KY
Crestwood, KY
Elizabethtown, KY
Florence, KY
Frankfort, KY
Georgetown, KY
Independence, KY
Shelbyville, KY
Shepherdsville, KY
Floyds Knobs, IN
Jeffersonville, IN
New Albany, IN
Largo, FL
Port Richey, FL
Seminole, FL
St. Petersburg, FL
Temple Terrace, FL
Norwood, OH
Franklin, TN
Nashville, TN
17
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission File Number: 0-24649
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
(State or other jurisdiction of
incorporation or organization)
601 West Market Street, Louisville, Kentucky
(Address of principal executive offices)
61-0862051
(I.R.S. Employer Identification No.)
40202
(Zip Code)
Registrant’s telephone number, including area code: (502) 584-3600
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock
(Title of each class)
NASDAQ Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:134) Yes (cid:95) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. (cid:134) Yes (cid:95) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
(cid:95) Yes (cid:134) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). (cid:95) Yes (cid:134) No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:134) Yes (cid:95) No
Non-accelerated filer (cid:134)
Accelerated filer (cid:95)
Smaller reporting company (cid:134)
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold as of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $270,193,563 (for purposes of this
calculation, the market value of the Class B Common Stock was based on the market value of the Class A Common Stock into which it is convertible).
The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of February 10, 2017 was 18,608,917 and 2,245,008.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated:
(1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act
of 1933. The listed documents should be clearly described for identification purposes:
•
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held April 20, 2017 are incorporated by reference into
Part III of this Form 10-K.
4
30
40
41
43
43
44
47
50
99
99
197
197
197
198
199
199
199
199
TABLE OF CONTENTS
PART I
Item 1.
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 5.
Item 6.
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . .
Item 9.
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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201
202
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Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains statements relating to future results of Republic Bancorp, Inc. that are considered
“forward-looking” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 1
“Business,” Part I Item 1A “Risk Factors” and Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
As used in this filing, the terms “Republic,” the “Company,” “we,” “our” and “us” refer to Republic Bancorp, Inc., and, where the
context requires, Republic Bancorp, Inc. and its subsidiaries; and the term the “Bank” or “RB&T” refers to the Company’s subsidiary
bank: Republic Bank & Trust Company.
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 may not update them to reflect changes that occur subsequent to the date the statements are made.
Broadly speaking, forward-looking statements include:
•
•
•
•
projections of revenue, income, expenses, losses, earnings per share, capital expenditures, dividends, capital structure or other
financial items;
descriptions of plans or objectives for future operations, products or services;
forecasts of future economic performance; and
descriptions of assumptions underlying or relating to any of the foregoing.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results,
performance or achievements to be materially different from future results, performance or achievements expressed or implied by the
forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and
uncertainties, including, but not limited to the following:
changes in political and economic conditions;
the magnitude and frequency of changes to the Federal Funds Target Rate (“FFTR”) implemented by the Federal Open
Market Committee (“FOMC”) of the Federal Reserve Bank (“FRB”);
long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;
competitive product and pricing pressures in each of the Company’s business segments;
equity and fixed income market fluctuations;
client bankruptcies and loan defaults;
inflation;
recession;
future acquisitions;
integrations of acquired businesses;
changes in technology;
changes in applicable laws and regulations or the interpretation and enforcement thereof;
changes in fiscal, monetary, regulatory and tax policies;
changes in accounting standards;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• monetary fluctuations;
•
•
•
changes to the Company’s overall internal control environment;
success in gaining regulatory approvals when required;
information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party
service providers;
3
•
as well as other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange
Commission (“SEC”), including Part 1 Item 1A “Risk Factors.”
PART I
Item 1. Business.
Republic Bancorp, Inc. (“Republic” or the “Company”) is a financial holding company headquartered in Louisville, Kentucky.
Republic is the parent company of Republic Bank & Trust Company (“RB&T” or the “Bank”) and Republic Insurance Services, Inc.
(the “Captive”). The Bank is a Kentucky-based, state chartered non-member financial institution that provides both traditional and
non-traditional banking products through four distinct operating segments using a multitude of delivery channels. While the Bank
operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the United States.
The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company that provides property and casualty insurance
coverage to the Company and the Bank as well as 10 other third-party insurance captives for which insurance may not be available or
economically feasible.
Republic Bancorp Capital Trust is a Delaware statutory business trust that is a 100%-owned unconsolidated finance subsidiary of
Republic Bancorp, Inc.
As of December 31, 2016, Republic had 44 full-service banking centers with locations as follows:
Kentucky — 32
• Metropolitan Louisville — 19
• Central Kentucky — 8
•
Elizabethtown — 1
•
Frankfort — 1
• Georgetown — 1
•
Lexington — 4
•
Shelbyville — 1
• Western Kentucky — 2
• Owensboro — 2
• Northern Kentucky — 3
• Covington — 1
•
Florence — 1
•
Independence — 1
•
Southern Indiana — 3
•
Floyds Knobs — 1
•
Jeffersonville — 1
• New Albany — 1
• Metropolitan Tampa, Florida — 6
• Metropolitan Cincinnati, Ohio — 1
• Metropolitan Nashville, Tennessee — 2
Republic’s headquarters are located in Louisville, which is the largest city in Kentucky based on population.
The principal business of Republic is directing, planning and coordinating the business activities of the Bank. The financial condition
and results of operations of Republic are primarily dependent upon the results of operations of the Bank. At December 31, 2016, Republic
had total assets of $4.8 billion, total deposits of $3.2 billion and total stockholders’ equity of $604 million. Based on total assets as of
December 31, 2016, Republic ranked as the largest Kentucky-based financial holding company. The executive offices of Republic are
located at 601 West Market Street, Louisville, Kentucky 40202, telephone number (502) 584-3600. The Company’s website address is
www.republicbank.com.
4
Website Access to Reports
The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, available free of charge
through its website, www.republicbank.com, as soon as reasonably practicable after the Company electronically files such material with,
or furnishes it to, the SEC. The information provided on the Company’s website is not part of this report, and is therefore not incorporated
by reference, unless that information is otherwise specifically referenced elsewhere in this report.
General Business Overview
As of December 31, 2016, the Company was divided into four distinct operating segments: Traditional Banking, Warehouse Lending
(“Warehouse”), Mortgage Banking and Republic Processing Group (“RPG”). Management considers the first three segments to
collectively constitute “Core Bank” or “Core Banking” activities. Correspondent Lending operations and the Company’s national
branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment. The RPG segment includes the
following divisions: Tax Refund Solutions (“TRS”), Republic Payment Solutions (“RPS”) and Republic Credit Solutions (“RCS”). TRS
generates the majority of RPG’s income, with the relatively smaller divisions of RPG, RPS and RCS, considered immaterial for separate
and independent segment reporting. All divisions of the RPG segment operate through the Bank.
Net income, total assets and net interest margin by business segment for the years ended December 31, 2016, 2015 and 2014 are
presented below:
(dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . .
Traditional
Banking
Warehouse
Lending
Mortgage
Banking
$
24,959
4,169,557
$
3.26 %
8,110
584,916
$
3.59 %
1,790
17,453
NM
Total
Core
Banking
Republic
Processing
Group
$
34,859
4,771,926
3.30 %
$
11,044
44,383
NM
Total
Company
$
45,903
4,816,309
3.65 %
Year Ended December 31, 2016
Core Banking
(dollars in thousands)
Net income (loss) . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . .
(dollars in thousands)
Net income (loss) . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2015
Core Banking
Traditional
Banking
Warehouse
Lending
Mortgage
Banking
Total
Core
Banking
$
23,919
3,809,526
$
3.20 %
5,964
386,414
$
3.58 %
(26)
9,348
NM
$
29,857
4,205,288
3.24 %
Republic
Processing
$
Group
5,309
25,001
NM
Year Ended December 31, 2014
Core Banking
Traditional
Banking
Warehouse
Lending
Mortgage
Banking
Total
Core
Banking
$
21,315
3,404,323
$
3,402
319,153
$
3.32 %
3.77 %
(385)
11,593
NM
$
24,332
3,735,069
3.35 %
Republic
Processing
$
Group
4,455
11,944
NM
Total
Company
$
35,166
4,230,289
3.27 %
Total
Company
$
28,787
3,747,013
3.33 %
Segment assets are reported as of the respective period ends while income and margin data are reported for the respective periods.
NM — Not Meaningful
For expanded segment financial data see Footnote 24 “Segment Information” of Part II Item 8 “Financial Statements and
Supplementary Data.”
5
(I) Traditional Banking segment
Acquisition of Cornerstone Bancorp, Inc.
On May 17, 2016, the Company completed its acquisition of Cornerstone Bancorp, Inc. (“Cornerstone”), and its wholly-owned bank
subsidiary Cornerstone Community Bank (“CCB”), for approximately $32 million in cash. The primary reason for the acquisition of
Cornerstone was to expand the Company’s footprint in the Tampa, Florida metropolitan statistical area.
For additional information concerning the Company’s acquisition of Cornerstone Bancorp, Inc., see Footnote 2 “Acquisition of
Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”
MemoryBank
In October 2016, the Bank opened the “digital doors” of MemoryBank, a national branchless banking platform. MemoryBank is a
separately branded division of the Bank, which from a marketing perspective, focuses on technologically savvy customers that prefer
to carry larger balances in highly-liquid bank accounts.
Additional MemoryBank features include the following:
• Higher Returns: MemoryBank’s initial product, the EarnMore account, offers a 1.0% Annual Percentage Yield plus an
additional 0.50% bonus on all deposits for the first year to qualifying customers, with no minimum balance to begin earning.
• FDIC Insurance: As a division of RB&T, MemoryBank provides its account holders the peace of mind that comes with
their accounts being Federal Deposit Insurance Corporation (“FDIC”) insured up to the applicable limit.
• Universal Access: MemoryBank clients have access to over 75,000 surcharge-free automated teller machines (“ATMs”) in
the United States. In addition, MemoryBank customers also have access to over 10,000 international surcharge-free ATMs.
• Password-free login: Eyeprint and fingerprint identification offer secure smart device login without the hassle of a
password.
• Mobile deposits: MemoryBank customers can take a picture of a check with a mobile device to direct deposit into their
MemoryBank account.
6
With the launch of MemoryBank in October 2016, the Traditional Banking segment began marketing the EarnMore deposit account to
customers outside of its traditional market footprint under its MemoryBank brand. As of December 31, 2016 and through the date of
this filing, generally all Traditional Banking products and services, except for the EarnMore deposit account, were offered through the
Company’s traditional RB&T brand.
Lending Activities
The Bank’s principal lending activities consists of the following:
Retail Mortgage Lending — Through its retail banking centers, its Correspondent Lending channel and its Internet Banking
channel, the Bank originates single family, residential real estate loans. In addition, the Bank originates home equity amortizing
loans (“HEALs”) and home equity lines of credit (“HELOCs”) through its retail banking centers. Such loans are generally
collateralized by owner occupied property. During 2016, the Bank continued to market its HELOCs utilizing a promotional rate
product. Under the terms of the promotional product during 2016, clients received a fixed interest rate for the first 12 months
with no upfront closing costs. When the promotional rate expires after 12 months, rates are adjusted to an index based on the
New York Prime Rate (“Prime”).
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 Correspondent Lending channel and Internet Banking are generally secured by
owner occupied collateral located outside of the Bank’s market footprint.
The Bank offers single family, first lien residential real estate, adjustable rate mortgages (“ARM”s) with interest rate adjustments
tied to various market indices with specified minimum and maximum adjustments. The Bank generally charges a higher interest
rate for its ARMs if the property is not owner occupied. The interest rates on the majority of ARMs are adjusted after their fixed
rate periods on an annual basis, with most having annual and lifetime limitations on upward rate adjustments to the loan. These
loans typically feature amortization periods of up to 30 years and have fixed interest rate periods generally ranging from five to
ten years, with demand dependent upon market conditions. In general, ARMs containing longer fixed rate periods have
historically been more attractive to the Bank’s clients in a relatively low rate environment, while ARMs with shorter fixed rate
periods have historically been more attractive to the Bank’s clients in a relatively high rate environment. While there is no
requirement for clients to refinance their loans at the end of the fixed rate period, clients have historically done so the majority of
the time, as most clients are interest rate risk-averse on their first mortgage loans.
Depending on the term and amount of the ARM, loans collateralized by single family, owner-occupied first lien residential real
estate may be originated with a loan-to-value (“LTV”) up to 90% and a combined LTV up to 100%. The Bank also offers a
100% LTV product for home purchase transactions within its primary markets. The Bank does not require the borrower to obtain
private mortgage insurance for ARM loans. Except for the HEAL product under $150,000, the Bank requires mortgagee’s title
insurance on single family, first lien residential real estate loans to protect the Bank against defects in its liens on the properties
that collateralize the loans. The Bank normally requires title, fire, and extended casualty insurance to be obtained by the
borrower and, when required by applicable regulations, flood insurance. The Bank maintains an errors and omissions insurance
policy to protect the Bank against loss in the event a borrower fails to maintain proper fire and other hazard insurance policies.
Single family, first lien residential ARMs originated prior to January 10, 2014 generally contain an early termination penalty
(“ETP”). Effective January 10, 2014, with the implementation of the Ability to Repay (“ATR”) Rule, the Bank eliminated ETPs
for subsequently originated ARMs.
Single family, first lien residential real estate loans with fixed rate periods of 15, 20 and 30 years are primarily sold into the
secondary market. Mortgage Servicing Rights (“MSRs”) attached to the sold portfolio are either sold along with the loan or
retained. All loans sold into the secondary market, along with their corresponding MSRs, are included as a component of the
Company’s Mortgage Banking segment, as discussed elsewhere in this filing. The Bank, as it has in the past, may retain such
longer-term fixed rate loans from time to time in the future to help combat market compression. Any such loans retained on
balance sheet would be reported as a component of the Traditional Banking segment.
7
The Bank does, on occasion, purchase single family, first lien residential real estate loans in low-to-moderate income areas in
order to meet its obligations under the Community Reinvestment Act (“CRA”). The Bank generally applies secondary market
underwriting criteria to the review of these purchased loan portfolios and generally reserves the right to reject particular loans
from a loan package being purchased that do not meet its underwriting criteria. In connection with loan purchases, the Bank
receives various representations and warranties from the sellers regarding the quality and characteristics of the loans.
Commercial Lending — The Bank conducts commercial lending activities primarily through its Commercial and Corporate
Banking (the “CCB Department”) and its Business Banking department.
The CCB Department is composed of the following divisions: Corporate Banking; Commercial Finance; Municipal Lending;
and Republic Realty. All credit approvals and processing for the CCB Department are prepared and underwritten through the
Bank’s existing Credit Administration Department (“CAD”). Clients are generally located within the Bank’s market footprint,
including adjacent areas that are within approximately two-hour drive of a specific market.
The Corporate Banking division focuses on locally-based companies, typically with revenues of $15 million to $150 million.
Credit opportunities are generally driven by the following: companies expanding their businesses; companies acquiring new
businesses; generational transfers from existing owners to children, existing management, or employees (Employee Stock
Ownership Plans); and refinancing of existing debt at other banks. Corporate Banking’s primary product focus is Commercial &
Industrial (“C&I”) lending, and to a lesser degree, Commercial Real Estate (“CRE”) opportunities. The targeted C&I credit size
for client relationships is $2.5 million to $25 million, with limited exceptions for corporate borrowers of the highest credit
quality. On an exception basis, for large locally-based or publicly-traded institutions, the Bank may consider participations in
larger credit facilities.
C&I loans typically include those secured by General Business Assets (“GBA”), which consist of equipment, accounts
receivable, inventory, and other business assets owned by the borrower/guarantor. Credit facilities include annually renewable
lines of credit and term loans with maturities typically from three to seven years, and may also involve quarterly financial
covenant requirements. These reporting requirements are monitored by the Bank’s CAD. Underwriting C&I loans is based on
the borrower’s financial capacity to repay these loans from its Earnings Before Interest, Taxes, Depreciation and Amortization
(“EBITDA”), with capital strength, collateral and management experience also important underwriting considerations.
The Commercial Finance division targets financing for equipment, typically ranging from $100,000 to $500,000 per unit
financed with five to seven year terms. Credit exposures to individual relationships are expected to be $500,000 to $5 million.
Both leasing and lending are used to accommodate financing needs, with EBITDA, company financial history, and collateral
values/useful life primary underwriting considerations.
The Municipal Lending division responds to financing requests from cities and counties, largely in the state of Kentucky and in
southern Indiana. The Bank issues general obligation and/or appropriation leases/loans to cities and counties. General obligation
leases/loans range between $100,000 to $5 million, with credits above $5 million requiring approval from the Bank’s Executive
Loan Committee. Appropriation leases generally do not exceed $1 million individually.
The Republic Realty division, initiated by the Bank in 2015, focuses on stabilized CRE loans with low leverage and strong cash
flows. Generally all borrowers are single-asset entities and loan sizes typically range from $3 million to $25 million. Primary
underwriting considerations are property cash flow (current and historical), quality of leases, financial capacity of sponsors, and
collateral value of property financed. The majority of interest rates offered are based on the 30-day London Interbank Offered
Rate (“LIBOR”). Fixed rate terms of up to 10 years are facilitated to borrowers by utilizing interest rate swaps. In some cases,
limited or non-recourse (of owners) loans will be issued, with such cases based upon the capital position, cash flows, and
stabilization of the borrowing entity.
The Bank’s CRE and multi-family loans are typically secured by improved property such as office buildings, medical facilities,
retail centers, warehouses, apartment buildings, condominiums, schools, religious institutions and other types of commercial use
property.
8
The Business Banking department focusses on locally based small-to-medium sized businesses in the Bank’s market footprint
with revenues of $1 million to $20 million. The needs of Business Banking clients range from expansion or acquisition,
equipment financing, owner-occupied real estate financing, and operating lines of credit. Business Banking utilizes all
appropriate programs of the Small Business Administration (“SBA”) to reduce credit risk exposure. Additionally, Business
Banking includes making loans to real estate investors for various types of investment properties, including rental homes and
apartments, shopping centers, and office buildings. Business Banking also makes loans to various not-for-profit agencies located
within the Bank’s market footprint. The targeted credit size for a relationship in this segment is between $500,000 and $5
million.
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). On a much
smaller scale, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable
lots.
Single family residential construction loans are made in the Bank’s market area to established homebuilders with solid financial
records. The majority of these loans are made for “contract” homes, which the builder has already pre-sold to a homebuyer. The
duration of these loans is generally less than 12 months and repaid at the end of the construction period from the sale of the
constructed property. Some loans are made on “speculative” homes, which the builder does not have pre-sold to a homebuyer,
but expects to execute a contract to sell during the construction period. These speculative homes are considered necessary to
have in inventory for homebuilders, as not all homebuyers want to wait during the construction period to purchase and move into
a newly-built home. Generally, the Bank will require a larger amount of equity from the builder when financing a speculative
home compared to a contract home due to the increased risk of failing to sell the underlying property in a reasonable period of
time.
Commercial construction loans are made in the Bank’s market to established commercial builders with solid financial records.
Typically these loans are made for investment properties and have tenants pre-committed for some or all of the space. Some
projects may begin as speculative, with the builder contracting to lease or sell the property during the construction period.
Generally, commercial construction loans are made for the duration of the construction period and slightly beyond and will
either convert to permanent financing with the Bank or with another lender at or before maturity.
Construction-to-permanent loans are another type of construction-related financing offered by the Bank. These loans are made
to borrowers who are going to build a property and retain it for ownership after construction completion. The construction phase
is handled just like all other construction loans, and the permanent phase offers similar terms to a permanent CRE loan, while
allowing the borrower a one-time closing process at loan origination. These loans are offered on both owner occupied and
nonowner occupied CRE properties.
Internet Lending — The Bank accepts online loan applications for its RB&T brand through its website at
www.republicbank.com. Historically, the majority of loans originated through the internet have been within the Bank’s
traditional markets of Kentucky and Indiana. Other states where loans are marketed include California, Colorado, Florida,
Georgia, Illinois, Michigan, Minnesota, North Carolina, Ohio, Tennessee and Virginia, as well as the District of Columbia.
Correspondent Lending — Primarily from its Warehouse clients, the Core Bank acquires for investment single family, first
lien mortgage loans that meet the Core Bank’s specifications through its Correspondent Lending channel. Substantially all loans
purchased through the Correspondent Lending channel are purchased at a premium.
Consumer Lending — Traditional consumer loans made by the Bank include home improvement and home equity loans, other
secured and unsecured personal loans, and credit cards. With the exception of home equity loans, which are actively marketed in
conjunction with single family, first lien residential real estate loans, other traditional consumer loan products, while available,
are not and have not been actively promoted in the Bank’s markets.
The Bank has, from time to time, acquired unsecured consumer installment loans for investment from a third-party originator.
Such consumer loans were purchased at par and were selected by the Bank based on certain underwriting characteristics.
9
Indirect Lending – In the fourth quarter of 2015, the Bank began to grow its presence in the consumer automobile loan market.
The program involves establishing relationships with automobile dealers in the Bank’s market footprint and obtaining consumer
automobile loans in a low-cost delivery method. As a result of its success in Indirect Auto Lending, the Bank entered Dealer
Floor Plan lending during the fourth quarter of 2016.
See additional discussion regarding Lending Activities under the sections titled:
• Part I Item 1A “Risk Factors”
• Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
• Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 5 “Loans and Allowance for Loan and Lease
Losses.”
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
Automated Clearing House (“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. The Bank promotes the EarnMore account solely
through its MemoryBank brand.
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 discussion regarding the Traditional Banking segment under Footnote 24 “Segment Information” of Part II Item 8
“Financial Statements and Supplementary Data.”
10
(II) Warehouse Lending segment
The Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse
lines of credit. These credit facilities are primarily secured by single family, first lien residential real estate loans. The credit facility
enables the mortgage banking clients to close single family, first lien residential real estate loans in their own name and temporarily
fund their inventory of these closed loans until the loans are sold to investors approved by the Bank or purchased by the Bank through
its Correspondent Lending channel. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days.
Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are
accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The 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 discussion regarding the Warehouse Lending segment under Footnote 24 “Segment Information” of Part II Item 8
“Financial Statements and Supplementary Data.”
(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 sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and the
Federal National Mortgage Association (“FNMA” or “Fannie Mae”). The Bank typically retains servicing on loans sold into the
secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments,
escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. A fee is received
by the Bank for performing these standard servicing functions.
As part of the sale of loans with servicing retained, the Bank records MSRs. MSRs represent an estimate of the present value of future
cash servicing income, net of estimated costs, which the Bank expects to receive on loans sold with servicing retained by the Bank.
MSRs are capitalized as separate assets. This transaction is posted to net gain on sale of loans, a component of “Mortgage Banking
income” in the income statement. Management considers all relevant factors, in addition to pricing considerations from other
servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially sold with servicing retained by the Bank.
The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and
subsequently adjusted quarterly based on the weighted average remaining life of the underlying loans. The MSR amortization is
recorded as a reduction to net servicing income, a component of Mortgage Banking income.
With the assistance of an independent third party, the MSRs asset is reviewed at least quarterly for impairment based on the fair value
of the MSRs using groupings of the underlying loans based on predominant risk characteristics. Any impairment of a grouping is
reported as a valuation allowance. A primary factor influencing the fair value is the estimated life of the underlying loans serviced.
The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates,
the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively,
during a period of rising interest rates, the fair value of MSRs is expected to increase, as prepayment speeds on the underlying loans
would be anticipated to decline.
See additional discussion regarding the Mortgage Banking segment under Footnote 24 “Segment Information” of Part II Item 8
“Financial Statements and Supplementary Data.”
11
(IV) Republic Processing Group segment
Tax Refund Solutions division:
Through its TRS division, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of
federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the United
States, as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business
generated by the TRS division occurs in the first half of the year. The TRS division traditionally operates at a loss during the
second half of the year, during which time the division incurs costs preparing for the upcoming year’s first quarter tax season.
Refund Transfers (“RTs”) are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the
refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because
they are only delivered to the taxpayer upon receipt of the refund directly from the governmental paying authority.
“Easy Advance” Product
Since RB&T’s discontinuance of Refund Anticipation Loans (“RALs”) in April 2012, the tax industry, as a whole, has continued
to make credit alternatives available to its customer base each year, including the availability of RALs in various states through
finance companies. One credit alternative to a RAL the industry has developed is a product that allows a taxpayer to receive an
advance of a portion of their refund, with the taxpayer’s Tax Provider paying all fees for the advance to the lender that offers this
product.
TRS first offered its Easy Advance (“EA”) tax credit product during the first two months of 2016 with the following features:
• An advance amount of $750 per taxpayer customer;
• No EA fee charged to the taxpayer customer;
• All fees for the product were paid by the Tax Providers with a restriction prohibiting the Tax Providers from passing
along the fees to the taxpayer customer;
• No requirement that the taxpayer customer pay for another bank product, such as an RT;
• Multiple funds disbursement methods, including direct deposit, prepaid card, check or Walmart Direct2Cash® product,
based on the taxpayer customer’s election;
• Repayment of the EA to the Bank was deducted from the taxpayer customer’s tax refund proceeds; and
•
If an insufficient refund to repay the EA occurred:
there was no recourse to the taxpayer customer,
o
o no negative credit reporting on the taxpayer customer, and
o no collection efforts against the taxpayer customer.
Fees paid by the Tax Providers to the Company for the EA product are reported as interest income on loans. EAs during 2016
were generally repaid within three weeks after the taxpayer customer’s tax return was submitted to the applicable taxing
authority. Provisions for loan losses on EAs were estimated when advances were made, with all loss provisions made in the first
quarter of 2016. Unpaid EAs were charged-off within 81 days after the taxpayer customer’s tax return was submitted to the
applicable taxing authority, with the majority of charge-offs recorded during the second quarter of 2016.
12
For the first quarter 2017 tax season the Company modified the EA product offering to have more than one advance amount and
a different price structure to the Tax Providers based on the amount borrowed by the taxpayer. All other features of the product
remained substantially the same as those from the first quarter 2016 tax season.
Related to the overall credit losses on EAs, the Bank’s ability to control those losses is highly dependent upon its ability to
predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA
approval model is based on the prior-year’s tax refund funding patterns with on-going changes made in-season, if possible, to
adjust for any new current-year tax refund funding patterns recognized by the Bank. Because much of the loan volume occurs
each year before that year’s tax refund funding patterns can be analyzed and subsequent underwriting changes made, credit
losses during a current year could be higher than management’s predictions if tax refund funding patterns change materially
between years.
See additional discussion regarding the EA product under the sections titled:
• Part I Item 1A “Risk Factors”
• Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
• Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 5 “Loans and Allowance for Loan and
Lease Losses”
Republic Credit Solutions division:
Through its RCS division, the Bank offers short-term consumer credit products. In general, the credit products are unsecured,
small dollar consumer loans with maturities of 30 days or more, and are dependent on various factors including the consumer’s
ability to repay.
RCS originates, primarily for sale, both a short-term, line-of-credit product and a credit card product. The Bank sells 90% of the
balances maintained through these two products within two days of loan origination and retains a 10% interest. The Company
carries such loans at the lower of cost or fair value. The short-term, line-of-credit product represented the substantial majority of
RCS activity during the years ended December 31, 2016 and 2015, as RCS expanded in June 2015 beyond its pilot phase. In
December 2015, RCS began piloting its credit card product. Any gains or losses on sale of such products are reported as a
component of “Program fees.”
During the first quarter of 2016, RCS initiated a short-term installment loan product, in which the Company sells 100% of the
receivables approximately 21 days after origination. The Company carries these loans at fair value, with the held-for-sale loan
portfolio marked to market on a monthly basis, and any changes in their fair value reported as a component of Program fees.
During the first quarter of 2016, RCS initiated a healthcare receivables product. RCS works with healthcare providers to finance
the healthcare services for their patients. RCS retains 100% of these loans, which totaled $12 million at December 31, 2016.
The operating results of the RCS division were immaterial to the Company’s overall results of operations for the years ended
December 31, 2016, 2015 and 2014 and were reported as part of the RPG business-operating segment. The RCS division will not
be reported as a separate business-operating segment until such time, if any, that it meets reporting thresholds.
Republic Payment Solutions division:
Through its RPS division, the Bank is an issuing bank offering general-purpose reloadable prepaid cards through third-party
program managers. This program’s objectives include:
•
•
•
•
generate a low-cost deposit source;
generate float revenue from the previously mentioned low cost deposit source;
serve as a source of fee income; and
generate interchange revenue.
13
The Company divides prepaid cards into two general categories:
Reloadable: These types of cards are considered general-purpose reloadable (“GPR”) cards. These cards may take the
form of payroll cards issued to an employee by an employer to receive the direct deposit of their payroll. GPR cards can
also be issued to a consumer at a retail location or mailed to a consumer after completing an online application. GPR
cards can be reloaded multiple times with a consumer’s payroll, government benefit, a federal or state tax refund, or
through banks and cash-reload networks located at retail locations. Reloadable cards are generally open loop cards as
described below.
Non-Reloadable: These are generally one-time use cards that are only active until the funds initially loaded to the card
are expended. These types of cards are considered gift or incentive cards. These cards may be open loop or closed loop,
as described below. Normally these types of cards are used for the purchase of goods or services at retail locations and
cannot be used to receive cash.
Prepaid cards may be open loop, closed loop or semi-closed loop. Open loop cards can be used to receive cash at ATMs or
purchase goods or services by use of personal identification numbers (“PINs”) or signature at retail locations. These cards can be
used virtually anywhere that Visa® or MasterCard® is accepted. Closed loop cards can only be used at a specific merchant.
Semi-closed loop cards can be used at several merchants.
The prepaid card market is one of the fastest growing segments of the payments industry throughout the United States. This
market has experienced significant growth in recent years due to consumers and merchants embracing improved technology,
greater convenience, more product choices and greater flexibility. Prepaid cards have also proven to be an attractive alternative
to traditional bank accounts for certain segments of the population, particularly those without, or who could not qualify for, a
checking or savings account.
The RPS division works with various third parties to distribute prepaid cards to consumers throughout the United States. The
Company will also likely work with these third parties to develop additional financial services for consumers to increase the
functionality of the program and prepaid card usage.
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 RPG business-operating segment.
The RPS division will not be reported as a separate business-operating segment until such time, if any, that it meets reporting
thresholds.
See additional discussion regarding RPG under the sections titled:
• Part I Item 1A “Risk Factors”
• Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
• Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 24 “Segment Information”
Employees
As of December 31, 2016, Republic had 938 full-time-equivalent employees (“FTE”s). Altogether, Republic had 922 full-time and 32
part-time employees. None of the Company’s employees are subject to a collective bargaining agreement, and Republic has never
experienced a work stoppage. The Company believes that its employee relations have been and continue to be good.
Executive Officers
See Part III, Item 10. “Directors, Executive Officers and Corporate Governance.” for information about the Company’s executive
officers.
14
Competition
Traditional Banking
The Traditional Bank encounters intense competition in its market footprint in originating loans, attracting deposits, and selling other
banking related financial services. Through its Correspondent Lending channel, the Bank also competes to acquire newly originated
mortgage loans from select mortgage companies on a national basis. Through its national branchless banking platform, MemoryBank,
the Bank competes for digital and mobile clients in select pilot markets under the MemoryBank brand. The deregulation of the
banking industry, the ability to create financial services holding companies to engage in a wide range of financial services other than
banking and the widespread enactment of state laws that permit multi-bank holding companies, as well as the availability of
nationwide interstate banking, has created a highly competitive environment for financial institutions. In one or more aspects of the
Bank’s business, the Bank competes with local and regional retail and commercial banks, other savings banks, credit unions, finance
companies, mortgage companies, fintech companies, and other financial intermediaries operating in Kentucky, Indiana, Florida,
Tennessee and Ohio. The Bank also competes with insurance companies, consumer finance companies, investment banking firms and
mutual fund managers. Some of the Company’s competitors are not subject to the same degree of regulatory review and restrictions
that apply to the Company and the Bank. Many of the Bank’s primary competitors, some of which are affiliated with large bank
holding companies or other larger financial based institutions, have substantially greater resources, larger established client bases,
higher lending limits, more extensive banking center networks, numerous ATMs, and greater advertising and marketing budgets. They
may also offer services that the Bank does not currently provide. These competitors attempt to gain market share through their
financial product mix, pricing strategies and banking center locations. Legislative developments related to interstate branching and
banking in general, by providing large banking institutions easier access to a broader marketplace, can act to create more pressure on
smaller financial institutions to consolidate. It is anticipated that competition from both bank and non-bank entities will continue to
remain strong in the foreseeable future.
The primary factors in competing for bank products are convenient locations and ATMs, flexible hours, deposit interest rates, services,
internet banking, mobile banking, range of lending services offered and lending fees. Additionally, the Bank believes that an emphasis
on highly personalized service tailored to individual client needs, together with the local character of the Bank’s business and its
“community bank” management philosophy will continue to enhance the Bank’s ability to compete successfully in its market
footprint.
Warehouse Lending
The Bank competes with financial institutions across the United States for mortgage banking clients in need of warehouse lines of
credit. Competitors may have substantially greater resources, larger established client bases, higher lending limits, as well as
underwriting standards and on-going oversight requirements that could be viewed more favorably by some clients. A few or all of
these factors can lead to a competitive disadvantage to the Company when attempting to retain or grow its Warehouse client base.
Mortgage Banking
The Bank competes with mortgage bankers, mortgage brokers and financial institutions for the origination and funding of mortgage
loans. Many competitors have branch offices in the same areas where the Bank’s loan officers operate. The Bank also competes with
mortgage companies whose focus is often on telemarketing and internet lending.
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Republic Processing Group
Tax Refund Solutions division
The TRS division encounters direct competition for RT and EA market share from a limited number of banks in the industry. The
Bank competes in the marketplace on the basis of various revenue-share and pricing incentives, as well as product features and
overall service levels.
Republic Credit Solutions division
The small-dollar consumer loan industry is highly competitive. Competitors for the Company’s small-dollar loan programs
include, but are not limited to, billers who accept late payments for a fee, overdraft privilege programs of other banks and credit
unions, as well as payday lenders and fintech companies.
New entrants to the small dollar consumer loan market must successfully implement underwriting and fraud prevention processes,
overcome consumer brand loyalty and have sufficient capital to withstand early losses associated with unseasoned loan portfolios.
In addition, there are substantial regulatory and compliance costs, including the need for expertise to customize products
associated with licenses to lend in various states across the United States.
Republic Payment Solutions division
The prepaid card industry is subject to intense and increasing competition. The Bank competes with a number of companies that
market different types of prepaid card products, such as GPR, gift, incentive and corporate disbursement cards. There is also
competition from large retailers who are seeking to integrate more financial services into their product offerings. Increased
competition is also expected from alternative financial services providers who are often well-positioned to service the
“underbanked” and who may wish to develop their own prepaid card programs.
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Supervision and Regulation
The Company and the Bank are subject to extensive federal and state banking laws and regulations, which establish a comprehensive
framework of activities in which the Company and the Bank may engage. These laws and regulations are primarily intended to
provide protection to clients and depositors, not stockholders.
The Company is a financial holding company, a legal entity separate and distinct from the Bank that is subject to direct supervision by
The FRB. The Company’s principal source of funds is the payment of cash dividends from the Bank. The Company files regular
routine reports with the FRB in addition to the Bank’s filings with the FDIC concerning business activities and financial condition.
These regulatory agencies conduct periodic examinations to review the Company’s safety and soundness, and compliance with
various requirements.
The Bank is a Kentucky-chartered commercial banking and trust corporation and as such, it is subject to supervision and regulation by
the FDIC and the Kentucky Department of Financial Institutions (“KDFI”). The Bank also operates physical locations in Florida,
Indiana, Ohio, and Tennessee; purchases mortgage loans on a national basis through its Correspondent Lending channel; and accepts
deposits on a national basis through its MemoryBank digital brand. All deposits, subject to regulatory prescribed limitations, held by
the Bank are insured by the FDIC.
The Bank is subject to restrictions, requirements, potential enforcement actions and examinations by the FDIC and KDFI. The FRB
regulates the Company with monetary policies and operational rules that directly impact the Bank. The Bank is a member of the
Federal Home Loan Bank (“FHLB”) System. As a member of the FHLB system, the Bank must also comply with applicable
regulations of the Federal Housing Finance Board. Regulation by these agencies is intended primarily for the protection of the Bank’s
depositors and the Deposit Insurance Fund (“DIF”) and not for the benefit of the Company’s stockholders. The Bank’s activities are
also regulated under consumer protection laws applicable to the Bank’s lending, deposit and other activities. The Bank and the
Company are also subject to regulations issued by the Consumer Financial Protection Bureau’s (“CFPB”), an independent bureau of
the FRB created by the Dodd-Frank Act. An adverse ruling against the Company or the Bank under these laws could have a material
adverse effect on results of operations.
Regulators have extensive discretion in connection with their supervisory and enforcement authority and examination policies,
including, but not limited to, policies that can materially impact the classification of assets and the establishment of adequate loan loss
reserves. Any change in regulatory requirements and policies, whether by the FRB, the FDIC, the KDFI the CFPB or state or federal
legislation, could have a material adverse impact on Company operations.
Regulators have broad enforcement powers over banks and their holding companies, including, but not limited to: the power to
mandate or restrict particular actions, activities, or divestitures; impose monetary fines and other penalties for violations of laws and
regulations; issue cease and desist or removal orders; seek injunctions; publicly disclose such actions; and prohibit unsafe or unsound
practices. This authority includes both informal and formal actions to effect corrective actions and/or sanctions. In addition, the Bank
is subject to regulation and potential enforcement actions by other state and federal agencies.
Certain regulatory requirements applicable to the Company and the Bank are referred to below or elsewhere in this filing. The
description of statutory provisions and regulations applicable to banks and their holding companies set forth in this filing does not
purport to be a complete description of such statutes and regulations. Their effect on the Company and the Bank is qualified in its
entirety by reference to the actual laws and regulations.
Prepaid Card Regulation
The prepaid cards marketed by the RPS division are subject to various federal and state laws and regulations, including
regulations issued by the CFPB, as well as those discussed below. Prepaid cards issued by the Bank could be subject to the
Electronic Fund Transfers Act (“EFTA”) and the FRB’s Regulation E. With the exception of those provisions comprising the
Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”); the Bank treats prepaid products
such as GPR cards as being subject to certain provisions of the EFTA and Regulation E when applicable, such as those
related to disclosure requirements, periodic reporting, error resolution procedures and liability limitations.
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State Wage Payment Laws and Regulations
The use of payroll card programs as means for an employer to remit wages or other compensation to its employees or
independent contractors is governed by state labor laws related to wage payments. RPS payroll cards are designed to allow
employers to comply with such applicable state wage and hour laws. Most states permit the use of payroll cards as a method
of paying wages to employees either through statutory provisions allowing such use, or, in the absence of specific statutory
guidance, the adoption by state labor departments of formal or informal policies allowing for the use of such cards. Nearly
every state allowing payroll card programs places certain requirements or restrictions on their use as a wage payment method.
The most common of these requirements or restrictions involves obtaining the prior written consent of the employee,
limitations on payroll card fees and disclosure requirements.
Card Association and Payment Network Operating Rules
In providing certain services, the Bank is required to comply with the operating rules promulgated by various card
associations and network organizations, including certain data security standards, with such obligations arising as a condition
to access or participation in the relevant card association or network organization. Each card association and network
organization may audit the Bank from time to time to ensure compliance with these standards. The Bank maintains
appropriate policies and programs and adapts business practices in order to comply with all applicable rules and standards of
such associations and organizations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
On July 21, 2010, the Dodd-Frank Act was signed into law, which was intended to cause a fundamental restructuring of federal
banking regulation through implementation of extensive regulatory reforms. Many of these reforms have been implemented and others
are expected to be implemented in the future. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight
Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate
financial companies. Provisions of the Dodd-Frank Act that have been or will be implemented that have impacted or may impact the
Company and the Bank include:
• Requiring publicly traded companies to provide stockholders the opportunity to cast a non-binding vote on executive
compensation at least every three years and on “golden parachute” payments in connection with approvals of mergers
and acquisitions. The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate
their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking
regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their
holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not. The
Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive
compensation matters.
• Applying Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative
transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an
affiliate or an insider. Any such transactions with affiliates must be fully secured. The exemption from Section 23A for
transactions with financial subsidiaries was effectively eliminated. The Dodd-Frank Act additionally prohibits an insured
depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market
terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.
• Creating the CFPB, which is granted broad rulemaking, supervisory and enforcement powers under various federal
consumer financial protection laws. The CFPB has examination and primary enforcement authority with respect to
depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the
CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance purposes.
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• Permanently increasing the maximum deposit insurance amount for financial institutions from $100,000 to $250,000 per
depositor, retroactive to January 1, 2009. The Dodd-Frank Act also broadened the base for FDIC insurance assessments.
Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution.
The Dodd-Frank Act also required the FDIC to increase the reserve ratio of the DIF from 1.15% to 1.35% of insured
deposits by 2020, for which the FDIC issued final rules in March 2016, and eliminated the requirement that the FDIC
pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act
eliminated the federal statutory prohibition against the payment of interest on business checking accounts.
•
Imposing new requirements for mortgage lending, including prohibitions on certain compensation to mortgage
originators and special consumer protections, including limitations on certain mortgage terms. Additionally, requiring
lenders to consider a consumer’s ability to repay a mortgage loan before extending credit to the consumer and limiting
prepayment penalties.
• Limiting permissible debit interchange fees for certain financial institutions.
• Revising certain corporate governance requirements for public companies.
Incentive Compensation — In 2016, six federal agencies, including the FDIC, the FRB and the SEC, issued a new Notice of
Proposed Rulemaking designed to implement section 956 of the Dodd-Frank Act, which applies only to financial institutions with
total consolidated assets of $1 billion or more. This seeks to strengthen the incentive compensation practices at covered
institutions by better aligning employee rewards with longer-term institutional objectives. The proposed orders are designed to:
•
•
•
•
•
prohibit incentive-based compensation arrangements that encourage inappropriate risks by providing covered persons
with “excessive” compensation;
prohibit incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered
persons with compensation that “could lead to a material financial loss” to an institution;
require certain incentive-based compensation arrangements for covered persons to include deferral of payments, risk of
downward adjustment and forfeiture, and clawbacks in order to appropriately balance risk and reward;
require disclosures and record-keeping requirements that will enable the appropriate federal regulator to determine
compliance with the rule; and
require the institution to maintain policies and procedures to ensure compliance with these requirements and prohibitions
commensurate with the size and complexity of the organization and the scope of its use of incentive compensation.
Volcker Rule — In December, 2013, the final Volcker Rule provision of the Dodd-Frank Act was approved and implemented by
the FRB, the FDIC, the SEC, and the Commodity Futures Trading Commission (“CFTC”) (collectively, the “Agencies”). The
Volcker Rule aims to reduce risk and banking system instability by restricting U.S. banks from investing in or engaging in
proprietary trading and speculation and imposing a strict framework to justify exemptions for underwriting, market making and
hedging activities. U.S. banks are restricted from investing in funds with collateral comprised of less than 100% loans that are not
registered with the SEC and from engaging in hedging activities that do not hedge a specific identified risk. Affected institutions
were required to fully conform to the Volcker Rule by July 21, 2015.
Because some components of the Dodd-Frank Act still have not been finalized, it is difficult to predict the ultimate effect of the Dodd-
Frank Act on the Company or the Bank at this time, especially after the recent 2016 election. In addition, the extent to which new
legislation, existing and planned governmental initiatives, and a new presidential administration result in a meaningful change in the
current regulatory environment and the national economy is uncertain.
I.
The Company
Acquisitions — The Company is required to obtain the prior approval of the FRB under the Bank Holding Company Act (“BHCA”)
before it may, among other things, acquire all or substantially all of the assets of any bank, or ownership or control of any voting
shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of any class of the voting
shares of such bank. In addition, the Bank must obtain regulatory approval before entering into certain transactions, such as adding
new banking offices and mergers with, or acquisitions of, other financial institutions. In approving bank acquisitions by bank holding
companies, the FRB is required to consider the financial and managerial resources and future prospects of the bank holding company,
its subsidiaries and related banks, and the target bank involved, the convenience and needs of the communities to be served and
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various competitive and other factors. Consideration of financial resources generally focuses on capital adequacy, which is discussed
below. Consideration of convenience and needs issues includes the parties’ performance under the CRA. Under the CRA, all financial
institutions have a continuing and affirmative obligation consistent with safe and sound operation to help meet the credit needs of their
designated communities, specifically including low-to-moderate income persons and neighborhoods.
Under the BHCA, so long as it is at least adequately capitalized, adequately managed, has a satisfactory or better CRA rating and is
not subject to any regulatory restrictions, the Company may purchase a bank, subject to regulatory approval. Similarly, an adequately
capitalized and adequately managed bank holding company located outside of Kentucky, Florida, Indiana, Ohio or Tennessee may
purchase a bank located inside Kentucky, Florida, Indiana, Ohio or Tennessee subject to appropriate regulatory approvals. In either
case, however, state law restrictions may be placed on the acquisition of a bank that has been in existence for a limited amount of
time, or would result in specified concentrations of deposits. For example, Kentucky law prohibits a bank holding company from
acquiring control of banks located in Kentucky if the holding company would then hold more than 15% of the total deposits of all
federally insured depository institutions in Kentucky.
The BHCA and the Change in Bank Control Act also generally require the approval of the Federal Reserve prior to any person or
company acquiring control of a state bank or bank holding company. Acquiring control conclusively occurs if immediately after a
transaction, the acquiring person or company owns, controls, or holds voting securities of the institution with the power to vote 25% or
more of any class. Acquiring control is refutably presumed if, immediately after a transaction, the acquiring person or company owns,
controls, or holds voting securities of the institution with the power to vote 10% or more of any class, and (i) the institution has
registered securities under section 12 of the Securities Exchange Act; or (ii) no other person will own, control, or hold the power to
vote a greater percentage of that class of voting securities immediately after the transaction.
Financial Activities — The activities permissible for bank holding companies and their affiliates were substantially expanded by the
Gramm-Leach-Bliley Act (“GLBA”). The GLBA permits bank holding companies that qualify as, and elect to be, Financial Holding
Company’s (“FHCs”), to engage in a broad range of activities that are financial in nature, incidental to financial activity, or
complementary to financial activity that does not pose a substantial risk to the safety or soundness of depository institutions or the
financial system generally. These financial activities include, but are not limited to, the following: underwriting securities, dealing in
and making a market in securities, insurance underwriting and agency activities without geographic or other limitation, as well as
merchant banking. To achieve and maintain its status as a FHC, the Company and all of its affiliated depository institutions must be
well capitalized, well-managed, and have at least a “satisfactory” CRA rating. The Company currently qualifies as and maintains an
election as a FHC.
Subject to certain exceptions, state banks are permitted to control or hold an interest in a financial subsidiary that engages in a broader
range of activities than are permissible for national banks to engage in directly, subject to any restrictions imposed on a bank under the
laws of the state under which it is organized. Conducting financial activities through a bank subsidiary can impact capital adequacy
and regulatory restrictions may apply to affiliate transactions between the bank and its financial subsidiaries.
Safe and Sound Banking Practice — The FRB does not permit bank holding companies to engage in unsafe and unsound banking
practices. The FDIC and the KDFI have similar restrictions with respect to the Bank.
Pursuant to the Federal Deposit Insurance Act (“FDIA”), the FDIC has adopted a set of guidelines prescribing safety and soundness
standards. These guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and
benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified
in the guidelines.
Source of Strength Doctrine — Under FRB policy, a bank holding company is expected to act as a source of financial strength to its
banking subsidiaries and to commit resources for their support. Such support may restrict the Company’s ability to pay dividends, and
may be required at times when, absent this FRB policy, a holding company may not be inclined to provide it. A bank holding
company may also be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary and any applicable
cross-guarantee provisions that may apply to the Company. In addition, any capital loans by the Company to its bank subsidiary are
subordinate in right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding
company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. The Dodd-Frank Act codifies the
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Federal Reserve Board’s existing “source of strength” policy that holding companies act as a source of strength to their insured
institution subsidiaries by providing capital, liquidity and other support in times of distress.
Office of Foreign Assets Control (“OFAC”) — The Company and the Bank, like all U.S. companies and individuals, are prohibited
from transacting business with certain individuals and entities named on the OFAC’s list of Specially Designated Nationals and
Blocked Persons. Failure to comply may result in fines and other penalties. The OFAC issued guidance for financial institutions in
whereby it asserted that it may, in its discretion, examine institutions determined to be high risk or to be lacking in their efforts to
comply with its requirements.
Code of Ethics — The Company has adopted a code of ethics that applies to all employees, including the Company’s principal
executive, financial and accounting officers. The Company’s code of ethics is posted on the Bank’s website. The Company intends to
disclose information about any amendments to, or waivers from, the code of ethics that are required to be disclosed under applicable
SEC regulations by providing appropriate information on the Company’s website. If at any time the code of ethics is not available on
the Company’s website, the Company will provide a copy of it free of charge upon written request.
II.
The Bank
The Kentucky and federal banking statutes prescribe the permissible activities in which a Kentucky chartered bank may engage and
where those activities may be conducted. Kentucky’s statutes contain a super parity provision that permits a well-rated Kentucky bank
to engage in any banking activity in which a national bank in Kentucky, a state bank, state thrift, or state savings operating in any
other state, a federal savings bank or federal thrift, or meeting the qualified thrift lender test, provided it first obtains a legal opinion
from counsel specifying the statutory or regulatory provisions that permit the activity.
Branching — Kentucky law generally permits a Kentucky chartered bank to establish a branch office in any county in Kentucky. A
Kentucky bank may also, subject to regulatory approval and certain restrictions, establish a branch office outside of Kentucky. Well-
capitalized Kentucky chartered banks that have been in operation at least three years and that satisfy certain criteria relating to, among
other things, their composite and management ratings, may establish a branch in Kentucky without the approval of the Commissioner
of the KDFI, upon notice to the KDFI and any other state bank with its main office located in the county where the new branch will be
located. Branching by all banks not meeting these criteria requires the approval of the Commissioner of the KDFI, who must ascertain
and determine that the public convenience and advantage will be served and promoted and that there is a reasonable probability of the
successful operation of the branch. In any case, the proposed branch must also be approved by the FDIC, which considers a number of
factors, including financial condition, capital adequacy, earnings prospects, character of management, needs of the community and
consistency with corporate powers. As a result of the Dodd Frank Act, the Bank, along with any other national or state chartered bank
generally may branch across state lines. Such unlimited branching authority has the potential to increase competition within the
markets in which the Company and the Bank operate.
Affiliate Transaction Restrictions — Transactions between the Bank and its affiliates, and in some cases the Bank’s correspondent
banks, are subject to FDIC regulations, the FRB’s Regulations O and W, and Sections 23A, 23B, 22(g) and 22(h) of the Federal
Reserve Act (“FRA”). In general, these transactions must be on terms and conditions that are consistent with safe and sound banking
practices and substantially the same, or at least as favorable to the bank or its subsidiary, as those for comparable transactions with
non-affiliated parties. In addition, certain types of these transactions referred to as “covered transactions” are subject to quantitative
limits based on a percentage of the Bank’s capital, thereby restricting the total dollar amount of transactions the Bank may engage in
with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between
100% and 130% of the covered transaction in order to receive loans from the Bank. Limitations are also imposed on loans and
extensions of credit by a bank to its executive officers, directors and principal stockholders and each of their related interests.
The FRB promulgated Regulation W to implement Sections 23A and 23B of the FRA. This regulation contains many of the foregoing
restrictions and also addresses derivative transactions, overdraft facilities and other transactions between a bank and its non-bank
affiliates.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets — Bank regulators may declare a dividend payment to be
unsafe and unsound even if the Bank continues to meet its capital requirements after the dividend. Dividends paid by the Bank provide
substantially all of the Company’s operating funds. Regulatory requirements limit the amount of dividends that may be paid by the
Bank. Under federal regulations, the Bank cannot pay a dividend if, after paying the dividend, the Bank would be undercapitalized.
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Under Kentucky and federal banking regulations, the dividends the Bank can pay during any calendar year are generally limited to its
profits for that year, plus its retained net profits for the two preceding years, less any required transfers to surplus or to fund the
retirement of preferred stock or debt, absent approval of the respective state or federal banking regulators. FDIC regulations also
require all insured depository institutions to remain in a safe and sound condition, as defined in regulations, as a condition of having
FDIC deposit insurance.
FDIC Deposit Insurance Assessments — All Bank deposits are insured to the maximum extent permitted by the DIF. These bank
deposits are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of,
and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined
by regulation or order to pose a serious threat to the DIF.
In addition to assessments for deposit insurance premiums, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”), a mixed-ownership government
corporation established to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature
between 2017 through 2019.
The FDIC’s risk-based premium system provides for quarterly assessments. Each insured institution is placed in one of four risk
categories depending on supervisory and capital considerations. Within its risk category, an institution is assigned to an initial base
assessment rate, which is then adjusted. The FDIC may adjust the scale uniformly from one quarter to the next, however, no
adjustment can deviate more than three basis points from the base scale without notice and comment. No institution may pay a
dividend if in default of paying FDIC deposit insurance assessments.
In 2011, the FDIC Board of Directors adopted a final rule, which redefined the deposit insurance assessment base as required by the
Dodd-Frank Act. The final rule:
• Redefined the deposit insurance assessment base as average consolidated total assets minus average tangible equity
(defined as Tier 1 Capital);
• Made generally conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates;
• Created a depository institution debt adjustment;
• Eliminated the secured liability adjustment; and
• Adopted a new assessment rate schedule, and, in lieu of dividends, other rate schedules when the reserve ratio reaches
certain levels.
The FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated insured deposits. The
Dodd-Frank Act mandates that the statutory minimum reserve ratio of the DIF increase from 1.15% to 1.35% of insured deposits by
September 30, 2020. Banks with assets of less than $10 billion are exempt from any additional assessments necessary to increase the
reserve fund above 1.15%.
The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a
hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It may also
suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing
circumstances that would result in termination of the Bank’s FDIC deposit insurance.
In 2014, the FDIC revised the risk-based deposit insurance assessment system to reflect changes in the regulatory capital rules in
accordance with Basel III, which became effective for the Company and the Bank in January 2015. For deposit insurance assessment
purposes, the updated system will revise the ratios and ratio thresholds relating to capital evaluations.
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Consumer Laws and Regulations — In addition to the laws and regulations discussed herein, the Bank is also subject to certain
consumer laws and regulations that are designed to protect consumers in their transactions with banks. While the discussion set forth
in this filing is not exhaustive, these laws and regulations include Regulation E, the Truth in Savings Act, Check Clearing for the 21st
Century Act and the Expedited Funds Availability Act, among others. These federal laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal with consumers when accepting deposits. Certain laws
also limit the Bank’s ability to share information with affiliated and unaffiliated entities. The Bank is required to comply with all
applicable consumer protection laws and regulations, both state and federal, as part of its ongoing business operations.
Regulation E — A 2009 amendment to Regulation E prohibits financial institutions from charging consumers fees for paying
overdrafts on ATM and one-time debit card transactions, unless a consumer affirmatively consents, or opts in, to the overdraft service
for those types of transactions. Before opting in, the consumer must be provided a notice that explains the financial institution’s
overdraft services, including the fees associated with the service and the consumer’s choices. The final rules require institutions to
provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to
consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any
overdrafts it pays on ATM and one-time debit card transactions.
The Bank earns a substantial majority of its deposit fee income related to overdrafts from the per item fee it assesses its clients for
each insufficient funds check or electronic debit presented for payment. Both the per item fee and the daily fee assessed to the account
resulting from its overdraft status, if computed as a percentage of the amount overdrawn, results in a high rate of interest when
annualized and are thus considered excessive by some consumer groups.
In October 2016, the CFPB issued a final rule establishing new consumer compliance requirements for prepaid accounts pursuant to
Regulations E and Z. These requirements govern disclosures, limited liability and error resolution protections, credit features, and
making account agreement information publicly available for prepaid accounts, among other provisions. The Bank must comply with
the rule beginning October 1, 2017, though certain provisions are not effective until October 1, 2018.
Prohibitions Against Tying Arrangements — The Bank is subject to prohibitions on certain tying arrangements. A depository
institution is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the client obtain some additional product or service from the
institution or its affiliates or not obtain services of a competitor of the institution.
The USA Patriot Act (“Patriot Act”), Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) — The Patriot Act was
enacted after September 11, 2001, to provide the federal government with powers to prevent, detect, and prosecute terrorism and
international money laundering, and has resulted in promulgation of several regulations that have a direct impact on financial
institutions. There are a number of programs that financial institutions must have in place such as: (i) BSA/AML controls to manage
risk; (ii) Customer Identification Programs to determine the true identity of customers, document and verify the information, and
determine whether the customer appears on any federal government list of known or suspected terrorists or terrorist organizations; and
(iii) monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Title III of the Patriot Act
takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including
banks, savings banks, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange
Act. Among other requirements, the Patriot Act imposes the following obligations on financial institutions:
• Establishment of enhanced anti-money laundering programs;
• Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open
new accounts;
• Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money
laundering;
• Prohibitions on correspondent accounts for foreign shell banks; and
• Compliance with record keeping obligations with respect to correspondent accounts of foreign banks.
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Depositor Preference — The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository
institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain
claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the
institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in
payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the U.S. and the
parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Liability of Commonly Controlled Institutions — FDIC-insured depository institutions can be held liable for any loss incurred, or
reasonably expected to be incurred, by the FDIC due to the default of another FDIC-insured depository institution controlled by the
same bank holding company, or for any assistance provided by the FDIC to another FDIC-insured depository institution controlled by
the same bank holding company that is in danger of default. “Default” generally means the appointment of a conservator or receiver.
“In danger of default” generally means the existence of certain conditions indicating that default is likely to occur in the absence of
regulatory assistance. Such a “cross-guarantee” claim against a depository institution is generally superior in right of payment to
claims of the holding company and its affiliates against that depository institution. At this time, the Bank is the only insured
depository institution controlled by the Company. However, if the Company were to control other FDIC-insured depository
institutions in the future, the cross-guarantee would apply to all such FDIC-insured depository institutions.
Federal Home Loan Bank System — The FHLB offers credit to its members, which include savings banks, commercial banks,
insurance companies, credit unions, and other entities. The FHLB system is currently divided into twelve federally chartered regional
FHLBs that are regulated by the Federal Housing Finance Board. The Bank is a member and owns capital stock in the FHLB
Cincinnati. The amount of capital stock the Bank must own to maintain its membership depends on its balance of outstanding
advances. It is required to acquire and hold shares in an amount at least equal to 1% of the aggregate principal amount of its unpaid
single-family residential real estate loans and similar obligations at the beginning of each year, or 1/20th of its outstanding advances
from the FHLB, whichever is greater. Advances are secured by pledges of loans, mortgage backed securities and capital stock of the
FHLB. FHLBs also purchase mortgages in the secondary market through their Mortgage Purchase Program (“MPP”). The Bank has
never sold loans to the MPP.
In the event of a default on an advance, the Federal Home Loan Bank Act establishes priority of the FHLB’s claim over various other
claims. Regulations provide that each FHLB has joint and several liability for the obligations of the other FHLBs in the system. If an
FHLB falls below its minimum capital requirements, the FHLB may seek to require its members to purchase additional capital stock
of the FHLB. If problems within the FHLB system were to occur, it could adversely affect the pricing or availability of advances, the
amount and timing of dividends on capital stock issued by FHLBs to its members, or the ability of members to have their FHLB
capital stock redeemed on a timely basis. Congress continues to consider various proposals that could establish a new regulatory
structure for the FHLB system, as well as for other government-sponsored entities. The Bank cannot predict at this time, which, if any,
of these proposals may be adopted or what effect they would have on the Bank’s business.
Federal Reserve System — Under regulations of the FRB, the Bank is required to maintain noninterest-earning reserves against its
transaction accounts (primarily NOW and regular checking accounts). The Bank is in compliance with the foregoing reserve
requirements. Required reserves must be maintained in the form of vault cash, a noninterest-bearing account at the FRB, or a pass-
through account as defined by the FRB. The effect of this reserve requirement is to reduce the Bank’s interest-earning assets. The
balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by
the FDIC. The Bank is authorized to borrow from the FRB discount window.
24
General Lending Regulations
Pursuant to FDIC regulations, the Bank may extend credit subject to certain restrictions. Additionally, state law may impose additional
restrictions. While the discussion of extensions of credit set forth in this filing is not exhaustive, federal laws and regulations include
but are not limited to the following:
• Community Reinvestment Act
• Home Mortgage Disclosure Act
• Equal Credit Opportunity Act
• Truth in Lending Act
• Real Estate Settlement Procedures Act
• Fair Credit Reporting Act
• CARD Act
Community Reinvestment Act (“CRA”) — Under the CRA, financial institutions have a continuing and affirmative obligation to help
meet the credit needs of their designated community, including low and moderate income neighborhoods, consistent with safe and
sound banking practices. The CRA does not establish specific lending requirements or programs for the Bank, nor does it limit the
Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent
with the CRA. In particular, the CRA assessment system focuses on three tests:
•
•
•
a lending test, to evaluate the institution’s record of making loans in its assessment areas;
an investment test, to evaluate the institution’s record of investing in community development projects, affordable
housing and programs benefiting low or moderate income individuals and businesses in its assessment area or a broader
area that includes its assessment area; and
a service test, to evaluate the institution’s delivery of services through its retail banking channels and the extent and
innovativeness of its community development services.
The CRA requires all institutions to make public disclosure of their CRA ratings. In June 2015, the Bank received a “Satisfactory”
CRA Performance Evaluation. A copy of the public section of this CRA Performance Evaluation is available to the public upon
request.
Home Mortgage Disclosure Act (“HMDA”) — The HMDA grew out of public concern over credit shortages in certain urban
neighborhoods. One purpose of the HMDA is to provide public information that will help show whether financial institutions are
serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair
lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics, as a way of identifying
possible discriminatory lending patterns and enforcing anti-discrimination statutes. The HMDA requires institutions to report data
regarding applications for loans for the purchase or improvement of single family and multi-family dwellings, as well as information
concerning originations and purchases of such loans. Federal bank regulators rely, in part, upon data provided under HMDA to
determine whether depository institutions engage in discriminatory lending practices. The appropriate federal banking agency, or in
some cases the Department of Housing and Urban Development, enforces compliance with HMDA and implements its regulations.
Administrative sanctions, including civil money penalties, may be imposed by supervisory agencies for violations of the HMDA.
Equal Credit Opportunity Act; Fair Housing Act (“ECOA”) — The ECOA prohibits discrimination against an applicant in any credit
transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age
(except in limited circumstances), receipt of income from public assistance programs or good faith exercise of any rights under the
Consumer Credit Protection Act. Under the Fair Housing Act, it is unlawful for any lender to discriminate in its housing-related
lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. Among other
things, these laws prohibit a lender from denying or discouraging credit on a discriminatory basis, making excessively low appraisals
of property based on racial considerations, or charging excessive rates or imposing more stringent loan terms or conditions on a
discriminatory basis. In addition to private actions by aggrieved borrowers or applicants for actual and punitive damages, the U.S.
Department of Justice and other regulatory agencies can take enforcement action seeking injunctive and other equitable relief or
sanctions for alleged violations.
25
Truth in Lending Act (“TLA”) — The TLA governs disclosures of credit terms to consumer borrowers and is designed to ensure that
credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As
result of the TLA, all creditors must use the same credit terminology and expressions of rates, and disclose the annual percentage rate,
the finance charge, the amount financed, the total of payments and the payment schedule for each proposed loan. Violations of the
TLA may result in regulatory sanctions and in the imposition of both civil and, in the case of willful violations, criminal penalties.
Under certain circumstances, the TLA also provides a consumer with a right of rescission, which if exercised within three business
days would require the creditor to reimburse any amount paid by the consumer to the creditor or to a third party in connection with the
loan, including finance charges, application fees, commitment fees, title search fees and appraisal fees. Consumers may also seek
actual and punitive damages for violations of the TLA.
Real Estate Settlement Procedures Act (“RESPA”) — The RESPA requires lenders to provide borrowers with disclosures regarding
the nature and cost of real estate settlements. The RESPA also prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts. Violations of the RESPA may result in imposition of penalties, including: (i) civil
liability equal to three times the amount of any charge paid for the settlement services or civil liability of up to $1,000 per claimant,
depending on the violation; (ii) awards of court costs and attorneys’ fees; and (iii) fines of not more than $10,000 or imprisonment for
not more than one year, or both. A rule requiring integrated disclosures from the TLA and RESPA became effective in October 2015.
Fair Credit Reporting Act (“FACT”) — The FACT requires the Bank to adopt and implement a written identity theft prevention
program, paying particular attention to several identified “red flag” events. The program must assess the validity of address change
requests for card issuers and for users of consumer reports to verify the subject of a consumer report in the event of notice of an
address discrepancy. The FACT gives consumers the ability to challenge the Bank with respect to credit reporting information
provided by the Bank. The FACT also prohibits the Bank from using certain information it may acquire from an affiliate to solicit the
consumer for marketing purposes unless the consumer has been given notice and an opportunity to opt out of such solicitation for a
period of five years.
Ability to Repay (“ATR”) Rule and Qualified Mortgage Loans (“QMs”) — In January 2014, the CFPB’s final rule implementing the
ATR requirements in the Dodd-Frank Act became effective. The rule, among other things, requires lenders to consider a consumer’s
ability to repay a mortgage loan before extending credit to the consumer and limits prepayment penalties. The rule also establishes
certain protections from liability for mortgage lenders with regard to QMs they originate. For this purpose, the rule defines QMs to
include loans with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by the
FNMA or Freddie Mac while they operate under Federal conservatorship or receivership, and loans eligible for insurance or guarantee
by the Federal Housing Administration (“FHA”), U.S. Department of Veterans Affairs (“VA”) or U.S. Department of Agriculture
(“USDA”). Additionally, QMs may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or
(iii) include interest-only or negative amortization payments.
The Dodd-Frank Act did not specify whether the presumption of ATR compliance is conclusive (i.e., creates a safe harbor) or is
rebuttable. For mortgages that are not QMs, the final rule describes certain minimum requirements for creditors making ATR
determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider
eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly
payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-
related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income;
and (8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to
evaluate the factors.
Loans to One Borrower — Under current limits, loans and extensions of credit outstanding at one time to a single borrower and not
fully secured generally may not exceed 15% of the institution’s unimpaired capital and unimpaired surplus. Loans and extensions of
credit fully secured by certain readily marketable collateral may represent an additional 10% of unimpaired capital and unimpaired
surplus.
26
Interagency Guidance on Non Traditional Mortgage Product Risks — In 2006, final guidance was issued to address the risks posed by
residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest (such as “interest-only”
mortgages and “payment option” ARMs. The guidance discusses the importance of ensuring that loan terms and underwriting
standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity. The guidance
also suggests that banks i) implement strong risk management standards, ii) maintain capital levels commensurate with risk and iii)
establish an Allowance that reflects the collectability of the portfolio. The guidance urges banks to ensure that consumers have
sufficient information to clearly understand loan terms and associated risks before making product or payment choices.
Loans to Insiders — The Bank’s authority to extend credit to its directors, executive officers and principal shareholders, as well as to
entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the
Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:
•
•
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than,
those prevailing for comparable transactions with non-insiders and that do not involve more than the normal risk of
repayment or present other features that are unfavorable to the Bank; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which
limits are based, in part, on the amount of the Bank’s capital.
The regulations allow small discounts on fees on residential mortgages for directors, officers and employees. In addition, extensions of
credit to insiders in excess of certain limits must be approved by the Bank’s Board of Directors.
Capital Adequacy Requirements
Capital Guidelines — Both the Company and the Bank are required to comply with capital adequacy guidelines. Guidelines are
established by the FRB in the case of the Company and the FDIC in the case of the Bank. The FRB and FDIC have substantially
similar risk based and leverage ratio guidelines for banking organizations, which are intended to ensure that banking organizations
have adequate capital related to the risk levels of assets and off balance sheet instruments. Under the risk based guidelines, specific
categories of assets are assigned different risk weights based generally on the perceived credit risk of the asset. These risk weights are
multiplied by corresponding asset balances to determine a risk weighted asset base. In addition to the risk based capital guidelines, the
FRB utilized a leverage ratio as a tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s
Tier 1 Capital divided by its average total consolidated assets (less goodwill and certain other intangible assets).
Effective January 1, 2015 the Company and the Bank became subject to the capital regulations in accordance with Basel III. These
regulations established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 Risk-Based Capital ratio
and a new capital conservation buffer. The regulations included revisions to the definition of capital and changes in the risk weighting
of certain assets. For prompt corrective action, the new regulations establish definitions of “well capitalized” as a 6.5% Common
Equity Tier 1 Risk Based Capital ratio, an 8.0% Tier 1 Risk Based Capital ratio, a 10.0% Total Risk Based Capital ratio and a 5.0%
Tier 1 Leverage ratio.
Under the new capital rules, Tier 1 Capital generally consists of common stock (plus related surplus) and retained earnings, a
restricted amount of minority interest as additional Tier 1 Capital, and non-cumulative preferred stock (plus related surplus), subject to
certain eligibility requirements, minus goodwill and other specified intangible assets and other regulatory deductions. Proceeds of
trust preferred securities are excluded from Tier 1 Capital unless such securities were issued before 2010 by bank or savings and loan
holding companies with less than $15 billion of assets.
The federal banking agencies’ risk-based and leverage ratios represent minimum supervisory ratios generally applicable to banking
organizations that meet certain specified criteria, assuming that they have the highest regulatory capital rating. Banking organizations
not meeting these criteria are required to operate with capital positions above the minimum ratios. FRB guidelines also provide that
banking organizations experiencing internal growth or making acquisitions may be expected to maintain strong capital positions above
the minimum supervisory levels, without significant reliance on intangible assets. The FDIC may establish higher minimum capital
adequacy requirements if, for example, a bank proposes to make an acquisition requiring regulatory approval, has previously
warranted special regulatory attention, rapid growth presents supervisory concerns, or, among other factors, has a high susceptibility
to interest rate and other types of risk. The Bank is not subject to any such individual minimum regulatory capital requirement.
27
As of December 31, 2016 and 2015, the Company’s capital ratios were as follows:
(dollars in thousands)
Total capital to risk-weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . . . . . . . . . .
Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . . . . . . . . . .
Tier 1 (core) capital to risk-weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage capital to average assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
As of December 31, 2016
Actual
Amount
Ratio
As of December 31, 2015
Actual
Amount
Ratio
655,908
553,905
16.37 % $
13.86
631,820
494,575
20.58 %
16.12
584,530
520,985
14.59 % $
13.03
564,329
467,084
18.39 %
15.23
622,988
520,985
15.55 % $
13.03
604,329
467,084
19.69 %
15.23
622,988
520,985
13.54 % $
11.34
604,329
467,084
14.82 %
11.46
Corrective Measures for Capital Deficiencies — The banking regulators are required to take “prompt corrective action” with respect
to capital deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A bank is
undercapitalized if it fails to meet any one of the ratios required to be adequately capitalized.
Undercapitalized, significantly undercapitalized and critically undercapitalized institutions are required to submit a capital restoration
plan, which must be guaranteed by the holding company of the institution. In addition, agency regulations contain broad restrictions
on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment, and expansion into new
lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including
dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any
such distribution or payment. A bank’s capital classification will also affect its ability to accept brokered deposits. Under banking
regulations, a bank may not lawfully accept, roll over or renew brokered deposits, unless it is either well capitalized or it is adequately
capitalized and receives a waiver from its applicable regulator.
If a banking institution’s capital decreases below acceptable levels, bank regulatory enforcement powers become more enhanced. A
significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions. Banking regulators have limited discretion in dealing with a
critically undercapitalized institution and are normally required to appoint a receiver or conservator. Banks with risk-based capital and
leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of
deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing if the institution has no tangible
capital.
28
In addition, a bank holding company may face significant consequences if its bank subsidiary fails to maintain the required capital and
management ratings, including entering into an agreement with the FRB that imposes limitations on its operations and may even
require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than
well-capitalized and well-managed institutions. More specifically, the FRB’s regulations require a FHC to notify the FRB within 15
days of becoming aware that any depository institution controlled by the company has ceased to be well-capitalized or well-managed.
If the FRB determines that a FHC controls a depository institution that is not well-capitalized or well-managed, the FRB will notify
the FHC that it is not in compliance with applicable requirements and may require the FHC to enter into an agreement acceptable to
the FRB to correct any deficiencies, or require the FHC to decertify as a FHC. Until such deficiencies are corrected, the FRB may
impose any limitations or conditions on the conduct or activities of the FHC and its affiliates that the FRB determines are appropriate,
and the FHC may not commence any additional activity or acquire control of any company under Section 4(k) of the BHC Act without
prior FRB approval. Unless the period of time for compliance is extended by the FRB, if a FHC fails to correct deficiencies in
maintaining its qualification for FHC status within 180 days of notice to the FRB, the FRB may order divestiture of any depository
institution controlled by the company. A company may comply with a divestiture order by ceasing to engage in any financial or other
activity that would not be permissible for a bank holding company that has not elected to be treated as a FHC. The Company is
currently classified as a FHC.
Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), each federal banking agency has prescribed, by
regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls,
information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan
acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a
plan may subject the institution to regulatory sanctions.
Other Legislative Initiatives
The U.S. Congress and state legislative bodies continually consider proposals for altering the structure, regulation and competitive
relationships of financial institutions. It cannot be predicted whether, or in what form, any of these potential proposals or regulatory
initiatives will be adopted, the impact the proposals will have on the financial institutions industry or the extent to which the business
or financial condition and operations of the Company and its subsidiaries may be affected.
Statistical Disclosures
The statistical disclosures required by Part I Item 1 “Business” are located under Part II Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
29
Item 1A. Risk Factors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in Republic Bancorp, Inc.’s (“Republic” or the “Company”) common stock is subject to risks inherent in its business.
Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of
the other information included in this filing. In addition to the risks and uncertainties described below, other risks and uncertainties not
currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect its
business, financial condition and results of operations in the future. The value or market price of the Company’s common stock could
decline due to any of these identified or other risks, and an investor could lose all or part of their investment.
There are factors, many beyond the Company’s control, which may significantly change the results or expectations of the Company.
Some of these factors are described below, however many are described in the other sections of this Annual Report on Form 10-K.
ACCOUNTING POLICIES/ESTIMATES, ACCOUNTING STANDARDS AND INTERNAL CONTROL
The Company’s accounting policies and estimates are critical components of the Company’s presentation of its financial statements.
Management must exercise judgment in selecting and adopting various accounting policies and in applying estimates. Actual
outcomes may be materially different from amounts previously estimated. Management has identified several accounting policies and
estimates as being critical to the presentation of the Company’s financial statements. These policies are described in Part II Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section titled “Critical
Accounting Policies and Estimates.” The Company’s management must exercise judgment in selecting and applying many accounting
policies and methods in order to comply with generally accepted accounting principles and reflect management’s judgment of the
most appropriate manner to report the Company’s financial condition and results. In some cases, management may select an
accounting policy that might be reasonable under the circumstances, yet might result in the Company’s reporting different results than
would have been reported under a different alternative. Materially different amounts could be reported under different conditions or
using different assumptions or estimates.
The Bank may experience goodwill impairment, which could reduce its earnings. The Bank performed its annual goodwill impairment
test during the fourth quarter of 2016 as of September 30, 2016. The evaluation of the fair value of goodwill requires management
judgment. If management’s judgment was incorrect and goodwill impairment was later deemed to exist, the Bank would be required
to write down its goodwill resulting in a charge to earnings, which would adversely affect its results of operations, perhaps materially.
Changes in accounting standards could materially impact the Company’s financial statements. The Financial Accounting Standards
Board (“FASB”) may change the financial accounting and reporting standards that govern the preparation of the Company’s financial
statements. These changes can be difficult to predict and can materially impact how the Company records and reports its financial
condition and results of operations. In addition, those who interpret the accounting standards, such as the Securities and Exchange
Commission (“SEC”), the banking regulators and the Company’s independent registered public accounting firm may amend or reverse
their previous interpretations or conclusions regarding how various standards should be applied. In some cases, the Company could be
required to apply a new or revised standard retroactively, resulting in the Company recasting, or possibly restating, prior period
financial statements. See additional discussion regarding accounting standard updates in Part II Item 8 “Financial Statements and
Supplemental Data” under the section titled “Adoption of Issued but Not Yet Effective Accounting Pronouncements.”
If the Company does not maintain strong internal controls and procedures, it may impact profitability. Management reviews and
updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures on a routine basis.
This system is designed to provide reasonable, not absolute, assurances that the internal controls comply with appropriate regulatory
guidance. Any undetected circumvention of these controls could have a material adverse impact on the Company’s financial condition
and results of operations.
30
If the Bank’s other real estate owned (“OREO”) portfolio is not properly valued or sufficiently reserved to cover actual losses, or if
the Bank is required to increase its valuation reserves, the Bank’s earnings could be reduced. Management typically obtains updated
valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property is taken in as OREO
and at certain other times during the asset’s holding period. The Bank’s net book value of the loan at the time of foreclosure and
thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A writedown is
recorded for any excess in the asset’s net book value over its fair value. If the Bank’s valuation process is incorrect, or if property
values decline, the fair value of the Bank’s OREO may not be sufficient to recover its carrying value in such assets, resulting in the
need for additional writedowns. Significant additional writedowns to OREO could have a material adverse effect on the Bank’s
financial condition and results of operations.
TRADITIONAL BANK LENDING AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES (“ALLOWANCE”)
The Allowance could be insufficient to cover the Bank’s actual loan losses. The Bank makes various assumptions and judgments about
the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets
serving as collateral for the repayment of many of its loans. In determining the amount of the Allowance, among other things, the
Bank reviews its loss and delinquency experience, economic conditions, etc. If its assumptions are incorrect, the Allowance may not
be sufficient to cover losses inherent in its loan portfolio, resulting in additions to its Allowance. In addition, regulatory agencies
periodically review the Allowance and may require the Bank to increase its provision for loan and lease losses or recognize further
loan charge-offs. A material increase in the Allowance or loan charge-offs would have a material adverse effect on the Bank’s
financial condition and results of operations.
Deterioration in the quality of the Traditional Banking loan portfolio may result in additional charge-offs, which would adversely
impact the Bank’s operating results. Despite the various measures implemented by the Bank to address the economic environment,
there may be further deterioration in the Bank’s loan portfolio. When borrowers default on their loan obligations, it may result in lost
principal and interest income and increased operating expenses associated with the increased allocation of management time and
resources associated with the collection efforts. In certain situations where collection efforts are unsuccessful or acceptable “work-
out” arrangements cannot be reached or performed, the Bank may charge-off loans, either in part or in whole. Additional charge-offs
will adversely affect the Bank’s operating results and financial condition.
The Bank’s financial condition and earnings could be negatively impacted to the extent the Bank relies on borrower information that
is false, misleading or inaccurate. The Bank relies on the accuracy and completeness of information provided by vendors, clients and
other parties in deciding whether to extend credit, or enter into transactions with other parties. Additional charge-offs will adversely
affect the Bank’s operating results and financial condition.
The Bank’s use of appraisals as part of the decision process to make a loan on or secured by real property does not ensure the value
of the real property collateral. As part of the decision process to make a loan secured by real property, the Bank generally requires an
independent third-party appraisal of the real property. An appraisal, however, is only an estimate of the value of the property at the
time the appraisal is made. An error in fact or judgment could adversely affect the reliability of the appraisal. In addition, events
occurring after the initial appraisal may cause the value of the real estate to decrease. As a result of any of these factors, the value of
collateral securing a loan may be less than supposed, and if a default occurs, the Bank may not recover the outstanding balance of the
loan. Additional charge-offs will adversely affect the Bank’s operating results and financial condition.
The Bank is exposed to risk of environmental liabilities with respect to properties to which it takes title. In the course of its business,
the Bank may own or foreclose and take title to real estate and could be subject to environmental liabilities with respect to these
properties. The Bank may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation
and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or
clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation
activities could be substantial. In addition, if the Bank is the owner or former owner of a contaminated site, the Bank may be subject to
common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the
property. These costs and claims could adversely affect the Bank.
31
Prepayment of loans may negatively impact the Bank’s business. The Bank’s clients may prepay the principal amount of their
outstanding loans at any time. The speeds at which such prepayments occur, as well as the size of such prepayments, are within the
Bank clients’ discretion. If clients prepay the principal amount of their loans, and the Bank is unable to lend those funds to other
clients or invest the funds at the same or higher interest rates, the Bank’s interest income will be reduced. A significant reduction in
interest income would have a negative impact on the Bank’s results of operations and financial condition.
The Bank is highly dependent upon programs administered by the Federal Home Loan Mortgage Corporation (“Freddie Mac” or the
“FHLMC”) and the Federal National Mortgage Association (“FNMA” or “Fannie Mae”). Changes in existing U.S. government-
sponsored mortgage programs or servicing eligibility standards could materially and adversely affect its business, financial position,
results of operations and cash flows. The Bank’s ability to generate revenues through mortgage loan sales to institutional investors
depends to a significant degree on programs administered by Freddie Mac and Fannie Mae. These entities play powerful roles in the
residential mortgage industry, and the Bank has significant business relationships with them. The Bank’s status as an approved
seller/servicer for both is subject to compliance with their selling and servicing guides.
Any discontinuation of, or significant reduction or material change in, the operation of Freddie Mac or Fannie Mae or any significant
adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of Freddie Mac or Fannie Mae
would likely prevent the Bank from originating and selling most, if not all, of its mortgage loan originations.
Loans originated through the Bank’s Correspondent Lending channel subject the Bank to additional negative earnings sensitivity as
the result of prepayments and additional credit risks that the Bank does not have through its historical origination channels. Loans
acquired through the Bank’s Correspondent Lending channel are typically purchased at a premium and also represent out-of-market
loans originated by a non-Republic representative. Loans purchased at a premium inherently subject the Bank’s earnings to additional
sensitivity related to prepayments, as increases in prepayment speeds will negatively affect the overall yield to maturity on such loans,
potentially even causing the net loan yield to be negative for the period of time the loan is owned by the Bank.
Loans originated out of the Bank’s market footprint by non-Republic representatives will inherently carry additional credit risk from
potential fraud due to the increased level of third-party involvement on such loans. In addition, the Bank will also experience an
increase in complexity for customer service and the collection process, given the number of different state laws the Bank could be
subject to from loans purchased throughout the U.S. As of December 31, 2016, the Bank’s Correspondent Lending channel maintained
loans with collateral in 26 different states, with the largest concentration of 75% from the state of California.
Failure to appropriately manage the additional risks related to this lending channel could lead to reduced profitability and/or operating
losses through this origination channel.
Loans originated through the Bank’s Internet Lending channel will subject the Bank to credit and regulatory risks that the Bank does
not have through its historical origination channels. The dollar volume of loans originated through the Bank’s Internet Lending
channel is expected to be increasingly out-of-market. Loans originated out of the Bank’s market footprint inherently carry additional
credit risk, as the Bank will experience an increase in the complexity of the customer authentication requirements for such loans.
Failure to appropriately identify the end-borrower for such loans could lead to fraud losses. Failure to appropriately manage these
additional risks could lead to reduced profitability and/or operating losses through this origination channel. In addition, failure to
appropriately identify the end-borrower could result in regulatory sanctions resulting from failure to comply with various customer
identification regulations.
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BANK OWNED LIFE INSURANCE
The Bank holds a significant amount of bank owned life insurance which creates credit risk relative to the insurers and liquidity risk
relative to the product. At December 31, 2016, the Bank held bank-owned life insurance (“BOLI”) on certain employees. The
eventual repayment of the cash surrender value is subject to the ability of the various insurance companies to pay death benefits or to
return the cash surrender value to the Bank if needed for liquidity purposes. The Bank continually monitors the financial strength of
the various insurance companies that carry these policies. However, any one of these companies could experience a decline in
financial strength, which could impair its ability to pay benefits or return the Bank’s cash surrender value. If the Bank needs to
liquidate these policies for liquidity purposes, it would be subject to taxation on the increase in cash surrender value and penalties for
early termination, both of which would adversely impact earnings.
DEPOSITS AND RELATED ITEMS
Clients could pursue alternatives to bank deposits, causing the Bank to lose a relatively inexpensive source of funding. Checking and
savings account balances and other forms of client deposits could decrease if clients perceive alternative investments, such as the stock
market, as providing superior expected returns. If clients move money out of bank deposits in favor of alternative investments, the
Bank could lose a relatively inexpensive source of funds, increasing its funding costs and negatively impacting its overall results of
operations.
The loss of large deposit relationships could increase the Bank’s funding costs. The Bank has several large deposit relationships that
do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these
balances are moved from the Bank, the Bank would likely utilize overnight borrowing lines on a short-term basis to replace the
balances. The overall cost of gathering brokered deposits and/or FHLB advances, however, could be substantially higher than the
Traditional Bank deposits they replace, increasing the Bank’s funding costs and reducing the Bank’s overall results of operations.
The Bank’s “Overdraft Honor” program represents a significant business risk, and if the Bank terminated the program, it would
materially impact the earnings of the Bank. There can be no assurance that Congress, the Bank’s regulators, or others, will not
impose additional limitations on this program or prohibit the Bank from offering the program. The Bank’s “Overdraft Honor”
program permits eligible clients to overdraft their checking accounts up to a predetermined dollar amount for the Bank’s customary
overdraft fee(s). Limitations or adverse modifications to this program, either voluntary or involuntary, would significantly reduce net
income.
REPUBLIC PROCESSING GROUP (“RPG”)
The Company’s lines of business and products not typically associated with traditional banking expose earnings to additional risks and
uncertainties. The RPG segment is comprised of three distinct divisions: Tax Refund Solutions (“TRS”), Republic Payment Solutions
(“RPS”) and Republic Credit Solutions (“RCS”).
RPG’s products represent a significant business risk and management believes the Bank could be subject to additional regulatory and
public pressure to exit these product lines, which may have a material adverse effect on the Bank’s operations.
Various governmental, regulatory and consumer groups have, from time to time, questioned the fairness of the products offered by
RPG. Actions of these groups and others could result in regulatory, governmental, or legislative action or litigation against the Bank,
which could have a material adverse effect on the Bank’s operations. If the Bank can no longer offer its RPG products, it will have a
material adverse effect on its profits.
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The TRS division represents a significant operational risk, and if the Bank were unable to properly service this business, it could
materially impact earnings. In order to process its business, the Bank must implement and test new systems, as well as train new
employees. The Bank relies heavily on communications and information systems to operate the TRS division. Any failure, sustained
interruption or breach in security of these systems could result in failures or disruptions in client relationship management and other
systems. Significant operational problems could also cause a material portion of the Bank’s tax-preparer base to switch to a competitor
to process their bank product transactions, significantly reducing the Bank’s projected revenue without a corresponding decrease in
expenses.
The Bank’s Easy Advance (“EA”) and Refund Transfer (“RT”) products represent a significant third-party management risk, and if
RB&T’s third-party program managers fail to comply with all the statutory and regulatory requirements for these products or if
RB&T fails to provide proper monitoring of its third-party program managers offering these products, it could have a material
negative impact on earnings. RPG and its third-party partners operate in a highly regulated environment and deliver products and
services that are subject to strict legal and regulatory requirements. Failure by RB&T’s third-party program managers or failure of
RB&T to provide proper monitoring of is third party program managers with laws and regulations could result in fines and penalties
that materially and adversely affect RB&T’s earnings. Such penalties could also include the discontinuance of any and all third party
program manager products and services.
The Bank’s EA and RT products represent a significant compliance and regulatory risk, and if RB&T fails to comply with all statutory
and regulatory requirements, it could have a material negative impact on earnings. Federal and state laws and regulations govern
numerous matters relating to the offering of consumer loan products, such as the EA, and consumer deposit products such as the RT.
Failure to comply with disclosure requirements or with laws relating to the permissibility of interest rates and fees charged could have
a material negative impact on earnings. In addition, failure to comply with applicable laws and regulations could also expose RB&T
to civil money penalties and litigation risk, including shareholder actions.
EAs represent a significant credit risk, and if RB&T is unable to collect a significant portion of its EAs, it would materially, negatively
impact earnings. There is credit risk associated with an EA because the funds are disbursed to the customer prior to RB&T receiving
the customer’s refund as claimed on the return. Because there is no recourse to the customer if the EA is not paid off by the
customer’s tax refund, RB&T must collect all of its payments related to EAs through the refund process. Losses will generally occur
on EAs when RB&T does not receive payment due to a number of reasons, such as Internal Revenue Service (“IRS”) revenue
protection strategies, including audits of returns, errors in the tax return, tax return fraud and tax debts not previously disclosed to
RB&T during its underwriting process. While RB&T’s underwriting during the EA approval process takes these factors into
consideration based on prior years’ payment patterns, if the IRS significantly alters its revenue protection strategies or if refund
payment patterns for a given tax season meaningfully change, or RB&T is incorrect in its underwriting assumptions, RB&T could
experience higher loan loss provisions above those projected. The provision for loan losses is a significant component of the RPG
segment’s overall earnings.
Management offered the EA product during the first quarter 2017 tax season with different minimum and maximum amounts than its
first quarter 2016 offering. This change, along with additional due diligence measures implemented by the federal and state
governments, which will delay the timing of individual tax refund payments or possibly deny those individual payments outright, could
present an increased credit risk to the Company. TRS first offered its EA tax credit product during the first quarter of 2016, with
repayment of the EA to the Bank deducted from the taxpayer’s tax refund proceeds. For the first quarter 2016 tax season through
December 31, 2016, the Company recorded $5.2 million in interest income from EAs and experienced net EA charge-offs of $3.0
million. In contrast to the singular $750 EA amount offered during 2016, management lowered the minimum EA to amounts below
$750 and increased the maximum EA to amounts greater than $750 during the first quarter 2017 tax season.
Additionally, to protect against fraudulent tax returns, the federal government and many state governments have enacted laws and
procedures that provide for additional due diligence by the applicable governmental authority prior to issuing an income tax refund.
This additional due diligence is expected to drive a longer period of time between the filing of a tax return and the receipt of the
corresponding refund. The federal government, specifically as a result of the PATH Act, has announced that taxpayers filing tax
returns with certain characteristics will not receive their corresponding refunds before February 15, 2017. These funding delays will
negatively impact the Company’s ability to make mid-season modifications to its EA underwriting model based on then-current year
tax refund funding patterns, because the substantial majority of all EAs will have been issued prior to February 15, 2017. In addition,
these enhanced due diligence measures implemented by the federal and state governments could prevent the taxpayer’s refund from
being issued altogether. These governmental changes by themselves, or in combination with management’s changes to the EA
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offering amounts, could have a material negative impact on the performance of the EA product and therefore on the Company’s
financial condition and results of operations if the loss rate on the EA product increases materially.
Consumer loans originated through the RCS division of RPG represent a higher credit risk than Core Bank loans. RCS originates
both a short-term line-of-credit product and a credit card product. The Bank sells 90% of the balances maintained through these two
products within two days of loan origination and retains a 10% interest. Both of these products are unsecured and made to borrowers
with below prime credit scores, therefore representing an elevated credit risk. The ratio of net charge-offs to total average loans
during the years ended December 31, 2016 and 2015 for these two products were higher than Traditional Bank net charge-offs to
average Traditional Bank unsecured consumer loans for the same periods and more in line with loss rates on overdrawn deposit
accounts. A material increase in the RCS loan charge-offs would have a material adverse effect on the Bank’s financial condition and
results of operations.
WAREHOUSE LENDING (“WAREHOUSE”)
The Warehouse Lending business is subject to numerous risks that may result in losses. Risks associated with warehouse loans
include, without limitation, (i) credit risks relating to the mortgage bankers that borrow from the Bank, (ii) the risk of intentional
misrepresentation or fraud by any of such mortgage bankers and their third party service providers, (iii) changes in the market value of
mortgage loans originated by the mortgage banker during the time in warehouse, the sale of which is the expected source of repayment
of the borrowings under a warehouse line of credit, or (iv) unsalable or impaired mortgage loans so originated, which could lead to
decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker. Failure
to mitigate these risks could have a material adverse impact on the Bank’s financial statements and results of operations.
Outstanding Warehouse lines of credit can fluctuate significantly and negatively impact the Bank’s liquidity and earnings. The Bank
has a lending concentration in outstanding Warehouse lines of credit. Because outstanding Warehouse balances are contingent upon
residential mortgage lending activity, changes in the residential real estate market nationwide can lead to wide fluctuations of balances
in this product. Additionally, Warehouse Lending period-end balances are generally higher than the average balance during the period
due to increased mortgage activity that occurs at the end of a month. A sudden increase in loans may materially impact the Company’s
liquidity position, while a sudden decrease in loans may materially impact the Company’s results of operations.
Outstanding Warehouse lines of credit and their corresponding earnings could decline due to several factors, such as intense industry
competition, overall mortgage demand and the interest rate environment. The Bank may experience decreased earnings on its
Warehouse lines of credit due primarily to strong industry competition, overall mortgage demand and the interest rate
environment. Such decreased earnings may materially impact the Company’s results of operations.
The Company may lose Warehouse clients due to mergers and acquisitions in the industry. The Bank’s Warehouse clients are
primarily mortgage companies across the United States. Mergers and acquisitions affecting such clients may lead to an end to the
client relationship with the Bank. The loss of a significant amount of clients may materially impact the Company’s results of
operations.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
Fluctuations in interest rates could reduce profitability. The Bank’s asset/liability management strategy may not be able to prevent
changes in interest rates from having a material adverse effect on results of operations and financial condition. The Bank’s primary
source of income is from the difference between interest earned on loans and investments and the interest paid on deposits and
borrowings. The Bank expects to periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning
that either interest-bearing liabilities will be more sensitive to changes in market interest rates than interest-earning assets, or vice
versa. In either event, if market interest rates should move contrary to the Bank’s position, earnings may be negatively affected.
A continued low interest rate environment may reduce profitability. An on-going low interest rate environment will cause the Bank’s
interest-earning assets to continue to reprice into lower yielding assets without the ability for the Bank to offset the decline in interest
income through a reduction in its cost of funds. Continued contraction in the Bank’s net interest margin may cause net interest income
to decrease if growth in interest-earning assets cannot fully compensate for such contraction in net interest margin. The overall impact
of such contraction in net interest margin will depend on the period of time that the current interest rate environment remains and the
Bank’s interest-earning asset growth and asset mix over such time period.
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A flattening interest rate yield curve may reduce profitability. Changes in the slope of the “yield curve,” or the spread between short-
term and long-term interest rates, could reduce the Bank’s net interest margin. Normally, the yield curve is upward sloping, meaning
short-term rates are lower than long-term rates. Because the Bank’s liabilities tend to be shorter in duration than its assets, when the
yield curve flattens, as is the case in the current interest rate environment, or even inverts, the Bank’s net interest margin could
decrease as its cost of funds increases relative to the yield it can earn on its assets.
Mortgage Banking activities could be adversely impacted by increasing or stagnant long-term interest rates. The Company is unable
to predict changes in market interest rates. Changes in interest rates can impact the gain on sale of loans, loan origination fees and loan
servicing fees, which account for a significant portion of Mortgage Banking income. A decline in market interest rates generally
results in higher demand for mortgage products, while an increase in rates generally results in reduced demand. Generally, if demand
increases, Mortgage Banking income will be positively impacted by more gains on sale; however, the valuation of existing mortgage
servicing rights will decrease and may result in a significant impairment. A decline in demand for Mortgage Banking products
resulting from rising interest rates could also adversely impact other programs/products such as home equity lending, title insurance
commissions and service charges on deposit accounts.
The Bank may be compelled to offer market-leading interest rates to maintain sufficient funding and liquidity levels. The Bank has
traditionally relied on client deposits, brokered deposits and advances from the FHLB to fund operations. Such traditional sources may
be unavailable, limited or insufficient in the future. 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 curtailed, such as its borrowing line at the FHLB, or if the Bank cannot
obtain brokered deposits, the Bank may be compelled to offer market leading deposit interest rates to meet its funding and liquidity
needs. Obtaining funds at market-leading interest rates may have an adverse impact on the Company’s net interest income and overall
results of operations.
COMPANY COMMON STOCK
The Company’s common stock generally has a low average daily trading volume, which limits a stockholder’s ability to quickly
accumulate or quickly sell large numbers of shares of Republic’s stock without causing wide price fluctuations. Republic’s stock price
can fluctuate widely in response to a variety of factors, as detailed in the next risk factor. A low average daily stock trading volume
can lead to significant price swings even when a relatively small number of shares are being traded.
The market price for the Company’s common stock may be volatile. The market price of the Company’s common stock could fluctuate
substantially in the future in response to a number of factors, including those discussed below. The market price of the Company’s
common stock has in the past fluctuated significantly and is likely to continue to fluctuate significantly. Some of the factors that may
cause the price of the Company’s common stock to fluctuate include:
• Variations in the Company’s and its competitors’ operating results;
• Actual or anticipated quarterly or annual fluctuations in operating results, cash flows and financial condition;
• Changes in earnings estimates or publication of research reports and recommendations by financial analysts or actions
taken by rating agencies with respect to the Bank or other financial institutions;
• Announcements by the Company or its competitors of mergers, acquisitions and strategic partnerships;
• Additions or departure of key personnel;
• The announced exiting of or significant reductions in material lines of business within the Company;
• Changes or proposed changes in banking laws or regulations or enforcement of these laws and regulations;
• Events affecting other companies that the market deems comparable to the Company;
• Developments relating to regulatory examinations;
• Speculation in the press or investment community generally or relating to the Company’s reputation or the financial
services industry;
• Future issuances or re-sales of equity or equity-related securities, or the perception that they may occur;
• General conditions in the financial markets and real estate markets in particular, developments related to market
conditions for the financial services industry;
• Domestic and international economic factors unrelated to the Company’s performance;
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• Developments related to litigation or threatened litigation;
• The presence or absence of short selling of the Company’s common stock; and,
• Future sales of the Company’s common stock or debt securities.
In addition, the stock market, in general, has historically experienced extreme price and volume fluctuations. This is due, in part, to
investors’ shifting perceptions of the effect of changes and potential changes in the economy on various industry sectors. This
volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their
performance or prospects. These broad market fluctuations may adversely affect the market price of the Company’s common stock,
notwithstanding its actual or anticipated operating results, cash flows and financial condition. The Company expects that the market
price of its common stock will continue to fluctuate due to many factors, including prevailing interest rates, other economic
conditions, operating performance and investor perceptions of the outlook for the Company specifically and the banking industry in
general. There can be no assurance about the level of the market price of the Company’s common stock in the future or that you will
be able to resell your shares at times or at prices you find attractive.
The Company’s insiders hold voting rights that give them significant control over matters requiring stockholder approval. The
Company’s Chairman/CEO and President hold substantial voting authority over the Company’s Class A Common Stock and Class B
Common Stock. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to
ten votes. This group generally votes together on matters presented to stockholders for approval. These actions may include, for
example, the election of directors, the adoption of amendments to corporate documents, the approval of mergers and acquisitions,
sales of assets and the continuation of the Company as a registered company with obligations to file periodic reports and other filings
with the SEC. Consequently, other stockholders’ ability to influence Company actions through their vote may be limited and the non-
insider stockholders may not have sufficient voting power to approve a change in control even if a significant premium is being
offered for their shares. Majority stockholders may not vote their shares in accordance with minority stockholder interests.
An investment in the Company’s Common Stock is not an insured deposit. The Company’s common stock is not a bank deposit and,
therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment
in the Company’s common stock is inherently risky for the reasons described in this section and elsewhere in this report and is subject
to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common
stock, you could lose some or all of your investment.
GOVERNMENT REGULATION / ECONOMIC FACTORS
The Company is significantly impacted by the regulatory, fiscal and monetary policies of federal and state governments that could
negatively impact the Company’s liquidity position and earnings. These policies can materially affect the value of the Company’s
financial instruments and can also adversely affect the Company’s clients and their ability to repay their outstanding loans. In
addition, failure to comply with laws, regulations or policies, or adverse examination findings, could result in significant penalties,
negatively impact operations, or result in other sanctions against the Company. The Board of Governors of the Federal Reserve
System regulates the supply of money and credit in the U.S. Its policies determine, in large part, the Company’s cost of funds for
lending and investing and the return the Company earns on these loans and investments, all of which impact net interest margin.
The Company and the Bank are heavily regulated at both the federal and state levels and are subject to various routine and non-routine
examinations by federal and state regulators. This regulatory oversight is primarily intended to protect depositors, the Deposit
Insurance Fund and the banking system as a whole, not the stockholders of the Company. Changes in policies, regulations and
statutes, or the interpretation thereof, could significantly impact the product offerings of Republic causing the Company to terminate
or modify its product offerings in a manner that could materially adversely affect the earnings of the Company.
Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and bank
holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts
and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and
restrictions on dividend payments. Various federal and state regulatory agencies possess cease and desist powers, and other authority
to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulations. The Federal Reserve
(“FRB”) possesses similar powers with respect to bank holding companies. These, and other restrictions, can limit in varying degrees,
the manner in which Republic conducts its business.
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Government responses to economic conditions may adversely affect the Company’s operations, financial condition and earnings.
Enacted financial reform legislation has changed and will continue to change the bank regulatory framework. Ongoing uncertainty and
adverse developments in the financial services industry and the domestic and international credit markets, and the effect of new
legislation and regulatory actions in response to these conditions, may adversely affect Company operations by restricting business
activities, including the Company’s ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These
measures are likely to increase the Company’s costs of doing business and may have a significant adverse effect on the Company’s
lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of
the Company’s loan and investment securities portfolios, which also would negatively affect financial performance.
The Company may be subject to examinations by taxing authorities that could adversely affect results of operations. In the normal
course of business, the Company may be subject to examinations from federal and state taxing authorities regarding the amount of
taxes due in connection with investments it has made and the businesses in which the Company is engaged. Recently, federal and state
taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. The challenges
made by taxing authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of
income among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have an
adverse effect on the Company’s financial condition and results of operations.
The Company may be adversely affected by the soundness of other financial institutions. Financial services institutions are interrelated
as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and
counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks,
brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in
the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held
by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative
exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results
of operations.
A decrease to the corporate federal income tax rate may impair the Company’s deferred tax assets (“DTAs”). At December 31, 2016,
the Company’s DTAs were approximately $27 million. While a decline in the corporate tax rate may lower the Company’s tax
provision expense, it may also significantly impair the value of the Company’s DTAs in the year the rate decrease is enacted. Such
impairment could have a material adverse effect on the Company’s earnings in the year the rate decrease is enacted.
MANAGEMENT, INFORMATION SYSTEMS, ACQUISITIONS, ETC.
The Company is dependent upon the services of its management team and qualified personnel. The Company is dependent upon the
ability and experience of a number of its key management personnel who have substantial experience with Company operations, the
financial services industry and the markets in which the Company offers services. It is possible that the loss of the services of one or
more of its senior executives or key managers would have an adverse effect on operations; moreover, the Company depends on its
account executives and loan officers to attract bank clients by developing relationships with commercial and consumer clients,
mortgage companies, real estate agents, brokers and others. The Company believes that these relationships lead to repeat and referral
business. The market for skilled account executives and loan officers is highly competitive and historically has experienced a high rate
of turnover. In addition, if a manager leaves the Company, other members of the manager’s team may follow. Competition for
qualified account executives and loan officers may lead to increased hiring and retention costs. The Company’s success also depends
on its ability to continue to attract, manage and retain other qualified personnel as the Company grows.
The Company’s operations could be impacted if its third-party service providers experience difficulty. The Company depends on a
number of relationships with third-party service providers, including core systems processing and web hosting. These providers are
well-established vendors that provide these services to a significant number of financial institutions. If these third-party service
providers experience difficulty or terminate their services and the Company is unable to replace them with other providers, its
operations could be interrupted, which would adversely impact its business.
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The Company’s operations, including third-party and client interactions, are increasingly done via electronic means, and this has
increased the risks related to cyber security. The Company is exposed to the risk of cyber-attacks in the normal course of business. In
general, cyber incidents can result from deliberate attacks or unintentional events. Management has observed an increased level of
attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for
purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may
also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on
websites. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to
electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering
aimed at obtaining information necessary to gain access. While the Company has not incurred any material losses related to cyber-
attacks, the Bank may incur substantial costs and suffer other negative consequences if the Bank or one of the Bank’s third party
service providers fall victim to successful cyber-attacks. Such negative consequences could include: remediation costs for stolen assets
or information; system repairs; consumer protection costs; increased cyber security protection costs that may include organizational
changes; deploying additional personnel and protection technologies, training employees, and engaging third-party experts and
consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract clients following
an attack; litigation and payment of damages; and reputational damage adversely affecting client or investor confidence.
The Company’s information systems may experience an interruption that could adversely impact the Company’s business, financial
condition and results of operations. The Company relies heavily on communications and information systems to conduct its business.
Any failure or interruption of these systems could result in failures or disruptions in client relationship management, general ledger,
deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the impact of the failure
or interruption of information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do
occur, that they will be adequately addressed. The occurrences of any failures or interruptions of the Company’s information systems
could damage the Company’s reputation, result in a loss of client business, subject the Company to additional regulatory scrutiny, or
expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the
Company’s financial condition and results of operations.
New lines of business or new products and services may subject the Company to additional risks. From time to time, the Company
may develop and grow new lines of business or offer new products and services within existing lines of business. There are substantial
risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing
and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial
timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and
price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives
and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service.
Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the
Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new
lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations
and financial condition. All service offerings, including current offerings and those that may be provided in the future, may become
more risky due to changes in economic, competitive and market conditions beyond the Company’s control.
Negative public opinion could damage the Company’s reputation and adversely affect earnings. Reputational risk is the risk to
Company operations from negative public opinion. Negative public opinion can result from the actual or perceived manner in which
the Company conducts its business activities, including sales practices, practices used in origination and servicing operations, the
management of actual or potential conflicts of interest and ethical issues, and the Company’s protection of confidential client
information. Negative public opinion can adversely affect the Company’s ability to keep and attract clients and can expose the
Company to litigation.
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The Company’s ability to successfully complete acquisitions will affect its ability to grow its franchise and compete effectively in its
market footprint. The Company has announced plans to pursue a policy of growth through acquisitions in the near future to
supplement internal growth. The Company’s efforts to acquire other financial institutions and financial service companies or branches
may not be successful. Numerous potential acquirers exist for many acquisition candidates, creating intense competition, which affects
the purchase price for which the institution can be acquired. In many cases, the Company’s competitors have significantly greater
resources than the Company has, and greater flexibility to structure the consideration for the transaction. The Company may also not
be the successful bidder in acquisition opportunities that it pursues due to the willingness or ability of other potential acquirers to
propose a higher purchase price or more attractive terms and conditions than the Company is willing or able to propose. The Company
intends to continue to pursue acquisition opportunities in its market footprint. The risks presented by the acquisition of other financial
institutions could adversely affect the Bank’s financial condition and results of operations.
Successful Company acquisitions present many risks that could adversely affect the Company’s financial condition and results of
operations. An institution that the Company acquires may have unknown asset quality issues or unknown or contingent liabilities that
the Company did not discover or fully recognize in the due diligence process, thereby resulting in unanticipated losses. The
acquisition of other institutions also typically requires the integration of different corporate cultures, loan and deposit products, pricing
strategies, data processing systems and other technologies, accounting, internal audit and financial reporting systems, operating
systems and internal controls, marketing programs and personnel of the acquired institution, in order to make the transaction
economically advantageous. The integration process is complicated and time consuming and could divert the Company’s attention
from other business concerns and may be disruptive to its clients and the clients of the acquired institution. The Company’s failure to
successfully integrate an acquired institution could result in the loss of key clients and employees, and prevent the Company from
achieving expected synergies and cost savings. Acquisitions also result in professional fees and may result in creating goodwill that
could become impaired, thereby requiring the Company to recognize further charges. The Company may finance acquisitions with
borrowed funds, thereby increasing the Company’s leverage and reducing liquidity, or with potentially dilutive issuances of equity
securities.
REPUBLIC INSURANCE SERVICES, INC.
Transactions between the Company and its insurance subsidiary, Republic Insurance Services, Inc. (the “Captive”), may be subject
to certain IRS responsibilities and penalties. The Company’s Captive is a Nevada-based, wholly-owned insurance subsidiary of the
Company that provides property and casualty insurance coverage to the Company and the Bank as well as 10 other third-party
insurance captives for which insurance may not be available or economically feasible. The Treasury Department of the United States
and the IRS by way of Notice 2016-66 have stated that transactions believed similar in nature to transactions between the Company
and the Captive may be deemed “transactions of interest” because such transactions may have potential for tax avoidance or
evasion. If the IRS ultimately concludes such transactions do create tax avoidance or evasion issues, the Company could be subject to
the payment of penalties and interest.
Item 1B. Unresolved Staff Comments.
None
40
Item 2. Properties.
The Company’s executive offices, principal support and operational functions are located at 601 West Market Street in Louisville,
Kentucky. As of December 31, 2016, Republic had 32 banking centers located in Kentucky, six banking centers located in Florida,
three banking centers in Indiana, two in Tennessee and one banking center in Ohio. During the first quarter of 2017, Republic opened
a banking center in Lexington, Kentucky and a loan production office in Brentwood, Tennessee.
The location of Republic’s facilities, their respective approximate square footage and their form of occupancy are as follows:
Bank Offices
Kentucky Banking Centers:
Approximate
Square
Footage
Owned (O)/
Leased (L)
Louisville Metropolitan Area
2801 Bardstown Road, Louisville . . . . . . . . . . . . . . . . . . . . . . . .
601 West Market Street, Louisville . . . . . . . . . . . . . . . . . . . . . . .
661 South Hurstbourne Parkway, Louisville . . . . . . . . . . . . . . .
9600 Brownsboro Road, Louisville . . . . . . . . . . . . . . . . . . . . . . .
5250 Dixie Highway, Louisville . . . . . . . . . . . . . . . . . . . . . . . . .
10100 Brookridge Village Boulevard, Louisville . . . . . . . . . . .
9101 U.S. Highway 42, Prospect . . . . . . . . . . . . . . . . . . . . . . . . .
11330 Main Street, Middletown . . . . . . . . . . . . . . . . . . . . . . . . .
3902 Taylorsville Road, Louisville . . . . . . . . . . . . . . . . . . . . . . .
3811 Ruckriegel Parkway, Louisville . . . . . . . . . . . . . . . . . . . . .
5125 New Cut Road, Louisville . . . . . . . . . . . . . . . . . . . . . . . . .
4808 Outer Loop, Louisville . . . . . . . . . . . . . . . . . . . . . . . . . . . .
438 Highway 44 East, Shepherdsville . . . . . . . . . . . . . . . . . . . . .
1420 Poplar Level Road, Louisville . . . . . . . . . . . . . . . . . . . . . .
4921 Brownsboro Road, Louisville . . . . . . . . . . . . . . . . . . . . . . .
3950 Kresge Way, Suite 108, Louisville. . . . . . . . . . . . . . . . . . .
3726 Lexington Road, Louisville . . . . . . . . . . . . . . . . . . . . . . . .
2028 West Broadway, Suite 105, Louisville . . . . . . . . . . . . . . .
6401 Claymont Crossing, Crestwood . . . . . . . . . . . . . . . . . . . . .
Lexington
3098 Helmsdale Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3608 Walden Drive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2401 Harrodsburg Road . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
641 East Euclid Avenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
333 West Vine Street . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northern Kentucky
535 Madison Avenue, Covington . . . . . . . . . . . . . . . . . . . . . . . .
8513 U.S. Highway 42, Florence . . . . . . . . . . . . . . . . . . . . . . . . .
2051 Centennial Boulevard, Independence . . . . . . . . . . . . . . . .
Owensboro
3500 Frederica Street . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3332 Villa Point Drive, Suite 101 . . . . . . . . . . . . . . . . . . . . . . . .
(continued)
5,000 L(1)
57,000 L(1)
42,000 L(1)
15,000 L(1)
5,000 O/L(2)
5,000 O/L(2)
3,000 O/L(2)
6,000 O/L(2)
4,000 O/L(2)
4,000 O/L(2)
4,000 O/L(2)
4,000 O/L(2)
4,000 O/L(2)
3,000 O
3,000 L
1,000 L
4,000 L
2,000 L
4,000 L
5,000 O/L(2)
4,000 O/L(2)
6,000 O
3,000 O
4,000 L(3)
4,000 L
4,000 L
2,000 L
5,000 O
2,000 L
41
Bank Offices
(continued)
Approximate
Square
Footage
Owned (O)/
Leased (L)
Elizabethtown, 1690 Ring Road . . . . . . . . . . . . . . . . . . . . . . . .
4,000 L
Frankfort, 100 Highway 676 . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000 O/L(2)
Georgetown, 430 Connector Road . . . . . . . . . . . . . . . . . . . . . . .
5,000 O/L(2)
Shelbyville, 1614 Midland Trail . . . . . . . . . . . . . . . . . . . . . . . . .
6,000 L(2)
Florida Banking Centers:
9037 U.S. Highway 19, Port Richey . . . . . . . . . . . . . . . . . . . . . .
11502 North 56th Street, Temple Terrace . . . . . . . . . . . . . . . . . .
6300 4th Street N, St. Petersburg . . . . . . . . . . . . . . . . . . . . . . . . .
6600 Central Avenue, St. Petersburg . . . . . . . . . . . . . . . . . . . . .
7800 Seminole Blvd, Seminole . . . . . . . . . . . . . . . . . . . . . . . . . .
12933 Walsingham Road, Largo . . . . . . . . . . . . . . . . . . . . . . . . .
11,000 O
3,000 L
10,000 O
9,000 O
3,000 O
4,000 O
Southern Indiana Banking Centers:
4571 Duffy Road, Floyds Knobs . . . . . . . . . . . . . . . . . . . . . . . . .
3141 Highway 62, Jeffersonville . . . . . . . . . . . . . . . . . . . . . . . . .
3001 Charlestown Crossing Way, New Albany . . . . . . . . . . . . .
4,000 O/L(2)
4,000 O
2,000 L
Tennessee Banking Centers:
2034 Richard Jones Road, Nashville . . . . . . . . . . . . . . . . . . . . . .
113 Seaboard Lane, Franklin . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000 L
2,000 L
Tennessee Loan Production Office:
8 Cadillac Drive, Brentwood, TN . . . . . . . . . . . . . . . . . . . . . . . .
4,000 L(3)
Ohio Banking Center:
4030 Smith Road, Norwood . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000 L
Support and Operations:
200 South Seventh Street, Louisville, KY . . . . . . . . . . . . . . . . .
651 Perimeter Drive, Lexington, KY . . . . . . . . . . . . . . . . . . . . .
64,000 L(1)
5,000 L
Closed Banking Centers Currently Marketed for Sale:
9100 Hudson Avenue, Hudson, FL . . . . . . . . . . . . . . . . . . . . . . .
5800 38th Avenue North, St. Petersburg, FL . . . . . . . . . . . . . . .
3320 E. Bay Drive, Largo, FL . . . . . . . . . . . . . . . . . . . . . . . . . .
4,000 O
3,000 O
3,000 O
(1) Locations are leased from partnerships in which Steven E. Trager, Chairman and Chief Executive Officer and A. Scott Trager, President, are partners. See
additional discussion included under Part III Item 13 “Certain Relationships and Related Transactions, and Director Independence.” For additional discussion
regarding Republic’s lease obligations, see Part II Item 8 “Financial Statements and Supplementary Data” Footnote 21 “Transactions with Related Parties and
Their Affiliates.”
(2) The banking centers at these locations are owned by Republic; however, the banking center is located on land that is leased through long-term agreements with
third parties.
(3) Office lease commenced during the first quarter of 2017.
42
Item 3. Legal Proceedings.
In the ordinary course of operations, Republic Bancorp, Inc. (“Republic”) and Republic Bank & Trust Company (the “Bank”) are
defendants in various legal proceedings. There is no proceeding pending or threatened litigation, to the knowledge of management, in
which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or
the Bank.
Item 4. Mine Safety Disclosures.
Not applicable.
43
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market and Dividend Information
Republic Bancorp, Inc.’s (“Republic” or the “Company”) Class A Common Stock is traded on The NASDAQ Global Select Market®
(“NASDAQ”) under the symbol “RBCAA.” The following table sets forth the high and low market value of the Class A Common
Stock and the respective dividends declared during 2016 and 2015.
Quarter Ended
2016
Sales Price(1)
Dividends Declared
High
Low
Class A
Class B
March 31st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30th . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30th . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
Quarter Ended
March 31st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30th . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30th . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) — Sales price based on closing market price.
$
$
$
26.71
28.18
32.62
39.95
$
23.53
24.69
27.14
28.67
$
0.198
0.209
0.209
0.209
0.180
0.190
0.190
0.190
Sales Price(1)
Dividends Declared
High
Low
Class A
Class B
$
24.85
26.43
26.53
27.26
$
22.79
23.38
23.95
24.39
$
0.187
0.198
0.198
0.198
0.170
0.180
0.180
0.180
At February 10, 2017, the Company’s Class A Common Stock was held by 565 shareholders of record and the Class B Common
Stock was held by 111 shareholders of record. There is no established public trading market for the Company’s Class B Common
Stock. The Company intends to continue its historical practice of paying quarterly cash dividends; however, there is no assurance by
the Board of Directors that such dividends will continue to be paid in the future. The payment of dividends in the future is dependent
upon future income, financial position, capital requirements, the discretion and judgment of the Board of Directors and numerous
other considerations.
For additional discussion regarding regulatory restrictions on dividends, see Part II Item 8 “Financial Statements and Supplementary
Data” Footnote 14 “Stockholders’ Equity and Regulatory Capital Matters.”
Republic has made available to its employees participating in its 401(k) Plan the opportunity, at the employee’s sole discretion, to
invest funds held in their accounts under the plan in shares of Class A Common Stock of Republic. Shares are purchased by the
44
independent trustee administering the plan from time to time in the open market in the form of broker’s transactions. As of December
31, 2016, the trustee held 237,432 shares of Class A Common Stock and 2,648 shares of Class B Common Stock on behalf of the plan.
Details of Republic’s Class A Common Stock purchases during the fourth quarter of 2016 are included in the following table:
Total Number of Maximum Number
Shares Purchased of Shares that May
as Part of Publicly Yet Be Purchased
Period
Total Number of Average Price Announced Plans Under the Plan
Shares Purchased Paid Per Share
or Programs
or Programs
October 1 - October 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 - November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 1 - December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
2,075
2,075 $
—
—
35.98
35.98
—
—
2,075
2,075
250,325
During 2016, the Company repurchased 43,536 shares and there were no shares exchanged for stock option exercises. During 2011,
the Company’s Board of Directors amended its existing share repurchase program by approving the repurchase of 300,000 additional
shares from time to time, as market conditions are deemed attractive to the Company. The repurchase program will remain effective
until the total number of shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of
December 31, 2016, the Company had 250,325 shares which could be repurchased under its current share repurchase programs.
During 2016, there were approximately 239 shares of Class A Common Stock issued upon conversion of shares of Class B Common
Stock by stockholders of Republic in accordance with the share-for-share conversion provision option of the Class B Common Stock.
The exemption from registration of the newly issued Class A Common Stock relied upon was Section (3)(a)(9) of the Securities Act of
1933.
There were no equity securities of the registrant sold without registration during the quarter covered by this report.
45
STOCK PERFORMANCE GRAPH
The following stock performance graph does not constitute soliciting material and should not be deemed filed or incorporated by
reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent
the Company specifically incorporates the performance graph by reference therein.
The following stock performance graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) on
Republic’s Class A Common Stock as compared to the NASDAQ Bank Stocks Index and the Standard & Poor’s (“S&P”) 500 Index.
The graph covers the period beginning December 31, 2011 and ending December 31, 2016. The calculation of cumulative total return
assumes an initial investment of $100 in Republic’s Class A Common Stock, the NASDAQ Bank Index and the S&P 500 Index on
December 31, 2011. The stock price performance shown on the graph below is not necessarily indicative of future stock price
performance.
December 31, December 31, December 31, December 31, December 31, December 31,
2011
2012
2013
2014
2015
2016
Republic Class A
Common Stock (RBCAA) . . . . . . . . . . . . . . . $
NASDAQ Bank Index . . . . . . . . . . . . . . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00 $
100.00
100.00
99.70 $
118.69
115.98
119.13 $
168.67
152.93
123.72 $
176.73
177.11
136.27 $
194.45
178.36
210.19
264.97
198.08
46
Item 6. Selected Financial Data.
The following table sets forth Republic Bancorp Inc.’s selected financial data from 2012 through 2016. This information should be read in conjunction with Part II Item
7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II Item 8 “Financial Statements and Supplementary Data.”
Certain amounts presented in prior periods have been reclassified to conform to the current period presentation.
(in thousands)
Balance Sheet Data:
As of and for the Years Ended December 31,
2016
2015
2014
2013
2012
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase and other short-term
borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
289,309
534,139
15,170
3,810,778
(32,920)
16,300
61,794
4,816,309
971,937
2,188,755
3,160,692
173,473
802,500
41,240
4,211,903
604,406
Average Balance Sheet Data:
Federal funds sold and other interest-earning deposits . . . . . . . . . . . $
Investment securities, including FHLB stock . . . . . . . . . . . . . . . . .
Gross loans, including loans held for sale . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
130,889
572,599
3,568,383
(29,880)
4,485,829
894,049
2,058,592
2,964,981
597,463
Income Statement Data - Total Company:
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
173,992
17,938
156,054
14,493
57,509
130,107
68,963
23,060
45,903
Income Statement Data - Core Bank(1):
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156,252
17,831
138,421
3,945
33,350
116,190
51,636
16,777
34,859
(continued)
47
$
$
$
$
210,082
555,785
4,597
3,326,610
(27,491)
10,168
52,817
4,230,289
634,863
1,852,614
2,487,477
395,433
699,500
41,240
3,653,742
576,547
68,847
546,655
3,174,234
(25,570)
3,982,840
651,275
1,714,214
2,734,561
574,766
142,432
18,462
123,970
5,396
47,994
113,324
53,244
18,078
35,166
139,155
18,424
120,731
3,065
28,441
101,184
44,923
15,066
29,857
$
$
$
$
72,878
481,348
6,388
3,040,495
(24,410)
10,168
51,415
3,747,013
502,569
1,555,613
2,058,182
356,108
707,500
41,240
3,188,282
558,731
118,803
525,748
2,738,304
(23,067)
3,559,617
553,929
1,510,201
2,432,153
557,378
132,377
19,604
112,773
2,859
42,519
108,118
44,315
15,528
28,787
132,014
19,571
112,443
3,392
24,607
96,451
37,207
12,875
24,332
$
$
$
$
170,863
483,537
3,506
2,589,792
(23,026)
10,168
25,086
3,371,904
488,642
1,502,215
1,990,857
165,555
605,000
41,240
2,829,111
542,793
145,970
527,681
2,575,146
(23,287)
3,385,345
513,891
1,514,847
2,305,106
546,880
134,568
21,393
113,175
2,983
46,230
115,924
40,498
15,075
25,423
134,419
21,392
113,027
3,828
31,471
99,743
40,927
14,112
26,815
$
$
$
$
137,691
484,256
10,614
2,650,197
(23,729)
10,168
—
3,394,399
479,046
1,503,882
1,982,928
250,884
542,600
41,240
2,857,697
536,702
187,790
640,830
2,504,150
(25,226)
3,560,739
624,053
1,512,455
2,351,768
530,096
183,459
22,804
160,655
15,043
163,465
125,132
183,945
64,606
119,339
137,886
22,655
115,231
8,167
85,157
102,825
89,396
30,943
58,453
Item 6. Selected Financial Data. (continued)
(in thousands, except per share data, FTEs and # of banking centers)
2016
2015
2014
2013
2012
As of and for the Years Ended December 31,
Per Share Data:
Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . .
End of period shares outstanding:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,942
20,954
18,615
2,245
2.22
2.02
2.22
2.01
Cash dividends declared per share:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.825
0.750
Market value per share at December 31, . . . . . . . . . . . . . . . . . . . . $
Book value per share at December 31,(2) . . . . . . . . . . . . . . . . . . .
Tangible book value per share at December 31,(2) . . . . . . . . . . . .
39.54
28.97
27.89
$
$
$
$
20,861
20,942
18,652
2,245
1.70
1.55
1.70
1.54
0.781
0.710
26.41
27.59
26.87
$
$
$
$
20,804
20,899
18,603
2,245
1.39
1.32
1.38
1.32
0.737
0.670
24.72
26.80
26.08
$
$
$
$
20,807
20,904
18,541
2,260
1.23
1.17
1.22
1.16
0.693
0.630
24.54
26.09
25.35
$
$
$
$
20,959
21,028
18,694
2,271
5.71
5.55
5.69
5.53
1.749
1.590
21.13
25.60
24.86
Performance Ratios:
Return on average assets (ROA) . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity (ROE) . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Yield on average interest-earning assets . . . . . . . . . . . . . . . . . . . .
Cost of average interest-bearing liabilities . . . . . . . . . . . . . . . . . . .
Cost of average deposits(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin - Total Company . . . . . . . . . . . . . . . . . . . . . .
Net interest margin - Core Bank(1) . . . . . . . . . . . . . . . . . . . . . . . .
Capital Ratios - Total Company:
Average stockholders’ equity to average total assets . . . . . . . . . . .
Total risk based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information:
1.02 %
7.68
61
4.07
0.60
0.21
3.47
3.65
3.30
13.32 %
16.37
14.59
15.55
13.54
37
2.09
0.88 %
6.12
66
3.76
0.68
0.19
3.08
3.27
3.24
14.43 %
20.58
18.39
19.69
14.82
46
2.96
0.81 %
5.16
70
3.91
0.81
0.19
3.10
3.33
3.35
15.66 %
22.17
NA
21.28
15.92
53
2.98
0.75 %
4.65
73
4.14
0.93
0.20
3.21
3.48
3.50
16.15 %
26.71
NA
25.67
16.81
56
2.82
3.35 %
22.51
39
5.50
0.97
0.24
4.53
4.82
3.63
14.89 %
25.28
NA
24.31
16.36
31
8.28
Period FTEs(5) - Total Company . . . . . . . . . . . . . . . . . . . . . . . . .
Period FTEs(5) - Core Bank(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of banking centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
938
869
44
785
726
40
723
672
41
736
675
45
797
729
44
(continued)
48
Item 6. Selected Financial Data. (continued)
(dollars in thousands)
2016
2015
2014
2013
2012
As of and for the Years Ended December 31,
Credit Quality Data and Ratios:
Loans on nonaccrual status . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans past due 90-days-or-more and still on accrual . . . . . .
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . $
Total delinquent loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
15,892
167
16,059
1,391
17,450
8,958
$
$
$
21,712
224
21,936
1,220
23,156
11,731
$
$
$
23,337
322
23,659
11,243
34,902
15,851
$
$
$
19,104
1,974
21,078
17,102
38,180
16,223
$
$
$
18,506
3,173
21,679
26,203
47,882
20,844
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans (including OREO) . . . .
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses to total loans . . . . . . . .
Allowance for loan and lease losses to nonperforming loans
Delinquent loans to total loans(6) . . . . . . . . . . . . . . . . . . . .
Net loan charge-offs to average loans . . . . . . . . . . . . . . . . .
Credit Quality Ratios - Core Bank(1):
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans (including OREO) . . . .
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses to total loans . . . . . . . .
Allowance for loan and lease losses to nonperforming loans
Delinquent loans to total loans(6) . . . . . . . . . . . . . . . . . . . .
Net charge-offs to average loans . . . . . . . . . . . . . . . . . . . . .
0.42 %
0.46
0.36
0.86
205
0.24
0.25
0.42 %
0.46
0.36
0.74
175
0.18
0.05
0.66 %
0.70
0.55
0.83
125
0.35
0.07
0.66 %
0.70
0.55
0.78
118
0.35
0.05
0.78 %
1.14
0.93
0.80
103
0.52
0.05
0.78 %
1.15
0.93
0.80
103
0.52
0.08
0.81 %
1.46
1.13
0.89
109
0.63
0.14
0.81 %
1.46
1.13
0.89
109
0.63
0.18
0.82 %
1.79
1.41
0.90
109
0.79
0.61
0.82 %
1.79
1.41
0.90
109
0.79
0.34
(1) “Core Bank” or “Core Banking” operations consist of the Traditional Banking, Warehouse Lending and Mortgage Banking segments.
See Footnote 24 “Segment Information” under Part II Item 8 “Financial Statements and Supplemental Data” for additional information regarding the segments
that constitute the Company’s Core Banking operations.
(2) The following table provides a reconciliation of total stockholders’ equity in accordance with U.S. generally accepted accounting principles (“GAAP”) to
tangible stockholders’ equity in accordance with applicable regulatory requirements, a non-GAAP measure. The Company provides the tangible book value ratio,
a non-GAAP measure, in addition to those defined by banking regulators, because of its widespread use by investors as a means to evaluate capital adequacy.
December 31, (dollars in thousands, except per share data)
Total stockholders’ equity (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tangible stockholders’ equity (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2016
604,406
16,300
5,180
1,070
581,856
Total assets (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,816,309
16,300
Less: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,180
Less: Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,070
Tangible assets (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,793,759
2015
576,547
10,168
4,912
—
561,467
$
$
$ 4,230,289
10,168
4,912
—
$ 4,215,209
2014
558,731
10,168
4,813
—
543,750
$
$
$ 3,747,013
10,168
4,813
—
$ 3,732,032
2013
542,793
10,168
5,409
—
527,216
$
$
$ 3,371,904
10,168
5,409
—
$ 3,356,327
2012
536,702
10,168
4,777
510
521,247
$
$
$ 3,394,399
10,168
4,777
510
$ 3,378,944
Total stockholders' equity to total assets (a/b) . . . . . . . . . . . . . . . . . . . . . .
Tangible stockholders’ equity to tangible assets (c/d) . . . . . . . . . . . . . . . .
12.55 %
12.14 %
13.63 %
13.32 %
14.91 %
14.57 %
16.10 %
15.71 %
15.81 %
15.43 %
Number of shares outstanding (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,860
20,897
20,848
20,801
20,965
Book value per share (a/e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tangible book value per share (c/e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.97
27.89
$
27.59
26.87
$
26.80
26.08
$
26.09
25.35
$
25.60
24.86
49
Item 6. Selected Financial Data. (continued)
(3) The efficiency ratio, a non-GAAP measure, equals total noninterest expense divided by the sum of net interest income and noninterest income. The ratio excludes
net gain (loss) on sales, calls and impairment of investment securities, if applicable.
(4) The cost of deposits ratio equals total interest expense on deposits divided by total average interest-bearing deposits plus total average noninterest-bearing
deposits.
(5) FTEs – Full-time-equivalent employees.
(6) The delinquent loans to total loans ratio equals loans 30-days-or-more past due loans divided by total loans. Depending on loan class, loan delinquency is
determined by the number of days or the number of payments past due.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic Bancorp, Inc. (“Republic” or
the “Company”) analyzes the major elements of Republic’s consolidated balance sheets and statements of income. Republic, a
financial holding company headquartered in Louisville, Kentucky, is the parent company of Republic Bank & Trust Company
(“RB&T” or the “Bank”) and Republic Insurance Services, Inc. (the “Captive”). The Bank is a Kentucky-based, state chartered non-
member financial institution that provides traditional banking products to clients primarily in its market footprint through its network
of banking centers and to clients outside of its market footprint primarily through its Digital and Correspondent Lending delivery
channels.
The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company that provides property and casualty insurance
coverage to the Company and the Bank as well as 10 other third-party insurance captives for which insurance may not be available or
economically feasible.
Republic Bancorp Capital Trust (“RBCT”) is a Delaware statutory business trust that is a 100%-owned unconsolidated finance
subsidiary of Republic.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction
with Part II Item 8 “Financial Statements and Supplementary Data.”
As used in this filing, the terms “Republic,” the “Company,” “we,” “our” and “us” refer to Republic Bancorp, Inc., and, where the
context requires, Republic Bancorp, Inc. and its subsidiaries; and the term the “Bank” refers to the Company’s subsidiary bank,
RB&T.
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 may not update them to reflect changes that occur subsequent to the date the statements are made.
Broadly speaking, forward-looking statements include:
•
•
•
•
projections of revenue, income, expenses, losses, earnings per share, capital expenditures, dividends, capital structure or other
financial items;
descriptions of plans or objectives for future operations, products or services;
forecasts of future economic performance; and
descriptions of assumptions underlying or relating to any of the foregoing.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results,
performance or achievements to be materially different from future results, performance or achievements expressed or implied by the
forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and
uncertainties, including, but not limited to the following:
50
changes in political and economic conditions;
the magnitude and frequency of changes to the Federal Funds Target Rate (“FFTR”) implemented by the Federal Open
Market Committee (“FOMC”) of the Federal Reserve Bank (“FRB”);
long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;
competitive product and pricing pressures in each of the Company’s business segments;
equity and fixed income market fluctuations;
client bankruptcies and loan defaults;
inflation;
recession;
future acquisitions;
integrations of acquired businesses;
changes in technology;
changes in applicable laws and regulations or the interpretation and enforcement thereof;
changes in fiscal, monetary, regulatory and tax policies;
changes in accounting standards;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• monetary fluctuations;
•
•
•
changes to the Company’s overall internal control environment;
success in gaining regulatory approvals when required;
information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party
service providers;
as well as other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange
Commission (“SEC”), including Part 1 Item 1A “Risk Factors.”
•
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S. generally
accepted accounting principles (“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.
Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial
statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory
guidance, and information obtained from independent third party professionals. Actual results may differ from those estimates made
by management.
Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial
condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting
policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or
not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates
have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other
information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and
whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy
and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.
Republic believes its critical accounting policies and estimates relate to the following:
• Allowance for Loan and Lease Losses (“Allowance”) and Provisions for Loan and Lease losses (“Provision”)
• Accounting for Business Acquisitions
• Goodwill and Other Intangible Assets
• Mortgage Servicing Rights (“MSRs”)
•
•
Income Tax Accounting
Investment Securities
51
• Other Real Estate Owned (“OREO”)
• Correspondent Loan Premiums
Allowance for Loan and Leases Losses and Provision for Loan and Lease Losses — The Bank maintains an allowance for
probable incurred credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management
evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the
Board of Directors on a quarterly basis.
The Allowance consists of both specific and general components. The specific component relates to loans that are individually
classified as impaired. The general component relates to pooled loans collectively evaluated on historical loss experience adjusted for
qualitative factors.
Specific Component – Loans Individually Classified as Impaired
The Bank defines impaired loans as follows:
• All loans internally rated as “Substandard,” “Doubtful” or “Loss”;
• All loans on nonaccrual status;
• All Troubled Debt Restructurings (“TDRs”);
• All loans internally rated in a purchased credit impaired (“PCI”) category with cash flows that have deteriorated from
management’s initial acquisition day estimate; and
• Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the
definition of impaired.
Generally, loans are designated as “Classified” or “Special Mention” to ensure more frequent monitoring. These loans are reviewed to
ensure proper accrual status and management strategy. If it is determined that there is serious doubt as to performance in accordance
with original or modified contractual terms, then the loan is generally downgraded and may be charged down to its estimated value
and placed on nonaccrual status.
Under GAAP, the Bank uses the following methods to measure specific loan impairment, including:
• Cash Flow Method — The recorded investment in the loan is measured against the present value of expected future cash
flows discounted at the loan’s effective interest rate. The Bank employs this method for a significant portion of its TDRs.
Impairment amounts under this method are reflected in the Bank’s Allowance as specific reserves on the respective impaired
loan. These specific reserves are adjusted quarterly based upon reevaluation of the expected future cash flows and changes in
the recorded investment.
• Collateral Method — The recorded investment in the loan is measured against the fair value of the collateral less applicable
selling costs. The Bank employs the fair value of collateral method for its impaired loans when repayment is based solely on
the sale or operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate
valuation on file. Measured impairment under this method is generally charged off unless the loan is a smaller-balance,
homogeneous loan. The Bank’s selling costs for its collateral-dependent loans typically range from 10-13% of the fair value
of the underlying collateral, depending on the asset class. Selling costs are not applicable for collateral-dependent loans
whose repayment is based solely on the operations of the underlying collateral.
In addition to obtaining appraisals at the time of origination, the Bank typically updates appraisals and/or broker price opinions
(“BPOs”) for loans with potential impairment. Updated valuations for commercial-related credits exhibiting an increased risk of loss
are typically obtained within one year of the previous valuation. Collateral values for delinquent residential mortgage loans and home
equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When measuring
impairment, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons,
the Bank discounts such stale valuations primarily based on age of valuation and market conditions of the underlying collateral.
52
General Component – Pooled Loans Collectively Evaluated
The general component of the Allowance covers loans collectively evaluated for impairment by loan class and is based on historical
loss experience, with potential adjustments for current relevant qualitative factors. Historical loss experience is determined by loan
performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller-balance, homogeneous
loans are typically included in the general component but may be individually evaluated if classified as a TDRs, on nonaccrual, or a
case where the full collection of the total amount due for a such loan is improbable or otherwise meets the definition of impaired.
In determining the historical loss rates for each respective loan class, management evaluates the following historical loss rate
scenarios:
• Rolling four quarter average
• Rolling eight quarter average
• Rolling twelve quarter average
• Rolling sixteen quarter average
• Rolling twenty quarter average
• Rolling twenty-four quarter average
• Rolling twenty-eight quarter average
• Rolling thirty-two quarter average
• Current year to date historical loss factor average
In order to take account of periods of economic growth and economic downturn, management generally uses the highest of the
evaluated averages above for each loan class when determining its historical loss factors.
Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation
for each class. Management assigns risk multiples to certain classes to account for qualitative factors such as:
• Changes in nature, volume and seasoning of the portfolio;
• Changes in experience, ability and depth of lending management and other relevant staff;
• Changes in the quality of the Bank’s credit review system;
• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and
recovery practices not considered elsewhere in estimating credit losses;
• Changes in the volume and severity of past due, nonperforming and classified loans;
• Changes in the value of underlying collateral for collateral-dependent loans;
• Changes in international, national, regional, and local economic and business conditions and developments that affect the
collectability of portfolios, including the condition of various market segments;
• The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
• The effect of other external factors, such as competition and legal and regulatory requirements on the level of estimated credit
losses in the Bank’s existing portfolio.
As this analysis, or any similar analysis, is an imprecise measure of loss, the Allowance is subject to ongoing adjustments. Therefore,
management will often take into account other significant factors that may be necessary or prudent in order to reflect probable
incurred losses in the total loan portfolio.
53
Management’s Evaluation of the Allowance
Management evaluates the Allowance for its more traditional Core Banking operations differently than its non-traditional Republic
Processing Group (“RPG”) segment.
For Core Banking operations, management performs two calculations at year-end in order to confirm the reasonableness of its
Allowance. In the first calculation, management compares the beginning Allowance to the net charge-offs for the most recent calendar
year. The ratio of net charge-offs to the beginning-of-year Allowance indicates how adequately the beginning-of-year Allowance
accommodated subsequent charge-offs. Higher ratios suggest the beginning-of-year Allowance may not have been large enough to
absorb impending charge-offs, while inordinately low ratios might indicate the accumulation of excessive allowances. The Core
Bank’s net charge-off ratio to the beginning-of-year Allowance was 7% at both December 31, 2016 and 2015. The Core Bank’s five-
year annual average for this ratio was 15% as of December 31, 2016. Management believes the Core Bank’s net charge-off ratio to
beginning Allowance was within a reasonable range at December 31, 2016 and 2015.
For the second calculation, management assesses the Core Bank’s Allowance exhaustion rate. Exhaustion rates indicate the time
(expressed in years) taken to use the beginning-of-year Allowance in the form of actual charge-offs. Management believes an
exhaustion rate that indicates a reasonable Allowance is in a range of four to eight years. The Core Bank’s Allowance exhaustion rates
at December 31, 2016 and 2015 were 7.6 years and 5.6 years compared to the five-year annual average of 4.7 years as of December
31, 2016. Management believes the Core Bank’s Allowance exhaustion rates were within a reasonable range at December 31, 2016
and 2015.
Based on management’s calculation, a Core Bank Allowance of $28 million, or 0.74% of total loans and leases, was an adequate
estimate of probable incurred losses within the loan portfolio as of December 31, 2016 compared to $26 million, or 0.78%, at
December 31, 2015. This estimate resulted in Core Banking Provision of $3.9 million during 2016 compared to $3.1 million in 2015.
If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its
determination, an adjustment to the Core Bank Allowance and the resulting effect on the income statement could be material.
The RPG Allowance at December 31, 2016 and 2015 primarily related to loans originated and held for investment through the
Republic Credit Solutions (“RCS”) division. RCS generally originates small-dollar, short-term credit products. In some instances, the
Bank originates these products, sells 90% of the balances within two days of loan origination, and retains a 10% interest.
One short-term line-of-credit product represented the substantial majority of the RCS held-for-investment loan portfolio at December
31, 2016. For this product, management conducts an analysis of historical losses and delinquencies by month of loan origination
when determining the Allowance. For RCS’s other products, the Allowance is estimated using a method similar to Core Bank loans,
as described above. Due to their non-traditional, small-dollar and short-term nature, RCS loans generally experience higher loss rates
than Core Bank consumer products. Based on management’s calculation, an Allowance of $4.9 million, or 13%, of total RPG loans
was an adequate estimate of probable incurred losses within the RPG portfolio as of December 31, 2016 compared to an Allowance of
$1.7 million, or 24%, at December 31, 2015.
RPG’s Tax Refund Solutions (“TRS”) division first offered its Easy Advance (“EA”) tax-credit product during the first two months of
2016 and again during the first quarter of 2017. An Allowance for losses on EAs is estimated during the limited, short-term period the
product is offered, which was through February 29, 2016 for the first quarter 2016 tax season. During 2016, EAs were generally
repaid within three weeks of origination. Provisions for loan losses on EAs were estimated when advances were made, with all
provisions made in the first quarter of 2016. No Allowance for EAs existed as of December 31, 2016, as all EAs had been paid off or
had been charged-off within 81 days of origination. The majority of EA charge-offs were recorded during the second quarter of 2016.
Related to the overall credit losses on EAs, the Bank’s ability to control those losses is highly dependent upon its ability to predict the
taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is
based on the prior-year’s tax refund funding patterns with on-going changes made in-season, if possible, to adjust for any new current-
year tax refund funding patterns recognized by the Bank. Because much of the loan volume occurs each year before that year’s tax
54
refund funding patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be
higher than management’s predictions if tax refund funding patterns change materially between years.
See additional discussion regarding the EA product under the sections titled:
• Part I Item 1A “Risk Factors”
• Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 5 “Loans and Allowance for Loan and Lease
Losses”
RPG recorded a net charge of $10.5 million and $2.3 million to the Provision during 2016 and 2015, with the 2016 Provision
primarily due to net losses on EAs and growth in short-term, consumer loans originated through the RCS division. If the amount of
future charge-offs on EAs and RCS loans differ significantly from assumptions used by management in making its determination, an
adjustment to the RPG Allowance and the resulting effect on the income statement could be material.
Accounting for Business Acquisitions — The Bank accounts for its business acquisitions in accordance with the acquisition method
as outlined in Account Standards Codification (“ASC”) Topic 805, Business Combinations. The acquisition method requires: a)
identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and
measurement of the identifiable assets acquired and liabilities assumed, and any noncontrolling interest in the acquiree; and d)
recognition and measurement of goodwill or bargain purchase gain.
Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their
acquisition date (“day-one”) fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The
measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it
has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the
determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market
conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are
retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically,
these recast adjustments for loans and other real estate owned may be made, as market value data, such as valuations, are received by
the Bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase
gain or goodwill.
Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the
acquisition.
Loans purchased in a business acquisition are accounted for using one of the following accounting standards:
• ASC Topic 310-20, Non Refundable Fees and Other Costs, is used to value loans that have not demonstrated post
origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the
borrower. For these loans, the difference between the loan’s day-one fair value and amortized cost would be amortized or
accreted into income using the interest method.
• ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, is used to value PCI loans.
For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the
borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan, or fair value,
represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash
flow periods of the loans. Additionally, the difference between contractual cash flows and expected cash flows of PCI
loans is referred to as the “non-accretable discount.”
Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming
nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are
considered in the determination of the Allowance once day-one fair values are final.
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Management utilized the following criteria in determining which loans were classified as PCI loans for its May 17, 2016 Cornerstone
acquisition:
• Loans for which the Bank assigned a non-accretable discount
• Loans classified as nonaccrual when acquired
• Loans past due 90+ days when acquired
See additional detail regarding the Company’s acquisition of Cornerstone Bancorp, Inc. under Footnote 2 “Acquisition of
Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”
In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the
remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net
present value of cash flows expected to be received. The Bank typically accounts for PCI loans individually, as opposed to
aggregating the loans into pools based on common risk characteristics such as loan type.
Management separately monitors the PCI portfolio and on a quarterly basis reviews the loans contained within this portfolio against
the factors and assumptions used in determining the day-one fair values. In addition to its quarterly evaluation, a loan is typically
reviewed when it is modified or extended, or when material information becomes available to the Bank that provides additional insight
regarding the loan’s performance, estimated life, the status of the borrower, or the quality or value of the underlying collateral.
To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-
accretable yield established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired -
Group 1 (“PCI-1”) category, whose credit risk is considered by management equivalent to a non-PCI Special Mention loan within the
Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the
future estimated cash flows of the loan have deteriorated from management’s initial acquisition day estimate. Provisions are made for
impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any
improvement in the expected performance of a PCI-1 loan would result in a reversal of the Provision to the extent of prior charges and
then an adjustment to accretable yield, which would have a positive impact on interest income.
If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss
of contractual principal beyond the non-accretable discount established as part of its initial day-one evaluation, such loan would be
classified PCI-Substandard (“PCI-Sub”) within the Bank’s credit risk matrix. Management deems the risk of default and overall credit
risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI Substandard loan. PCI-Sub loans are
considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the
Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest
income.
PCI loans are placed on nonaccrual if management cannot reasonably estimate future cash flows on such loans.
If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting
standards and transferred out of the PCI population. The loan may require an additional Provision if its restructured cash flows are less
than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are
generally not considered TDRs and remain in the PCI population.
Goodwill and Other Intangible Assets — Goodwill resulting from business acquisitions prior to January 1, 2009 represents the
excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business acquisitions
after January 1, 2009 represents the future economic benefits arising from other assets acquired that are individually identified and
separately recognized. Goodwill and intangible assets acquired in a business acquisition and determined to have an indefinite useful
life are not amortized, but tested for impairment at least annually.
The Company has selected September 30th as the date to perform its annual goodwill impairment test. Intangible assets with definite
useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with
an indefinite life on the Bank’s balance sheet.
All goodwill is attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes.
Based on its assessment, the Company believes its goodwill of $16 million and $10 million at December 31, 2016 and 2015 was not
56
impaired and is properly recorded in the consolidated financial. Related to the Company’s May 17, 2016 acquisition of Cornerstone
Bancorp, Inc., the Company recorded $6 million of goodwill.
Other intangible assets consist of core deposit intangible (“CDI”) assets arising from business acquisitions. CDI assets are initially
measured at fair value and then amortized on an accelerated method over their estimated useful lives.
Related to the Company’s May 17, 2016 acquisition of Cornerstone Bancorp, Inc., the Company maintained $1 million of CDI assets
as of December 31, 2016, with no similar intangible assets recorded as of December 31, 2015. The Cornerstone related CDI is
scheduled to amortize through 2022.
See additional detail regarding the Company’s acquisition of Cornerstone Bancorp, Inc. under Footnote 2 “Acquisition of
Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”
Mortgage Servicing Rights — Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are
sold with servicing retained, servicing rights are initially recorded at fair value, with the income statement effect recorded as a
component of net servicing income within Mortgage Banking income. Fair value is based on market prices for comparable mortgage
servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future
net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires
servicing rights to be amortized into Mortgage Banking income in proportion to, and over the period of, the estimated future net
servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a
quarterly basis based on the weighted average remaining life of the underlying loans.
MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is
determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms
and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is
less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular
grouping, a reduction of the valuation allowance is recorded as an increase to income. Changes in valuation allowances are reported
within Mortgage Banking income on the income statement. The fair value of the MSR portfolio is subject to significant fluctuations as
a result of changes in estimated and actual prepayment speeds and default rates.
A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans
serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is
expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising
interest rates, the fair value of MSRs is expected to increase, as prepayment speeds on the underlying loans would be anticipated to
decline. Based on the estimated fair value at December 31, 2016 and 2015, management determined there was no impairment within
the MSR portfolio.
The Bank’s carrying value of its MSR portfolio was $5 million and $5 million at December 31, 2016 and 2015.
Income Tax Accounting — Income tax liabilities or assets are established for the amount of taxes payable or refundable for the
current year. Deferred tax liabilities and assets are also established for the future tax consequences of events that have been recognized
in the Company’s financial statements or tax returns. A deferred tax liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and deductions that can be carried forward (used) in future years. The valuation of current and
deferred tax liabilities and assets is considered critical, as it requires management to make estimates based on provisions of the
enacted tax laws. The assessment of tax liabilities and assets involves the use of estimates, assumptions, interpretations and judgments
concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as
court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of
which could be significant to the consolidated results of operations and reported earnings. The Company believes its tax assets and
liabilities are adequate and are properly recorded in the consolidated financial statements at December 31, 2016 and 2015.
Investment Securities — Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-
temporary.” Investment securities are evaluated for other-than-temporary impairment (“OTTI”) on at least a quarterly basis and more
frequently when economic or market conditions warrant such an evaluation to determine whether a decline in value below amortized
57
cost is other-than-temporary. In conducting this assessment, the Bank evaluates a number of factors including, but not limited to the
following:
• The length of time and the extent to which fair value has been less than the amortized cost basis;
• The Bank’s intent to hold until maturity or sell the debt security prior to maturity;
• An analysis of whether it is more-likely-than-not that the Bank will be required to sell the debt security before its
anticipated recovery;
• Adverse conditions specifically related to the security, an industry, or a geographic area;
• The historical and implied volatility of the fair value of the security;
• The payment structure of the security and the likelihood of the issuer being able to make payments;
• Failure of the issuer to make scheduled interest or principal payments;
• Any rating changes by a rating agency; and
• Recoveries or additional decline in fair value subsequent to the balance sheet date.
The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-
term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or
greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the
security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.
The Bank held one security at December 31, 2016 and 2015 with a total carrying value of $5 million and $5 million for which it
recorded OTTI charges in previous years.
Other Real Estate Owned — Assets acquired through loan foreclosures are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage
loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to
satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently
accounted for at lower of cost or fair value less estimated costs to sell. The Bank’s selling costs for OREO typically range from 10-
13% of each property’s fair value, depending on property class. Fair value is commonly based on recent real estate appraisals or BPO.
Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income
approach. Operating costs after acquisition are expensed.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for
commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been
reviewed and verified by the Bank. Appraisals may utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Once the appraisal is received, a member of the Bank’s Credit Administration Department
(“CAD”) typically reviews the assumptions and approaches utilized in the appraisal, as well as the fair value in comparison with
independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a back
test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral.
Back tests are performed for each collateral class and may lead to additional adjustments to the value of unliquidated collateral of
similar class.
The Bank’s total OREO recorded was $1 million and $1 million at December 31, 2016 and 2015.
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Correspondent Loan Premiums — The Bank began acquiring single family, first lien mortgage loans for investment through its
Correspondent Lending channel in May 2014. Correspondent Lending generally involves the Bank acquiring, primarily from its
Warehouse Lending (“Warehouse”) clients, closed loans that meet the Bank’s specifications. Substantially all loans purchased through
the Correspondent Lending channel are purchased at a premium.
Premiums on loans held for investment acquired though the Correspondent Lending channel are amortized into interest income on the
level-yield method over the expected life of the loan. During a period of declining interest rates, the expected life of Correspondent
Loans would generally be expected to decline due to anticipated prepayments within the portfolio. Alternatively, during a period of
rising interest rates, the expected life of Correspondent Loans would generally be expected to increase as prepayments on the
underlying loans would be anticipated to decline. Shorter estimated lives will increase premium amortization expense and decrease
interest income, with longer lives having the reverse effect.
Unamortized premiums totaled $2 million and $4 million at December 31, 2016 and 2015. The weighted average estimated remaining
life of the Correspondent Loan portfolio was 4.4 and 4.9 years at December 31, 2016 and 2015. In the third quarter of 2016, the Bank
sold $71 million of mortgage loans previously originated through its Correspondent Lending channel in order to enhance its overall
liquidity position and recorded a $1.1 million gain on this sale.
OVERVIEW
Net income for 2016 was $45.9 million, representing an increase of $10.7 million, or 31%, compared to 2015. Diluted earnings per
Class A Common Share increased 31% to $2.22 for 2016 compared to $1.70 for 2015. As discussed further below, growth in net
income during 2016 was spread across all four of the Company’s operating segments.
Table 1 — Summary
Years Ended December 31, (dollars in thousands, except per share data)
2016
2015
2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,903
2.22
Diluted earnings per Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.02 %
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.68
$ 35,166
1.70
0.88 %
6.12
$ 28,787
1.38
0.81 %
5.16
Additional discussion follows in this section of the filing under “Results of Operations.”
General highlights by business segment for the year ended December 31, 2016 consisted of the following:
Traditional Banking segment
• Net income increased $1.0 million, or 4%, for 2016 compared to 2015. A key driver of this increase was the successful
execution of organic loan growth initiatives over the previous two years. Additionally, the Traditional Bank’s net income
was meaningfully impacted by accretive benefits from the Company’s May 17, 2016 Cornerstone Bancorp (“Cornerstone”)
acquisition.
See additional detail regarding the Company’s acquisition of Cornerstone Bancorp, Inc. under Footnote 2 “Acquisition of
Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”
• Net interest income increased $13.4 million, or 12%, for 2016 to $121.7 million. The Traditional Banking segment net
interest margin increased six basis points for the year ended December 31, 2016 to 3.26%.
• The Traditional Banking Provision was $3.4 million for 2016 compared to $2.9 million for 2015.
• Total noninterest income increased $2.3 million, or 10%, for 2016 compared to 2015.
• Total noninterest expense increased $14.6 million, or 16%, during 2016 compared 2015.
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• Gross Traditional Bank loans increased by $254 million, or 9%, from December 31, 2015 to December 31, 2016. A
significant portion of the increase in Traditional Bank loans was attributable to the Cornerstone acquisition.
• Traditional Bank deposits grew by $647 million, or 27%, from December 31, 2015 to December 31, 2016. A significant
portion of the increase in Traditional Bank deposits was attributable to the Cornerstone acquisition.
• Total nonperforming loans to total loans for the Traditional Banking segment was 0.50% at December 31, 2016 compared to
0.75% at December 31, 2015.
• Delinquent loans to total loans for the Traditional Banking segment was 0.21% at December 31, 2016 compared to 0.39% at
December 31, 2015.
Warehouse Lending segment
• Net income increased $2.1 million, or 36%, for 2016 compared to 2015. Key drivers of this increase were increases in the
number of Warehouse clients and the continuing strong usage of committed Warehouse lines.
• Net interest income increased $4.3 million, or 35%, for 2016 compared to 2015. The Warehouse segment net interest margin
increased one basis point from 2015 to 3.59% for 2016.
• The Warehouse Provision was $497,000 for 2016 compared to $168,000 for 2015.
• Total committed Warehouse lines increased from $670 million at December 31, 2015 to $1.0 billion at December 31, 2016.
• Average line usage was 57% during 2016 compared to 55% during 2015.
• There were no nonperforming loans or delinquent loans associated with the Warehouse segment at December 31, 2016 and
2015.
Mortgage Banking segment
• Within the Mortgage Banking segment, mortgage banking income increased $2.5 million, or 56%, during 2016 compared to
2015, with $1.1 million of the increase attributable to a bulk loan sale of $71 million representing a portion of the Company’s
correspondent loan portfolio during the third quarter of 2016.
• Overall, excluding the aforementioned bulk loan sale, Republic’s proceeds from the sale of secondary market loans totaled
$215 million during 2016 compared to $167 million during the same period in 2015.
Republic Processing Group segment
• Net income increased $5.7 million, or 108%, for 2016 compared to 2015, driven by the Tax Refund Division’s (“TRS”)
newly introduced EA product and growth in the Republic Credit solutions (“RCS”) division’s short-term loan programs.
• Net interest income increased $14.4 million for 2016 compared to 2015, with the above-mentioned newly introduced EA
product and growth in short-term credit products driving the increase.
• RPG recorded a net charge to the Provision of $10.5 million during 2016, compared to a net charge of $2.3 million for 2015,
with the above mentioned newly introduced EA product and growth in short-term credit products also driving the increased
Provision.
• Noninterest income was $24.2 million for 2016 compared to $19.6 million for 2015.
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• Net Refund Transfers (“RT”) revenue increased $1.9 million, or 11%, during 2016 compared to 2015.
• Noninterest expenses were $13.9 million for 2016 compared to $12.1 million for 2015.
• Total nonperforming loans to total loans for the RPG segment was 0.21% at December 31, 2016 compared to 0.00% at
December 31, 2015.
• Delinquent loans to total loans for the RPG segment was 5.49% at December 31, 2016 compared to 3.41% at December 31,
2015.
General highlights by business segment for the year ended December 31, 2015 consisted of the following:
Traditional Banking segment
• Net income increased $2.6 million, or 12%, for 2015 compared to 2014.
• Net interest income increased $3.5 million, or 3%, for 2015 to $108.3 million. The Traditional Banking segment net interest
margin decreased 17 basis points for the year ended December 31, 2015 to 3.15%.
• The Traditional Banking Provision was $2.9 million for 2015 compared to $3.0 million for 2014.
• Total noninterest income increased $2.3 million, or 11%, for 2015 compared to 2014.
• Total noninterest expense increased $3.0 million, or 3%, during 2015 compared 2014.
• Gross Traditional Bank loans increased by $216 million, or 8%, from December 31, 2014 to December 31, 2015.
• Traditional Bank deposits grew by $395 million, or 19%, from December 31, 2014 to December 31, 2015.
• Total nonperforming loans to total loans for the Traditional Banking segment was 0.75% at December 31, 2015 compared to
0.87% at December 31, 2014.
• Delinquent loans to total loans for the Traditional Banking segment was 0.39% at December 31, 2015 compared to 0.58% at
December 31, 2014.
Warehouse Lending segment
• Net income increased $2.6 million, or 75%, for 2015 compared to 2014.
• Net interest income increased $4.8 million, or 64%, for 2015 compared to 2014. The Warehouse segment net interest margin
decreased 19 basis points from 2014 to 3.58% for 2015.
• The Warehouse Provision was $168,000 for 2015 compared to $350,000 for 2014.
• Total committed lines increased from $528 million at December 31, 2014 to $670 million at December 31, 2015.
• Average line usage was 55% during 2015 compared to 47% during 2014.
• There were no nonperforming loans or delinquent loans associated with the Warehouse segment at December 31, 2015 and
2014.
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Mortgage Banking segment
• Within the Mortgage Banking segment, mortgage banking income increased $1.5 million, or 54%, during 2015 compared to
2014.
• Overall, Republic’s proceeds from the sale of secondary market loans totaled $167 million during 2015 compared to $82
million during 2014. Volume during 2015 benefited from favorably low, long-term mortgage rates during the period.
Republic Processing Group segment
• Net income increased $854,000, or 19%, for 2015 compared to 2014.
• RPG recorded a net charge to the Provision of $2.3 million during 2015, compared to a net credit of $533,000 for 2014.
• Noninterest income was $19.6 million for 2015 compared to $17.9 million for 2014.
• Net RT revenue increased $1.3 million, or 8%, during 2015 compared to 2014.
• Noninterest expenses were $12.1 million for 2015 compared to $11.7 million for 2014.
RESULTS OF OPERATIONS
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 Federal Home Loan Bank (“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.
Discussion of 2016 vs. 2015
Total Company net interest income increased $32.1 million, or 26%, during 2016 compared to the same period in 2015. The primary
drivers of the increase in total Company net interest income were growth in the Core Bank’s average loans, loan volume associated
with the EA product at TRS and growth in the RCS small-dollar consumer loan programs. The total Company net interest margin
increased to 3.65% during 2016 compared to 3.27% for the same period in 2015, with higher margins on TRS’s EA product and
RCS’s small-dollar consumer loan programs being significant drivers of the overall increase in the Company’s net interest margin.
The most significant components affecting the total Company’s net interest income and net interest margin by business segment were
as follow:
Traditional Banking segment
Net interest income within the Traditional Banking segment increased $13.4 million, or 12%, during 2016 compared to 2015. The
Traditional Banking net interest margin was 3.26% for 2016, an increase of six basis points from 2015.
The increases in the Traditional Bank’s net interest income and net interest margin during 2016 were primarily attributable to the
following:
• Average Traditional Bank loans outstanding, excluding loans from the Company’s May 17, 2016 Cornerstone acquisition and
2012 FDIC-assisted transactions, were $2.9 billion with a weighted average yield of 4.09% during 2016 compared to $2.8
billion with a weighted average yield of 4.06% during 2015. The overall effect of this change in volume was an increase of
$6.7 million in interest income. This increase in average loans for 2016 over 2015 was driven primarily by growth in the
Bank’s commercial real estate (“CRE”), commercial and industrial (“C&I”) and home equity line of credit (“HELOC”)
portfolios.
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• Net interest income related to the Company’s May 17, 2016 Cornerstone acquisition contributed $4.9 million to the
Traditional Bank’s overall net interest income during 2016. Loan accretion income related to the Cornerstone acquisition was
approximately $240,000 for 2016. See additional detail regarding the Company’s acquisition of Cornerstone Bancorp, Inc.
under Footnote 2 “Acquisition of Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary
Data.”
• Net interest income related to loans from the Company’s 2012 FDIC-assisted transactions was lower during 2016 compared
to 2015 primarily due to a lower rate of favorable payoffs and paydowns on the portfolio. When loans from these transactions
are paid off, all unearned discount on such loans is immediately accreted into income. Accretion income during 2016 from
this portfolio was $1.1 million compared to $2.4 million in 2015. Overall, the average balance of the portfolio was $20
million with a yield of 13.30% during 2016 compared to $32 million with a yield of 13.60% in 2015. The overall effect of
these changes in rate and volume was a decrease of $1.7 million in interest income.
• The weighted average cost of FHLB advances during 2016 compared to 2015 declined to 1.87% from 1.99%. The average
outstanding FHLB advances decreased $16 million during the same period, with the Traditional Bank continuing to employ a
higher mix of lower cost overnight borrowings during 2016. The net effect of these changes in rate and volume was an
increase in net interest income of $1.0 million.
• The Company’s subordinated note related to RBCT paid a fixed interest rate of 6.015% through September 30, 2015 and
adjusted to LIBOR plus 1.42% thereafter. During 2016, the note’s coupon rate was based on the LIBOR index and
approximately 4.00% lower than the note’s coupon rate during the first nine months of 2015. The overall lower rate during
2016 equated to $1.2 million less in interest expense compared to 2015. This subordinated note matures on December 31,
2035 and is currently redeemable at the Company’s option on a quarterly basis. The Company elected not to redeem its
subordinated note on January 1, 2017.
The FFTR increased for only the second time in 10 years during December 2016. Additionally, the FOMC of the FRB has provided
further guidance that additional FFTR increases are likely during 2017. While an increase in short-term interest rates is generally
believed by management to be favorable to the Bank’s net interest income and net interest margin in the near-term, such increases in
short-term interest rates could have a negative impact to net interest income and net interest margin if the Bank is unable to maintain
its overall funding costs at those levels assumed in its interest rate risk model or the yield curve flattens causing the spread between
long-term interest rates and short-term interest rates to decrease. Unknown variables, which may impact the Bank’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.
For additional information on the potential future effect of changes in short-term interest rates on Republic’s net interest income, see
the table titled “Bank Interest Rate Sensitivity at December 31, 2016” under “Financial Condition.”
Warehouse Lending segment
Net interest income within the Warehouse Lending segment increased $4.3 million, or 35%, in 2016 compared to 2015. The increase
in net interest income was partially attributable to higher average outstanding balances and partially to higher weighted average loan
yield for the current period as compared to 2015. Total Warehouse line commitments increased to $1.0 billion at December 31, 2016
from $670 million at December 31, 2015, with the Company continuing to grow its Warehouse client base over the previous 12
months. Furthermore, average line usage on Warehouse commitments increased to 57% during 2016 compared to 55% during 2015.
Usage rates during both years benefitted from continued low, long-term mortgage rates. The yield for Warehouse lines of credit during
2016 increased 15 basis points from the same period in 2015, as the Warehouse yield was positively impacted by an increase in short-
term interest rates.
Overall, average outstanding Warehouse lines of credit during 2016 increased $119 million, or 35%, compared to 2015. Average
outstanding warehouse lines were $460 million during 2016 with a weighted average yield of 3.99%, compared to average outstanding
lines of $341 million with a weighted average yield of 3.84% during 2015.
63
Warehouse Lending net interest income is greatly influenced by the overall mortgage market and the competitive environment. The
Mortgage Bankers Association’s economic forecast released in February 2017 projected mortgage originations to decline 17% across
the United States from 2016 to 2017, which leads management to believe that usage rates among the Bank’s Warehouse Lending
clients may also decrease. This predicted decline in mortgage volume, along with a very competitive landscape, may negatively
impact the Bank’s ability to maintain its existing Warehouse Lending clients and to attract new mortgage companies to its warehouse
platform, thus making it difficult to increase net interest income overall within the Warehouse Lending segment.
Republic Processing Group segment
Net interest income within the RPG segment increased $14.4 million during 2016 compared to 2015. The increase in RPG’s net
interest income was primarily attributed to the following factors:
• The TRS division’s newly introduced EA product earned $5.2 million in interest income during 2016, with the substantial
majority of this income earned during the first quarter of 2016.
See additional discussion regarding the EA product under the sections titled:
o Part I Item 1A “Risk Factors”
o Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 5 “Loans and Allowance for Loan
and Lease Losses”
• The TRS division had a short-term commercial loan relationship with one of the Company’s third-party program managers in
the tax business. TRS earned $1.1 million in loan fees from this relationship during 2016 compared to $700,000 in 2015.
• Short-term, consumer credit products through the RCS division of RPG earned $11.0 million in net interest income during
2016 compared to $2.3 million for the same period in 2015. The increase was driven by the previously discussed growth in
one of its RCS loan programs, which expanded in June 2015 beyond its pilot phase.
Discussion of 2015 vs. 2014
Total Company net interest income increased $11.2 million, or 10%, during 2015 compared to 2014. The primary driver of the
increase in total Company net interest income was growth in the Company’s average loans during 2015, which increased $436
million, or 16%, over this time period. The benefit from loan growth was partially offset by a continuing general decline in the
Company’s interest-earning asset yields. The total Company net interest margin decreased to 3.27% for 2015 from 3.33% during
2014.
The most significant components affecting the total Company’s net interest income and net interest margin by business segment were
as follow:
Traditional Banking segment
Net interest income within the Traditional Banking segment increased $3.5 million, or 3%, for 2015 compared to 2014. The
Traditional Banking net interest margin decreased 12 basis points from 2014 to 3.20%. The increase in the Traditional Bank’s net
interest income and decrease in net interest margin during 2015 was primarily attributable to the following:
• Traditional Bank loans, excluding loans acquired through the Company’s 2012 FDIC-assisted transactions, experienced yield
compression of 23 basis points during 2015. Average loans outstanding, excluding loans from the 2012 FDIC-assisted
transactions, were $2.8 billion with a weighted average yield of 4.06% during 2015 compared to $2.5 billion with a weighted
average yield of 4.29% during 2014. The overall effect of these changes in rate and volume was an increase of $7.2 million in
interest income.
• Net interest income related to loans from the Company’s 2012 FDIC-assisted transactions was lower during 2015 due to
payoffs on the portfolio over the previous 12 months together with diminishing benefits from discount accretion. Overall, the
average balance of the portfolio was $32 million with a yield of 13.60% for 2015 compared to $57 million with a yield of
15.79% for 2014. The overall effect of these changes in rate and volume was a decrease of $4.7 million in interest income.
Interest income on this portfolio was $4.3 million for 2015, with $2.4 million, or 55%, of such income attributable to
64
discount accretion compared to $9.0 million during 2014, with $5.2 million, or 58%, of such income attributable to discount
accretion.
• The weighted average cost of FHLB advances during 2015 compared to 2014 declined to 1.99% from 2.24%. The average
outstanding advances increased $15 million during the same period, with the Traditional Bank employing a higher mix of
lower cost overnight borrowings during 2015. The net effect of these changes in rate and volume was an increase in net
interest income of $1.1 million.
• The weighted average cost of time deposits during 2015 compared to 2014 increased to 0.96% from 0.65%, while average
time deposits increased $26 million during the same period. These changes in rate and volume drove a $788,000 increase in
interest expense and were primarily driven by the Bank’s promotion of its five-year certificate of deposit product. This
promotion first began in September of 2014, and through December 31, 2015, had raised $67 million in certificates of deposit
at a weighted average cost of 1.90%.
• The subordinated note related to RBCT paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to
LIBOR + 1.42% thereafter. Based on this repricing, the note’s coupon rate repriced from 6.015% through September 30,
2015 to 1.75% on October 1, 2015. The overall savings during 2015 from the change in rate when compared to 2014 totaled
$459,000.
Warehouse Lending segment
Net interest income within the Warehouse Lending segment increased $4.8 million, or 64%, for 2015 compared to 2014, despite a
decline in net interest margin of 19 basis points. The increase in net interest income was primarily attributable to higher average
outstanding balances for 2015 as compared to 2014.
Total Warehouse line commitments increased to $670 million at December 31, 2015 from $528 million at December 31, 2014.
Average line usage rates of such commitments increased to 55% during 2015 compared to 47% during 2014. Usage rates for 2015
benefitted from continued low, long-term mortgage rates during the period, while the overall yield declined due to competitive pricing
pressures within the industry.
Driven by the increase in outstanding commitments and usage rates, average outstanding Warehouse lines of credit during 2015
increased $144 million, or 73%, compared to 2014. Average outstanding warehouse lines were $341 million during 2015 with a
weighted average yield of 3.84%, compared to average outstanding lines of $197 million with a weighted average yield of 4.00% for
2014.
Republic Processing Group segment
Net interest income within the RPG segment increased $2.9 million for 2015 compared to 2014. The increase in net interest income
was primarily attributable to year-over-year growth in higher yielding short-term, consumer credit products originated through RPG’s
RCS division. In addition, net interest income at RPG also increased due to loan fees earned on two new, large short-term commercial
loans to one of the Company’s third party program managers in the tax business. Average RPG loans outstanding were $8 million
during 2015 compared to $5 million during 2014.
65
Table 2 — Total Company Average Balance Sheets and Interest Rates
Years Ended December 31, (dollars in thousands)
ASSETS
2016
2015
2014
Average
Balance
Interest
Average Average
Balance
Rate
Interest
Average Average
Balance
Rate
Interest
Average
Rate
Interest-earning assets:
Taxable investment securities, including FHLB stock(1) . . . . . . .
Federal funds sold and other interest-earning deposits . . . . . . . . .
RPG Easy Advance loans and fees(2) . . . . . . . . . . . . . . . . . . . .
Other RPG loans and fees(2)(3) . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding Warehouse lines of credit and fees(2)(3) . . . . . . . . . .
All other Traditional Bank loans and fees(2)(3) . . . . . . . . . . . . . .
$
572,599 $
130,889
5,268
23,090
460,285
3,079,740
8,932
828
5,210
12,081
18,357
128,584
1.56 % $
0.63
98.90
52.32
3.99
4.18
546,655 $
68,847
—
8,479
340,938
2,824,817
8,265
209
—
3,149
13,075
117,734
1.51 % $
0.30
—
37.14
3.84
4.17
525,748 $
118,803
—
5,482
197,226
2,535,596
8,673
344
—
275
7,889
115,196
1.65 %
0.29
—
5.02
4.00
4.54
Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,271,871
173,992
4.07
3,789,736
142,432
3.76
3,382,855
132,377
3.91
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . .
(29,880)
(25,570)
(23,067)
Noninterest-earning assets:
Noninterest-earning cash and cash equivalents . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,190
38,591
58,242
58,815
$ 4,485,829
81,503
32,868
52,127
52,176
$ 3,982,840
75,837
33,296
44,545
46,151
$ 3,559,617
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered money market and brokered certificates of deposit . . . . .
$
962,473 $
546,360
221,634
328,125
953
1,094
2,218
1,793
0.10 % $
0.20
1.00
0.55
840,815 $
485,508
200,863
187,028
563
762
1,930
1,125
0.07 % $
0.16
0.96
0.60
750,693 $
477,129
174,904
107,475
488
761
1,142
1,514
0.07 %
0.16
0.65
1.41
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . .
2,058,592
6,058
0.29
1,714,214
4,380
0.26
1,510,201
3,905
0.26
Securities sold under agreements to repurchase and other short-
term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
280,296
583,591
42,502
65
10,900
915
0.02
1.87
2.15
379,477
599,630
41,240
92
11,934
2,056
0.02
1.99
4.99
296,196
584,516
41,240
112
13,072
2,515
0.04
2.24
6.10
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
2,964,981
17,938
0.60
2,734,561
18,462
0.68
2,432,153
19,604
0.81
Noninterest-bearing liabilities and Stockholders’ equity:
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . .
894,049
29,336
597,463
$ 4,485,829
651,275
22,238
574,766
$ 3,982,840
553,929
16,157
557,378
$ 3,559,617
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 156,054
$ 123,970
$ 112,773
Net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.47 %
3.65 %
3.08 %
3.27 %
3.10 %
3.33 %
(1) For purpose of this calculation, the market value adjustment on investment securities resulting from ASC Topic 320, Investments — Debt and Equity Securities, is
included as a component of other assets.
(2) The amount of loan fee income included in total interest income was $24.2 million, $10.3 million and $9.4 million for 2016, 2015 and 2014.
(3) Average balances for loans include the principal balance of nonaccrual loans and loans held for sale and are inclusive of all premiums, discounts, fees and costs.
66
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 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
(in thousands)
Interest income:
Year Ended December 31, 2016
Compared to
Year Ended December 31, 2015
Year Ended December 31, 2015
Compared to
Year Ended December 31, 2014
Total Net
Change
Increase / (Decrease) Due to Total Net
Change
Volume
Rate
Increase / (Decrease) Due to
Volume
Rate
Taxable investment securities, including FHLB stock . . . . . . . . . .
Federal funds sold and other interest-earning deposits . . . . . . . . . .
RPG Easy Advance loans and fees . . . . . . . . . . . . . . . . . . . . . . . .
Other RPG loans and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding Warehouse lines of credit and fees . . . . . . . . . . . . . . .
All other Traditional Bank loans and fees . . . . . . . . . . . . . . . . . . .
$
667 $
619
5,210
8,932
5,282
10,850
399 $
280
5,210
7,219
4,741
10,644
268 $
339
—
1,713
541
206
(408) $
(135)
—
2,874
5,186
2,538
336 $
(151)
—
226
5,524
12,511
Net change in interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,560
28,493
3,067
10,055
18,446
Interest expense:
Transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered money market and brokered certificates of deposit . . . . .
Securities sold under agreements to repurchase and other short-
term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
390
332
288
668
(27)
(1,034)
(1,141)
103
102
229
811
(20)
(516)
61
287
230
59
(143)
(7)
(518)
(1,202)
75
1
788
(389)
(20)
(1,138)
(459)
61
13
188
759
26
331
—
Net change in interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
(524)
770
(1,294)
(1,142)
1,378
Net change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . .
$
32,084 $
27,723 $
4,361 $
11,197 $
17,068 $
(744)
16
—
2,648
(338)
(9,973)
(8,391)
14
(12)
600
(1,148)
(46)
(1,469)
(459)
(2,520)
(5,871)
67
Provision for Loan and Lease Losses
Discussion of 2016 vs. 2015
The Company recorded a Provision of $14.5 million during 2016, compared to $5.4 million in 2015. The significant components
comprising the Company’s Provision by business segment were as follows:
Traditional Banking segment
The Traditional Banking Provision during 2016 was $3.4 million, compared to $2.9 million in 2015. An analysis of the Provision for
2016 compared to 2015 follows:
• Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $3.1 million and $2.0 million to the
Provision for 2016 and 2015. Loan growth primarily drove the net charges to the Provision in both periods.
• Related to the Bank’s loans rated Substandard and Special Mention, the Bank recorded net charges of $756,000 and $680,000
to the Provision during 2016 and 2015. Charges of $472,000 related to one CRE relationship and $234,000 related to one C&I
relationship drove the 2016 Provision. The net charge during 2015 was the result of an increase in the assumed lives for a large
portion of the Bank’s retail TDRs based on an updated analysis of the payment histories of these loans.
• Related to PCI loans, the Bank recorded a net credit of $410,000 to the Provision during 2016 compared to a net charge of
$173,000 during 2015. Charges generally reflect projected shortfalls in cash flows below initial day-one estimates for PCI
loans, while credits are primarily attributable to generally positive dispositions.
As a percentage of total loans, the Traditional Banking Allowance decreased to 0.83% at December 31, 2016 compared to 0.85% at
December 31, 2015. The Company believes, based on information presently available, that it has adequately provided for loan losses
at December 31, 2016.
See the sections titled “Allowance for Loan and Lease Losses and Provision for Loan and Lease Losses” and “Asset Quality” in this
section of the filing under “Financial Condition” for additional discussion regarding the Provision and the Bank’s delinquent,
nonperforming, impaired and TDR loans.
Warehouse Lending segment
The Warehouse Provision was $497,000 for 2016, a $329,000 increase from 2015. Provision expense for both 2016 and 2015 reflects
general reserves for growth in outstanding balances. Outstanding Warehouse balances grew $199 million during 2016 compared to
growth of $67 million during 2015.
As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at December 31, 2016 and 2015. The
Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at
December 31, 2016.
68
Republic Processing Group segment
RPG recorded a net charge to the Provision of $10.5 million during 2016, an increase of $8.2 million compared to 2015. The increase
in Provision was primarily attributable to the introduction of the EA product during 2016 and general loss reserves for growth in loans
originated through the RCS division.
The TRS division of RPG recorded a Provision of $3.0 million during 2016 on its new EA product. Of the $123 million in EAs
originated during 2016, all were either collected or charged off at December 31, 2016.
The Bank recorded net charges of $7.8 million and $2.6 million to the Provision during 2016 and 2015 associated with short-term
consumer loans originated through the RCS division of RPG.
While RPG loans generally return higher yields, these loans also present a greater credit risk than Traditional Banking loan products.
As a percentage of total RPG loans, the RPG Allowance was 12.82% at December 31, 2016 compared to 23.65% at December 31,
2015.
See additional detail regarding the EA product under Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part II Item 8
“Financial Statements and Supplemental Data.”
Discussion of 2015 vs. 2014
The Company recorded total Provision of $5.4 million for 2015 compared to $2.9 million during 2014. The significant components
comprising the Company’s Provision by business segment were as follows:
Traditional Banking segment
The Traditional Banking Provision during 2015 was $2.9 million compared to $3.0 million recorded during 2014. An analysis of the
Provision for 2015 compared to 2014 follows:
• Related to the Bank’s pass rated and non-rated credits, the Bank recorded net charges of $2.0 million and $2.5 million to the
Provision during 2015 and 2014, primarily driven by loan growth.
• Related to the Bank’s loans rated Substandard or Special Mention, the Bank recorded net charges of $680,000 and $1.2
million to the Provision during 2015 and 2014. The net charge recorded during 2015 was primarily the result of an increase
in the assumed lives for a large portion of the Bank’s retail TDRs based on an updated analysis of payment histories of these
loans. The longer assumed lives on such loans increased the impairment for these loans measured under the cash flow
method. By comparison, the net charge to the Provision during 2014 was partially due to loss allocations on collateral-
dependent impaired loans and partially due to an updated migration analysis on the Bank’s small dollar, retail nonaccrual
loans.
• The Bank recorded a net charge of $173,000 to the Provision in 2015 compared to a net credit to the Provision of $726,000
for 2014 for PCI loans. The charges generally reflect deterioration in the projected future cash flows for the PCI loans from
the Bank’s initial acquisition day estimates of those cash flows, while the credits generally reflect improvements in their
projected cash flows.
As a percentage of total loans, the Traditional Banking Allowance decreased to 0.85% at December 31, 2015 compared to 0.87% at
December 31, 2014.
Warehouse Lending segment
The Warehouse Provision was $168,000 for 2015, a decrease of $182,000 from $350,000 recorded during 2014. The higher Provision
during 2014 was due to higher year-over-year growth compared to 2015, with the Provision attributable to growth during 2014
partially offset by a five basis point reduction in the qualitative factor applied to the portfolio during 2014. The qualitative factor was
lowered during 2014 because the portfolio had achieved over three years of vintage with no losses incurred.
69
As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at December 31, 2015 and 2014.
Republic Processing Group segment
RPG recorded recoveries of $278,000 and $582,000 during 2015 and 2014 to the Provision for the collection of prior period RAL
charge-offs. Additionally, RPG recorded charges of $2.6 million and $49,000 to the Provision during 2015 and 2014 due to growth in
short-term consumer loans originated by the RCS division. The increase in Provision for RPG during 2015 was primarily driven by
the growth in one of RCS’ loan programs, as the Company moved beyond the pilot phase for this particular program.
Noninterest Income
Table 4 — Analysis of Noninterest Income
Years Ended December 31, (dollars in thousands)
2016
2015
2014
Percent Increase/(Decrease)
2015/2014
2016/2015
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,176 $ 13,015 $ 13,807
16,130
Net refund transfer fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,862
Mortgage banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,017
Interchange fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
591
Program fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,329
Increase in cash surrender value of bank owned life insurance . . . . . . . .
—
Gain on call of security available for sale . . . . . . . . . . . . . . . . . . . . . . . . .
(2,218)
Net gains (losses) on other real estate owned . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,001
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,509 $ 47,994 $ 42,519
17,388
4,411
8,353
1,233
1,402
88
(301)
2,405
19,240
6,882
9,009
3,044
1,516
—
244
4,398
1 %
11
56
8
147
8
(100)
181
83
20
(6)%
8
54
19
109
5
—
86
(20)
13
Discussion of 2016 vs. 2015
Noninterest income increased $9.5 million, or 20%, for 2016 compared to 2015. The most significant components comprising the total
Company’s change in noninterest income by business segment were as follows:
Traditional Banking segment
Traditional Banking noninterest income increased $2.3 million, or 10%, for 2016 compared to 2015. The most significant categories
affecting the change in noninterest income for 2016 were as follows:
•
Interchange fees increased $1.4 million, or 19%, primarily due to a 7% increase in checking accounts, which helped to drive
an 11% increase in the Company’s active debit cards.
• Net gains (losses) on OREO improved $545,000, as the Bank’s OREO required $270,000 in mark-to-market writedowns during
2016 compared to approximately $1.3 million in such charges during the same period in 2015. Partially offsetting the difference
related to mark-to-market writedowns was a decrease of $443,000 in net realized gains on the final disposition of OREO from
2016 to 2015.
Service charges on deposit accounts increased from $13.0 million during 2015 to $13.2 million during 2016. 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 2016 and 2015 were $7.8 million and $7.5 million. The total daily overdraft charges, net of refunds, included in
interest income were $1.7 million and $1.6 million for 2016 and 2015.
70
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased $2.5 million, or 56%, during 2016 compared to the same
period in 2015, with $1.1 million of the increase attributable to a bulk loan sale of $71 million representing a portion of the
Company’s correspondent loan portfolio during the third quarter of 2016.
Overall, excluding the aforementioned bulk loan sale, Republic’s proceeds from the sale of secondary market loans totaled $215
million during 2016 compared to $167 million during 2015. Republic’s net gains as a percentage of loans sold increased from 2.43%
during 2015 to 2.55% during 2016. Volume during both 2016 and 2015 benefited from continued low, long-term mortgage interest
rates.
Republic Processing Group segment
The TRS division of RPG accounts for the majority of RPG’s annualized revenues. TRS derives substantially all of its revenues
during the first half of the year and historically operates at a net loss during the second half of the year, as the Company prepares for
the next tax season.
Within the RPG segment, noninterest income increased $4.6 million, or 24%, during 2016 compared to 2015. The increase was
partially due to a $1.9 million, or 11%, increase in net RT revenue from 2015, primarily driven by an increase in RT volume.
Additionally, RPG program fees increased $1.8 million to $3.0 million for 2016 compared to $1.2 million in 2015. The increase in
RPG program fees resulted from the previously reported increase in volume from one of the RCS’ small-dollar consumer loan
programs. As part of this program, the Company retains a 10% ownership in the loans originated and sells a 90% participation interest
in these loans. During the 2016, the Company sold approximately $331 million of loans from this program compared to $138 million
during 2015. Furthermore, the RCS division benefited from the recognition of $1.2 million of income related to a first-year volume
guarantee for its installment credit product.
Discussion of 2015 vs. 2014
Noninterest income increased $5.5 million, or 13%, for 2015 compared to 2014. The most significant components comprising the total
Company’s change in noninterest income by business segment were as follows:
Traditional Banking segment
Traditional Banking noninterest income increased $2.3 million, or 11%, for 2015 compared to 2014. The most significant categories
affecting the change in noninterest income for 2015 were as follows:
Service charges on deposit accounts decreased from $13.8 million for 2014 to $13.0 million for 2015. 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
during 2015 and 2014 were $7.5 million and $7.7 million. The total daily overdraft charges, net of refunds, included in interest income
for 2015 and 2014 was $1.6 million in both periods.
Interchange income increased from $6.2 million during 2014 to $7.5 million during 2015. The increase in interchange income was
primarily driven by increases in both credit and debit card sales volume of 31% and 4%, respectively. Such sales growth was further
complemented by a greater mix of commercial credit and signature debit transactions, which generally generate higher margins than
consumer and PIN related transactions.
Net losses on OREO fluctuated from a net loss of $2.2 million during 2014 to a net loss of $301,000 for 2015. The net losses during
2015 and 2014 were primarily driven by mark-to-market writedowns of OREO properties.
71
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased $1.5 million, or 54%, during 2015 compared to 2014.
Overall, Republic’s proceeds from the sale of secondary market loans totaled $167 million during 2015 compared to $82 million
during 2014. Volume during 2015 benefited from continued low, long-term interest rates.
Republic Processing Group segment
RPG’s noninterest income increased $1.6 million, or 9%, to $19.6 million during 2015. The higher profitability was primarily driven
by a 39% increase in RT volume over 2014. This higher RT volume was driven by growth in retail store-front product demand
resulting from an increase in the number of tax preparation offices served through existing contracts and new contracts between the
Company and third party tax preparation companies.
The higher RT volume more than offset the impact of a lower profit margin the Company earned on its RT product during the year
due to less favorable pricing the Company is receiving on some of its newer contracts. Driving the overall decline in profit margin for
the RT product from its new contracts was stiff competition in the marketplace. In addition, also driving a decline in RT profit margin
was a shift in program management responsibilities, along with the corresponding revenue of those responsibilities, away from
Republic over to some of its third party partners in the business.
Noninterest Expenses
Table 5 — Analysis of Noninterest Expenses
Years Ended December 31, (dollars in thousands)
2016
2015
2014
Percent Increase/(Decrease)
2015/2014
2016/2015
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,882 $ 58,091 $ 54,373
22,008
Occupancy and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,866
Communication and transportation . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,264
Marketing and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,865
FDIC insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,616
Bank franchise tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,513
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,450
Interchange related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,009
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,024
Other real estate owned expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,766
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
FHLB advance prepayment penalty . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,364
Total noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,107 $ 113,324 $ 108,118
20,689
3,752
3,161
2,084
4,734
4,340
3,873
1,101
735
3,306
—
7,458
21,777
4,256
3,778
1,780
4,757
6,121
4,140
1,406
503
2,556
846
8,305
20 %
5
13
20
(15)
—
41
7
28
(32)
(23)
—
11
15
7 %
(6)
(3)
(3)
12
3
24
12
9
(28)
20
—
17
5
Discussion of 2016 vs. 2015
Total Company noninterest expenses increased $16.8 million, or 15%, during 2016 compared to 2015. The most significant
components comprising the change in noninterest expense by business segment were as follows:
72
Traditional Banking segment
For 2016 compared to 2015, Traditional Banking noninterest expenses increased $14.6 million, or 16%. The following factors drove
the increase:
• Salaries and benefits expense increased $9.6 million, or 20%, primarily due to an increase of 141 full-time-equivalent (“FTEs”)
employees from December 31, 2015 to December 31, 2016. A total of 36 of these additions were directly attributable to the
Company’s Cornerstone acquisition. The remaining increase of 105 FTEs was driven by additional staffing needed to
implement the Company’s strategic initiatives.
• Data processing expenses increased $1.6 million, or 42%, with $628,000 of the increase attributable to the Company’s
Cornerstone acquisition. The remainder of the increase was spread across multiple loan and deposit platforms and was due to
growth in the Company’s overall customer base and their associated activity.
• Occupancy expense increased $1.2 million, or 6%, with $532,000 of the increase attributable to the Company’s Cornerstone
acquisition. The remaining increase of $639,000 primarily reflects recent renovations to the Traditional Bank’s premises over
the previous 12 months, which drove an 8% increase in depreciation expense.
•
Interchange-related expense increased $694,000, or 22%, consistent with the increases in debit card and credit card
transaction volume over the previous 12 months.
• Marketing expenses increased $474,000, or 16%, partially driven by new sponsorship agreements with two professional sports
teams in the Company’s market footprint and partially by increased promotions of both RB&T and MemoryBank branded
products.
• Legal and professional fees decreased $537,000, or 19%, during 2016 compared to 2015 primarily due to higher legal
expenses incurred during the prior year related to the Company’s Cornerstone acquisition.
• The Company incurred an $846,000 prepayment penalty on payoff of $50 million in higher-costing FHLB advances during
the third quarter of 2016, with no similar penalty in 2015.
Warehouse Lending segment
For 2016 compared to 2015, Warehouse noninterest expenses increased $616,000, or 24%. The increase was primarily related to an
increase in salaries and employee benefits expense, driven by additional staffing over the previous 12 months along with annual merit
increases.
Republic Processing Group segment
For 2016 compared to 2015, RPG noninterest expenses increased $1.8 million, or 15%, primarily due to a $2.0 million, or 29%
increase in salaries and employee benefits expense, driven by additional staffing to support RPG’s lending initiatives.
Discussion of 2015 vs. 2014
Total Company noninterest expenses increased $5.2 million, or 5%, during 2015 compared to 2014. The most significant components
comprising the change in noninterest expense by business segment were as follows:
73
Traditional Banking segment
For 2015 compared to 2014, Traditional Banking noninterest expenses increased $3.0 million, or 3%.
Salaries and benefits increased $1.8 million, or 4%, for 2015 compared to 2014. The higher expense for the year was primarily the
result of an increase in the Traditional Bank’s FTEs from 657 at December 31, 2014 to 711 at December 31, 2015. The increased
staffing was in order to meet loan demand and execute the Company’s overall long-term growth objectives.
Occupancy expense decreased $802,000, or 4%, during 2015 due primarily to the Company’s closure of five banking centers over the
past two years and a reduction in overhead costs associated with the Company’s new telecommunications system that was
implemented during the fourth quarter of 2014.
Data processing expenses increased $753,000, or 25%, during 2015 partially due to $233,000 in costs associated with the Company’s
then-pending acquisition of Cornerstone Bancorp, Inc. and partially due to additional technology employed by the Traditional Bank
concentrated in the loan and deposit operational areas.
Interchange-related expenses increased $360,000, or 13%, during 2015 driven by increased credit and debit card sales volume during
2015.
Legal expense increased $434,000, or 41%, during 2015, primarily due to costs associated with the Company’s acquisition efforts,
including the Company’s then-pending acquisition of Cornerstone Bancorp, Inc.
Warehouse Lending segment
For 2015 compared to 2014, Warehouse noninterest expenses increased $669,000, or 36%. The increase was primarily related to an
increase in salaries and employee benefits expense, driven primarily by additional staffing over the previous 12 months.
Republic Processing Group segment
For 2015 compared to 2014, RPG noninterest expenses increased $473,000, or 4%.
Salaries and employee benefits increased $499,000, or 8%, primarily due to increased contract labor costs, driven by the 39% increase
in RT’s processed during 2015 compared to 2014.
Occupancy expenses decreased $627,000, or 37%, for 2015 compared to 2014, primarily due to the Company’s new
telecommunications system that was implemented during the fourth quarter of 2014.
Legal fees increased $209,000, primarily related to increased usage of outside legal counsel for contract review and program design of
new prepaid card and small dollar credit programs.
74
FINANCIAL CONDITION
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 $289 million in cash and cash equivalents at December 31, 2016 compared to $210 million at December 31,
2015. The Company maintained a higher level of cash and cash equivalents at December 31, 2016, primarily to support its overall
liquidity position.
For cash held at the FRB, the Bank earned a yield of 0.50% for most of 2016 on amounts in excess of required reserves. In mid-
December 2016, this rate increased to 0.75% in connection with the FOMC’s action to increase the FFTR. For all other cash held
within the Bank’s banking center and ATM networks, the Bank does not earn interest.
The Company’s Captive maintains cash reserves to cover insurable claims. Captive cash reserves totaled approximately $2 million and
$2 million at December 31, 2016 and 2015.
Investment Securities
Table 6 — Investment Securities Portfolio
December 31, (in thousands)
2016
2015
2014
2013
2012
Securities available for sale (fair value):
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . $ 294,544 $ 286,479 $ 146,922 $ 97,465 $ 39,472
5,687
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . . . . . .
197,210
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . .
195,877
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Freddie Mac preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Community Reinvestment Act mutual fund . . . . . . . . . . . . . . . . . . . . .
—
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Trust preferred security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
438,246
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,485
150,087
163,946
—
995
14,915
—
432,893
5,250
124,256
143,171
231
1,018
15,063
—
435,911
5,132
92,268
113,668
173
1,011
14,922
3,405
517,058
4,777
73,004
87,654
483
2,455
15,158
3,200
481,275
Securities held to maturity (carrying value):
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . .
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
506
158
27,142
25,058
52,864
515
53
33,159
5,000
38,727
1,747
147
38,543
5,000
45,437
2,311
420
42,913
5,000
50,644
4,388
827
40,795
—
46,010
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 534,139 $ 555,785 $ 481,348 $ 483,537 $ 484,256
Securities available for sale primarily consists of U.S. Treasury securities and U.S. Government agency obligations, including agency
mortgage backed securities (“MBSs”) and agency collateralized mortgage obligations (“CMOs”). The agency MBSs primarily consist
of hybrid mortgage investment securities, as well as other adjustable rate mortgage investment securities, underwritten and guaranteed
by Ginnie Mae (“GNMA”), Freddie Mac (“FHLMC”) and the Federal National Mortgage Association (“FNMA” or “Fannie Mae”).
Agency CMOs held in the investment portfolio are substantially all floating rate securities that adjust monthly. The Bank uses a
portion of the investment securities portfolio as collateral to Bank clients for securities sold under agreements to repurchase
(“repurchase agreements”). The remaining eligible securities that are not pledged to secure client repurchase agreements may be
pledged to the FHLB as collateral for the Bank’s borrowing line. Strategies for the investment securities portfolio are influenced by
economic and market conditions, loan demand, deposit mix and liquidity needs.
75
Table 7 — Mortgage Backed Investment Securities
December 31, (in thousands)
2016
2015
2014
2013
2012
5,687
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . . . . . . $
198,100
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
236,988
Total fair value of mortgage backed securities . . . . . . . . . . . . . . . . . . . $ 192,873 $ 244,750 $ 311,806 $ 363,097 $ 440,775
4,777 $
73,174
114,922
5,132 $
92,327
147,291
124,423
182,133
150,550
207,062
5,485 $
5,250 $
Table 8 — Securities Available for Sale
December 31, 2016 (dollars in thousands)
U.S. Treasury securities and U.S. Government agencies:
Amortized
Cost
Fair
Value
Weighted
Weighted
Average
Yield
Average
Maturity in
Years
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due from one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . .
199,323
295,425
96,102 $
96,249
198,295
294,544
Corporate bonds:
Due from one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred security, due beyond ten years . . . . . . . . . . . . . . . . . . . . . . . . . .
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . .
Total collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act mutual fund . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,033
10,125
15,158
3,200
4,777
73,004
87,654
483
2,455
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 479,825 $ 481,275
5,004
10,000
15,004
3,449
3,691
71,197
88,559
—
2,500
1.03 %
1.25
1.17
1.99
1.87
1.91
4.97
4.24
2.40
1.59
NM
NM
1.47
0.50
2.10
1.53
1.21
6.34
4.63
20.43
4.41
4.49
5.57
NM
NM
2.92
NM - Not meaningful, as the security does not have a finite maturity.
Table 9 — Securities Held to Maturity
December 31, 2016 (dollars in thousands)
Carrying
Value
Fair
Value
Weighted
Weighted
Average
Yield
Average
Maturity in
Years
U.S. Treasury securities and U.S. Government agencies:
Due from one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . .
506 $
506
504
504
NM
NM
Corporate bonds:
Due from one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,013
Due from five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,294
Total corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,307
Total mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . . .
170
27,268
Total collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,864 $ 53,249
5,075
19,983
25,058
158
27,142
2.15 %
2.15
2.15
3.66
1.29
1.40
0.70
0.70
3.38
5.86
5.36
13.39
5.84
5.59
NM - Not meaningful.
76
Loan Portfolio
Table 10 — Loan Portfolio Composition
December 31, (in thousands)
2016
2015
2014
2013
2012
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000,148 $ 1,081,934 $ 1,118,341 $ 1,097,795 $ 1,145,495
Owner occupied - correspondent* . . . . . . . . . . . . . .
NA
74,539
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . .
714,642
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
33,531
Commercial real estate - purchased whole loans* . . . .
68,214
Construction & land development . . . . . . . . . . . . . . . . .
130,681
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . .
NA
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . .
216,576
Warehouse lines of credit* . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
241,607
Consumer:
149,028
156,605
1,023,981
36,515
119,650
265,721
13,614
585,439
341,285
NA
110,809
773,173
34,186
44,351
127,763
NA
149,576
226,782
226,628
96,492
772,309
34,898
38,480
157,339
2,530
319,431
245,679
249,344
116,294
824,887
35,674
66,500
229,721
8,905
386,729
289,194
RPG loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . .
32,252
13,414
803
52,579
19,744
3,810,778
(32,920)
7,204
11,068
685
6,473
11,998
3,326,610
(27,491)
4,095
9,573
1,180
3,231
10,289
3,040,495
(24,410)
1,827
9,030
944
5,395
8,161
2,589,792
(23,026)
—
8,716
955
5,727
9,514
2,650,197
(23,729)
Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,777,858 $ 3,299,119 $ 3,016,085 $ 2,566,766 $ 2,626,468
* Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans increased by $484 million, or 15%, during 2016 to $3.8 billion at December 31, 2016, primarily driven by $199 million in
growth in outstanding Warehouse lines of credit and $190 million in loans from the Company’s Cornerstone acquisition.
See additional detail regarding the Company’s acquisition of Cornerstone Bancorp, Inc. under Footnote 2 “Acquisition of Cornerstone
Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”
Warehouse Lines of Credit
As of December 31, 2016, the Bank had $585 million outstanding on total committed Warehouse credit lines of $1.0 billion. As of
December 31, 2015, the Bank had $387 million outstanding on total committed Warehouse credit lines of $670 million. The $343
million increase in committed lines generally reflects growth in the number of Warehouse clients combined with a 27% increase in the
average line amount. The $199 million increase in outstanding balances reflects the impact of the growth in committed lines combined
with a favorable mortgage rate environment, which helped sustain higher usage rates on outstanding Warehouse lines as of December
31, 2016.
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 segment during 2011, the Bank has experienced volatility in the Warehouse
portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse
lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 64% during the second quarter of 2015. On an
annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 40% during 2013 to a high of
57% during 2016.
77
Correspondent Loans
During the third quarter of 2016, the Bank sold $71 million of mortgage loans previously originated through its Correspondent Lending
channel in order to enhance its overall liquidity position and recorded a $1.1 million gain on this sale.
The table below illustrates the Bank’s fixed and variable rate loan maturities:
Table 11 — Selected Loan Distribution
December 31, 2016 (in thousands)
Total
One Year
Or Less
Over One
Through
Five Years
Over
Five Years
Fixed rate loan maturities:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed rate loans . . . . . . . . . . . . . . . . . . . . . . . . .
Variable rate loan maturities:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total variable rate loans . . . . . . . . . . . . . . . . . . . . . .
Total:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
432,786
369,659
20,715
102,197
13,614
—
—
104,569
1,043,540
872,995
690,837
98,935
163,524
—
585,439
341,285
14,223
2,767,238
1,305,781
1,060,496
119,650
265,721
13,614
585,439
341,285
118,792
3,810,778
$
$
$
$
$
$
97,068
92,437
10,861
17,106
191
—
—
53,078
270,741
140,035
159,226
30,172
63,415
—
585,439
82,114
13,769
1,074,170
237,103
251,663
41,033
80,521
191
585,439
82,114
66,847
1,344,911
$
$
$
$
$
$
165,297
196,575
3,464
61,170
13,423
—
—
41,416
481,345
339,945
380,835
46,596
58,105
—
—
147,274
344
973,099
505,242
577,410
50,060
119,275
13,423
—
147,274
41,760
1,454,444
$
$
$
$
$
$
170,421
80,647
6,390
23,921
—
—
—
10,075
291,454
393,015
150,776
22,167
42,004
—
—
111,897
110
719,969
563,436
231,423
28,557
65,925
—
—
111,897
10,185
1,011,423
78
Allowance for Loan and Lease Losses (“Allowance”)
The Bank maintains an Allowance for probable incurred credit losses inherent in the Bank’s loan portfolio, which includes overdrawn
deposit accounts. Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis
with the Audit Committee and the Board of Directors on a quarterly basis.
The Bank’s Allowance increased $5 million, or 20%, during 2016 to $33 million at December 31, 2016, primarily driven by reserves
for growth in RCS small-dollar credit products and general growth in Core Bank portfolios.
As a percent of total loans, the total Bank’s Allowance increased to 0.86% at December 31, 2016 compared to 0.83% at December 31,
2015. The increase in ratio of Allowance to total loans was primarily driven by reserves for growth in RCS small-dollar consumer
products. An analysis of the Allowance by business segment follows:
Traditional Banking segment
The Allowance at the Traditional Banking segment, increased to $27 million at December 31, 2016 from $25 million at December 31,
2015. The Allowance to total Traditional Bank loans decreased to 0.83% at December 31, 2016 from 0.85% at December 31, 2015
primarily because the $190 million of loan growth as a result of the Company’s Cornerstone acquisition required minimal loss
reserves at December 31, 2016, as such loans were acquired and recorded at fair value, which gives consideration to estimated future
losses within the portfolio.
Warehouse Lending segment
The Allowance on loans originated through the Company’s Warehouse segment remained at approximately $1 million, as the
Allowance to total Warehouse loans remained at 0.25% from December 31, 2015 to December 31, 2016.
Republic Processing Group segment
The Allowance on loans originated through the Company’s RPG segment increased to $5 million at December 31, 2016 from $2
million at December 31, 2015, as RPG grew its loan portfolio $25 million during 2016. The Allowance to total RPG loans decreased
to 12.82% at December 31, 2016 from 23.65% at December 31, 2015, as RPG diversified its product mix during 2016, reserving as
low as 0.25% for its newly obtained $12 million healthcare receivables portfolio and as high as 24.10% for its $19 million line-of-
credit portfolio during 2016. Lower reserve percentages are provided for RCS’s healthcare receivables, as such receivables are
generally repurchased by the Bank’s healthcare partner if they become 90-days-or-more delinquent.
For additional discussion regarding Republic’s methodology for determining the adequacy of the Allowance, see the section titled
“Critical Accounting Policies and Estimates” in this section of the filing.
See additional detail regarding Republic Credit Solution’s loan products under Item 1 “Business.”
79
Table 12 — Summary of Loan and Lease Loss Experience
Years Ended December 31, (dollars in thousands)
2016
2015
2014
2013
2012
Allowance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
$
27,491
$
24,410
$
23,026
$
23,729
$
24,063
Charge-offs:
Residential real estate
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Residential real estate
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loan charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision - Core Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision - RPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Credit Quality Ratios - Total Company:
(416)
—
—
(514)
—
(44)
(330)
—
—
(351)
(8,474)
(164)
(816)
(12)
(735)
(11,856)
421
—
8
152
—
78
127
—
—
151
1,219
52
242
1
341
2,792
(9,064)
3,945
10,548
14,493
32,920
(622)
—
(126)
(546)
—
—
(56)
—
—
(466)
(971)
(146)
(598)
—
(441)
(3,972)
308
—
10
98
—
—
62
—
—
148
295
53
312
—
371
1,657
(2,315)
3,065
2,331
5,396
27,491
$
$
(836)
—
(185)
(868)
—
(18)
(20)
—
—
(548)
(5)
(88)
(591)
—
(404)
(3,563)
137
—
27
155
—
89
114
—
—
183
582
35
391
—
375
2,088
(1,475)
3,392
(533)
2,859
24,410
(1,886)
NA
(241)
(1,190)
—
(619)
(466)
NA
—
(632)
—
(142)
(601)
—
(408)
(6,185)
285
NA
172
117
—
48
99
NA
—
165
845
19
411
—
338
2,499
(3,686)
3,828
(845)
2,983
23,026
$
(3,128)
NA
(520)
(1,033)
—
(1,922)
(176)
NA
—
(2,252)
(11,097)
(123)
(468)
—
(266)
(20,985)
256
NA
137
90
—
104
25
NA
—
92
4,221
36
422
—
225
5,608
(15,377)
8,167
6,876
15,043
23,729
$
Allowance to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance to nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . .
Net loan charge-offs to average loans . . . . . . . . . . . . . . . . . . . . . .
0.86 %
205
0.27
0.83 %
125
0.07
0.80 %
103
0.05
0.89 %
109
0.14
0.90 %
109
0.61
Credit Quality Ratios - Core Bank:
Allowance to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance to nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . .
Net loan charge-offs to average loans . . . . . . . . . . . . . . . . . . . . . .
0.74 %
175
0.05
0.83 %
125
0.05
0.80 %
103
0.08
0.89 %
109
0.18
0.90 %
109
0.34
NA - not applicable
80
The following table sets forth management’s allocation of the Allowance by loan class. The Allowance allocation is based on
management’s assessment of economic conditions, historical loss experience, loan volume, past due and nonaccrual loans and various
other qualitative factors. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily
indicative of future loan portfolio performance or future Allowance allocation.
Table 13 — Management’s Allocation of the Allowance for Loan and Lease Losses
December 31, (dollars in thousands)
Allowance
Loans*
2016
Percent of
Loans to
Total
2015
2014
2013
2012
Percent of
Loans to
Total
Loans*
Percent of
Loans to
Total
Loans*
Percent of
Loans to
Total
Loans*
Percent of
Loans to
Total
Loans*
Allowance
Allowance
Allowance
Allowance
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans
Construction & land development . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . .
Home equity. . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
7,158
373
1,139
8,042
36
1,850
1,511
136
1,464
3,757
RPG loans . . . . . . . . . . . . . . . . . . . . . . .
4,992
Credit cards . . . . . . . . . . . . . . . . . . . . . .
490
Overdrafts . . . . . . . . . . . . . . . . . . . . . . .
675
Automobile loans . . . . . . . . . . . . . . . . . .
526
Other consumer . . . . . . . . . . . . . . . . . . . . . .
771
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,920
26 % $
5
4
27
1
3
7
—
15
9
8,301
623
1,052
7,636
36
1,303
1,455
89
967
2,996
1
—
—
1
1
100
1,699
448
351
56
479
$ 27,491
33 % $
8
3
25
1
2
7
—
12
9
8,565
567
837
7,740
34
926
1,167
25
799
2,730
38 % $
7
3
26
1
1
5
—
11
8
7,816
NA
1,023
8,309
34
1,296
1,089
NA
449
2,396
—
—
—
—
—
100
44
285
382
32
277
$ 24,410
—
—
—
—
—
100
—
289
199
54
72
$ 23,026
43 % $
NA
4
30
1
2
5
NA
6
9
7,006
NA
1,049
8,843
34
2,769
580
NA
541
2,348
—
—
—
—
—
100
—
210
198
57
94
$ 23,729
44 %
NA
3
26
1
3
5
NA
8
9
—
—
—
—
1
100
NA - Not Applicable
*Values of less than 50 basis points are rounded down to zero.
Management believes, based on information presently available, that it has adequately provided for loan and lease losses at
December 31, 2016 and 2015.
For additional discussion regarding Republic’s methodology for determining the adequacy of the Allowance, see the section titled
“Critical Accounting Policies and Estimates” in this section of the filing.
81
Asset Quality
Classified and Special Mention Loans
The Bank applies credit quality indicators, or “ratings,” to individual loans based on internal Bank policies. Such internal policies are
informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard” and PCI-Substandard (“PCI-Sub”) are considered
“Classified.” Loans rated “Special Mention” or PCI Group 1 (“PCI-1”) are considered Special Mention. The Bank’s Classified and
Special Mention loans decreased $9 million during 2016, primarily due to the payoffs and paydowns of Substandard and PCI loans
during the period.
See Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part II Item 8 “Financial Statements and Supplementary Data”
for additional discussion regarding Classified and Special mention loans.
Table 14 — Classified and Special Mention Loans
December 31, (in thousands)
2016
2015
2014
2013
2012
Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased Credit Impaired - Substandard . . . . . . . . .
Total Classified Loans . . . . . . . . . . . . . . . . . . . . . .
Special Mention . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased Credit Impaired - Group 1 . . . . . . . . . . . .
Total Special Mention Loans . . . . . . . . . . . . . . . .
$
—
—
21,412
2,366
23,778
30,702
7,908
38,610
$
—
—
27,833
—
27,833
31,312
12,543
43,855
$
—
—
39,999
—
39,999
36,268
17,490
53,758
$
—
—
44,305
—
44,305
40,167
40,731
80,898
$
—
—
49,352
—
49,352
50,625
72,978
123,603
Total Classified and Special Mention Loans . . . . . .
$
62,388
$
71,688
$
93,757
$ 125,203
$ 172,955
Nonperforming Loans
Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. Impaired loans that are
not placed on nonaccrual status are not included as nonperforming loans. The nonperforming loan category included TDRs totaling
approximately $10 million and $12 million at December 31, 2016 and 2015. Generally, all nonperforming loans are considered
impaired.
Nonperforming loans to total loans decreased to 0.42% at December 31, 2016 from 0.66% at December 31, 2015, as the total balance
of nonperforming loans decreased by $6 million, or 27%, while total loans increased $484 million, or 15%, during 2016.
82
Table 15 — Nonperforming Loans and Nonperforming Assets Summary
December 31, (dollars in thousands)
2016
2015
2014
2013
2012
Loans on nonaccrual status* . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans past due 90-days-or-more and still on accrual** . . . . . . . . .
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
15,892
167
16,059
1,391
17,450
$
$
21,712
224
21,936
1,220
23,156
$
$
23,337
322
23,659
11,243
34,902
$
$
19,104
1,974
21,078
17,102
38,180
$
$
18,506
3,173
21,679
26,203
47,882
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans (including OREO) . . . . . . . . .
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . . . . .
Credit Quality Ratios - Core Bank:
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans (including OREO) . . . . . . . . .
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . . . . .
0.42 %
0.46
0.36
0.42 %
0.46
0.36
0.66 %
0.70
0.55
0.66 %
0.70
0.55
0.78 %
1.14
0.93
0.78 %
1.15
0.93
0.81 %
1.46
1.13
0.81 %
1.46
1.13
0.82 %
1.79
1.41
0.82 %
1.79
1.41
*Loans on nonaccrual status include impaired loans. See Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part II Item 8 “Financial Statements and
Supplementary Data” for additional discussion regarding impaired loans.
** Loans past due 90-days-or-more and still accruing consist of PCI loans or smaller-balance consumer loans.
Approximately $13 million, or 80%, of the Bank’s total nonperforming loans at December 31, 2016 were concentrated in the real
estate mortgage category (residential real estate and HELOCs), with the underlying collateral predominantly located in the Bank’s
primary market footprint of Kentucky. The Bank’s nonperforming real estate mortgage concentration was $16 million, or 73%, as of
December 31, 2015.
Approximately $3 million, or 17%, of the Bank’s total nonperforming loans were concentrated in the CRE and construction and land
development portfolios as of December 31, 2016, compared to the $6 million, or 26%, at December 31, 2015. While CRE is the
primarily collateral for such loans, the Bank also obtains in many cases, at the time of origination, personal guarantees from the
principal borrowers and secured liens on the guarantors’ primary residences.
Table 16 — Nonperforming Loan Composition
December 31, (dollars in thousands)
Balance
Loan Class Balance
Loan Class Balance
Loan Class Balance
Loan Class Balance
Percent of
Total
Percent of
Total
Percent of
Total
Percent of
Total
Percent of
Total
Loan Class
2016
2015
2014
2013
2012
Residential real estate
Owner occupied . . . . . . . . . . . . . . . . . $ 10,955
Owner occupied - correspondent . . . . .
—
Nonowner occupied . . . . . . . . . . . . . .
852
Commercial real estate . . . . . . . . . . . . . . .
2,725
Commercial real estate - purchased whole
loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . .
Commercial & industrial . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
—
77
154
—
—
1,069
RPG loans . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . .
82
—
—
—
145
1.10 %
—
0.54
0.27
$ 13,197
—
935
4,165
1.22 %
—
0.80
0.50
$ 11,225
—
2,352
6,151
1.00 %
—
2.44
0.80
—
0.06
0.06
—
—
0.31
0.25
—
—
—
0.73
—
1,589
194
—
—
1,793
—
—
—
—
63
—
2.39
0.08
—
—
0.62
—
—
—
—
0.50
—
1,990
169
—
—
1,678
—
—
—
—
94
—
5.17
0.11
—
—
0.68
—
—
—
—
1.06
$ 9,211
0.84 %
$ 10,028
0.88 %
NA NA
1.15
0.99
1,279
7,643
—
167
1,558
—
0.38
1.22
NA NA
—
—
0.50
1,128
—
—
—
—
—
—
NA NA
0.60
92
NA NA
0.85
0.63
1,376
4,468
—
2,308
1,534
—
3.38
1.17
NA NA
—
—
0.77
1,868
NA NA
—
—
—
—
NA NA
0.64
97
Total nonperforming loans . . . . . . . . . . . . $ 16,059
0.42
$ 21,936
0.66
$ 23,659
0.78
$ 21,078
0.81
$ 21,679
0.82
NA - Not Applicable
83
Table 17 — Stratification of Nonperforming Loans
December 31, 2016
(dollars in thousands)
Residential real estate:
Number of Nonperforming Loans and Recorded Investment
No.
Balance
<= $100
Balance
> $100 &
<= $500
No.
No.
Balance
> $500
No.
Total
Balance
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
120
—
5
2
—
1
—
—
—
25
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,163
—
—
—
39
$
5,417
—
77
106
—
77
—
—
—
589
82
—
—
—
145
30
—
—
5
—
—
1
—
—
3
—
—
—
—
—
$
5,538
—
—
1,190
—
—
154
—
—
480
—
—
—
—
—
—
—
1
1
—
—
—
—
—
—
—
—
—
—
—
$
—
—
775
1,429
—
—
—
—
—
—
$
150
—
6
8
—
1
1
—
—
28
—
—
—
—
—
1,163
—
—
—
39
10,955
—
852
2,725
—
77
154
—
—
1,069
82
—
—
—
145
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,355
$
6,493
39
$
7,362
2
$
2,204
1,396
$
16,059
December 31, 2015
(dollars in thousands)
Residential real estate:
Number of Nonperforming Loans and Recorded Investment
Balance
No.
Balance
<= $100
> $100 &
<= $500
Balance
> $500
No.
No.
Total
No.
Balance
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125
—
5
2
—
1
—
—
—
25
—
—
—
—
19
$
6,313
—
87
69
—
89
—
—
—
530
—
—
—
—
63
34
—
—
8
—
—
1
—
—
6
—
—
—
—
—
$
6,287
—
—
1,972
—
—
194
—
—
1,263
—
—
—
—
—
1
—
1
3
1
—
—
—
—
—
—
—
—
—
$
597
—
848
2,124
1,500
—
—
—
—
—
—
—
—
—
160
—
6
13
—
2
1
—
—
31
—
—
—
—
19
$
13,197
—
935
4,165
—
1,589
194
—
—
1,793
—
—
—
—
63
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177
$
7,151
49
$
9,716
6
$
5,069
232
$
21,936
84
Approximately $8 million in nonperforming loans at December 31, 2015, were removed from the nonperforming loan classification
during 2016. Approximately $329,000, or 4%, of these loans were removed from the nonperforming category because they were
charged-off. Approximately $3 million, or 37%, in loan balances were transferred to OREO with the remaining $5 million, or 59%,
refinanced at other financial institutions.
Interest income that would have been recorded if nonaccrual loans were on a current basis in accordance with their original terms was
$888,000, $1.1 million and $898,000 in 2016, 2015 and 2014.
Based on the Bank’s review as of December 31, 2016, management believes that its reserves are adequate to absorb probable losses on
all nonperforming credits.
Table 18 — Rollforward of Nonperforming Loan Activity
Years Ended December 31, (in thousands)
2016
2015
2014
2013
2012
Nonperforming loans at beginning of period . . . . . . . . . . . . . . . . . $ 21,936 $ 23,659 $ 21,078 $ 21,679 $ 23,306
14,627
Loans added to nonperforming status . . . . . . . . . . . . . . . . . . . . . . .
(15,391)
Loans removed from nonperforming status (see table below) . . .
(863)
Principal paydowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,403
(15,374)
(630)
15,657
(12,060)
(1,016)
3,784
(8,086)
(1,575)
7,861
(8,505)
(1,079)
Nonperforming loans at end of period . . . . . . . . . . . . . . . . . . . . . . $ 16,059 $ 21,936 $ 23,659 $ 21,078 $ 21,679
Table 19 — Detail of Loans Removed from Nonperforming Status
Years Ended December 31, (in thousands)
2016
2015
2014
2013
2012
Loans charged-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans transferred to OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans refinanced at other institutions . . . . . . . . . . . . . . . . . . . . . . . . .
Loans returned to accrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,986)
(4,771)
—
(2,034)
(4,026)
(2,235)
(329) $
(210) $
(119) $ (1,520) $ (2,421)
(5,871)
(3,340)
(3,664)
(5,626)
(3,435)
(4,888)
(4,365)
(5,034)
(2,542)
Total nonperforming loans removed from nonperforming status . . . $ (8,086) $ (8,505) $ (12,060) $ (15,374) $ (15,391)
85
Delinquent Loans
Delinquent loans to total loans decreased to 0.24% at December 31, 2016, from 0.35% at December 31, 2015, as the total balance of
delinquent loans decreased by $3 million, or 24%. With the exception of PCI loans and smaller-balance consumer loans, all loans past
due 90-days-or-more as of December 31, 2016 and 2015 were on nonaccrual status.
As detailed in the following table, delinquent loans within the residential real estate and home equity categories decreased $3 million,
or 33%, during 2016, while Construction, CRE and C&I delinquencies decreased $2 million, or 74%, for the same period.
Table 20 — Delinquent Loan Composition*
December 31,
(dollars in thousands)
2016
Percent of
Total
2015
2014
2013
Percent of
Total
Percent of
Total
Percent of
Total
2012
Percent of
Total
Balance Loan Class Balance Loan Class Balance Loan Class Balance Loan Class Balance Loan Class
Residential real estate
Owner occupied . . . . . . . . . . . . . .
Owner occupied - correspondent . .
Nonowner occupied . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . .
Commercial real estate - purchased
whole loans . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . .
Commercial & industrial . . . . . . . . . . .
Lease financing receivables . . . . . . . . .
Warehouse lines of credit . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . .
2,137
18
161
—
305
$ 4,554
—
46
425
0.46 % $ 6,882
—
53
1,111
—
0.03
0.04
0.64 % $ 8,008
—
776
2,972
—
0.05
0.13
0.72 % $ 6,357
NA
1,293
5,198
—
0.80
0.38
0.58 % $ 8,900
NA
2,899
2,640
NA
1.17
0.67
0.78 %
NA
3.89
0.37
—
—
342
—
—
970
—
—
0.13
—
—
0.28
6.63
0.13
20.05
—
1.54
—
1,500
299
—
—
1,393
246
12
133
1
101
—
2.26
0.13
—
—
0.48
3.41
0.11
19.42
0.02
0.84
—
1,990
211
—
—
1,362
141
134
178
19
60
—
5.17
0.13
—
—
0.55
3.44
1.40
15.08
0.59
0.58
—
499
1,415
NA
—
1,110
—
98
159
34
60
—
1.13
1.11
NA
—
0.49
—
1.09
16.84
0.63
0.74
—
2,124
2,262
NA
—
1,654
—
65
168
—
132
—
3.11
1.73
NA
—
0.68
—
0.75
17.59
—
1.39
Total delinquent loans . . . . . . . . . . . . .
$ 8,958
0.24
$ 11,731
0.35
$ 15,851
0.52
$ 16,223
0.63
$ 20,844
0.79
*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.
NA — Not applicable.
86
Approximately $10 million in delinquent loans at December 31, 2015, were removed from delinquent status during 2016.
Approximately $150,000, or 1%, of these loans were removed from the delinquent category because they were charged-off.
Approximately $3 million, or 27%, in loan balances were transferred to OREO with $4 million, or 38%, refinanced at other financial
institutions. The remaining $3 million, or 33%, in delinquent loans were paid current in 2016.
Table 21 — Rollforward of Delinquent Loan Activity
Years Ended December 31, (in thousands)
2016
2015
2014
2013
2012
Delinquent loans at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,731 $ 15,851 $ 16,223 $ 20,844 $ 24,433
17,604
Loans that became delinquent during the period . . . . . . . . . . . . . . . . . .
(20,965)
Delinquent loans removed from delinquent status (see table below) . . . . . .
(228)
Change in principal balance of loans delinquent in both periods* . . . .
5,399
(10,205)
2,033
13,016
(17,328)
(309)
7,038
(10,969)
(189)
13,750
(14,079)
(43)
Delinquent loans at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,958 $ 11,731 $ 15,851 $ 16,223 $ 20,844
*Includes relatively-small consumer portfolios, e.g., credit cards.
Table 22 — Detail of Loans Removed From Delinquent Status
Years Ended December 31, (in thousands)
2016
2015
2014
2013
2012
Loans charged-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred to OREO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans refinanced at other institutions . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans paid current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(150) $
(302) $
(2,805)
(3,926)
(3,324)
(2,207)
(4,072)
(4,388)
(159) $ (1,380) $ (2,120)
(6,358)
(6,331)
(7,741)
(6,115)
(4,746)
(3,502)
(4,889)
(5,617)
(3,414)
Total delinquent loans removed from delinquent status . . . . . . . . . . .
$ (10,205) $ (10,969) $ (14,079) $ (17,328) $ (20,965)
Impaired Loans and Troubled Debt Restructurings
The Bank’s policy is to charge-off all or that portion of its recorded investment in a collateral-dependent impaired credit upon a
determination that it is probable the full amount of contractual principal and interest will not be collected. Impaired loans totaled $53
million at December 31, 2016 compared to $66 million at December 31, 2015.
A TDR is the 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 review of the
borrower’s financial condition, and ability and willingness to service the modified debt. As of December 31, 2016, the Bank had $42
million in TDRs, of which $10 million were also on nonaccrual status. As of December 31, 2015, the Bank had $50 million in TDRs,
of which $12 million were also on nonaccrual status.
87
Table 23 — Impaired Loan Composition
December 31, (in thousands)
2016
2015
2014
2013
2012
Troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans (which are not TDRs) . . . . . . . . . . . . . . . .
41,586
$
11,098
49,580
$
16,543
$
65,266
20,914
$
73,972
34,022
$
83,307
22,400
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
52,684
$
66,123
$
86,180
$ 107,994
$ 105,707
See Footnote 5 “Loans and Allowance for Loan and Lease Losses” of Part II Item 8 “Financial Statements and Supplementary Data”
for additional discussion regarding impaired loans and TDRs.
Other Real Estate Owned
Table 24 — Stratification of Other Real Estate Owned
December 31, 2016
(dollars in thousands)
Number of OREO Properties and Carrying Value Range
Carrying
Value
< = $100
No.
No.
Carrying
Value
> $100 &
< = $500
No.
Carrying
Value
> $500
Total
Carrying
No.
Value
Residential real estate . . . . . . . . . . . . . . . . . . . . .
3
$
848
1
$
543
—
$
—
4
$
1,391
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
$
848
1
$
543
—
$
—
4
$
1,391
December 31, 2015
(dollars in thousands)
Number of OREO Properties and Carrying Value Range
Carrying
Value
< = $100
No.
No.
Carrying
Value
> $100 &
< = $500
Carrying
Value
> $500
No.
No.
Total
Carrying
Value
Residential real estate . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . .
3
1
—
$
193
54
—
$
2
1
1
285
388
300
—
—
—
$
—
—
—
$
5
2
1
478
442
300
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
$
247
4
$
973
—
$
—
8
$
1,220
Table 25 — Rollforward of Other Real Estate Owned Activity
Years Ended December 31, (in thousands)
2016
2015
2014
2013
2012
OREO at beginning of period . . . . . . . . . . . . . . . . . . . .
Transfer from loans to OREO . . . . . . . . . . . . . . . . . . . .
Proceeds from sale* . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,220
4,778
(4,851)
514
(270)
$
11,243
2,938
(12,660)
956
(1,257)
$
17,102
7,333
(10,974)
883
(3,101)
$
26,203
14,197
(23,644)
2,170
(1,824)
$
10,956
41,876
(25,326)
416
(1,719)
OREO at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,391
$
1,220
$
11,243
$
17,102
$
26,203
*Inclusive of non-cash proceeds where the Bank financed the sale of the property.
88
The fair value of OREO represents the estimated value that management expects to receive when the property is sold, net of related
costs to sell. These estimates are based on the most recently available real estate appraisals, with certain adjustments made based on
the type of property, age of appraisal, current status of the property and other relevant factors to estimate the current value of the
property.
Bank Owned Life Insurance (“BOLI”)
BOLI offers tax advantaged noninterest income to help the Bank offset employee benefits expenses. The Company carried $62
million and $53 million of BOLI on its consolidated balance sheet at December 31, 2016 and 2015. The Company acquired $7
million of BOLI during 2016 in association with its May 17, 2016 Cornerstone acquisition.
Table 26 — Rollforward of Bank Owned Life Insurance
December 31, (in thousands)
2016
2015
2014
BOLI at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BOLI acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BOLI at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
52,817
7,461
1,516
61,794
$
$
51,415
—
1,402
52,817
$
$
25,086
25,000
1,329
51,415
Deposits
Table 27 — Deposit Composition
December 31, (in thousands)
2016
2015
2014
2013
2012
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Money market accounts . . . . . . . . . . . . . . . . . . . . . . .
Brokered money market accounts . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Individual retirement accounts* . . . . . . . . . . . . . . . . .
Time deposits, $250 and over* . . . . . . . . . . . . . . . . .
Other certificates of deposit* . . . . . . . . . . . . . . . . . . .
Brokered certificates of deposit* . . . . . . . . . . . . . . . .
872,709 $
541,622
360,597
164,410
42,642
37,200
140,894
28,681
783,054 $
501,059
200,126
117,408
36,016
42,775
127,878
44,298
691,787 $
471,339
35,649
91,625
28,771
56,556
104,010
75,876
651,134 $
479,569
35,533
78,020
28,767
67,255
75,516
86,421
580,900
514,698
35,596
62,145
32,491
80,906
100,036
97,110
Total interest-bearing deposits . . . . . . . . . . . . . . . . . .
Total noninterest-bearing deposits . . . . . . . . . . . . . . .
2,188,755
971,937
1,852,614
634,863
1,555,613
502,569
1,502,215
488,642
1,503,882
479,046
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,160,692 $ 2,487,477 $ 2,058,182 $ 1,990,857 $ 1,982,928
*Represents a time deposit.
Total Company deposits increased $673 million, or 27%, from December 31, 2015 to $3.2 billion at December 31, 2016. Total
Company interest-bearing deposits increased $336 million, or 18%, while total Company noninterest bearing deposits increased $337
million, or 53%.
The Company assumed $205 million in deposits through its May 17, 2016 Cornerstone acquisition, including approximately $152
million in interest-bearing deposits and $53 million in noninterest-bearing deposits. Outside of the Company’s Cornerstone
acquisition and a $160 million increase in brokered money market deposits, increases in balances for several large corporate clients
drove the Company’s overall increase in deposits during 2016.
89
Despite an increase in short-term interest rates in mid-December 2016, the Bank did not increase interest rates, in general, on its
deposit product offerings in an effort to combat on-going compression within the Bank’s net interest margin. Due to on-going
competitive pressures, however, management is uncertain if, and to what extent, it will be able to maintain this strategy in the future if
short-term interest rates continue to rise. If the Bank begins to experience an increased outflow of deposits due to its pricing structure,
it may be forced to increase rates on most, if not all, of its transactional deposit accounts in order to maintain adequate liquidity for
anticipated asset growth and the normal operations of the Bank. Such an increase in the Bank’s deposit rates would likely have a
negative impact on the Bank’s net interest income and net interest margin.
Table 28 — Average Deposits
December 31, (dollars in thousands)
2016
2015
2014
2013
2012
Average
Balance
Average Average
Balance
Rate
Average Average
Balance
Rate
Average Average
Balance
Rate
Average Average
Balance
Rate
Average
Rate
Transaction accounts . . . . . . . . . . . . . . . . . . . . . . $
962,473
Money market accounts . . . . . . . . . . . . . . . . . . . .
546,360
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
221,634
Brokered money market . . . . . . . . . . . . . . . . . . . .
289,612
Brokered certificates of deposit . . . . . . . . . . . . . . .
38,513
Total average interest-bearing deposits . . . . . . . . . .
2,058,592
Total average noninterest-bearing deposits . . . . . . .
894,049
Total average deposits . . . . . . . . . . . . . . . . . . . . . $ 2,952,641
0.10 % $
0.20
1.00
0.43
1.45
0.29
—
0.21
840,815
485,508
200,863
132,623
54,405
1,714,214
651,275
$ 2,365,489
0.07 % $
0.16
0.96
0.21
1.57
0.26
—
0.19
750,693
477,129
174,904
34,586
72,889
1,510,201
553,929
$ 2,064,130
0.07 % $
0.16
0.65
0.20
2.12
0.26
—
0.19
696,295
508,288
187,076
34,691
88,497
1,514,847
513,891
$ 2,028,738
0.07 % $
0.12
0.73
0.20
1.75
0.27
—
0.20
614,118
478,682
253,567
22,469
143,619
1,512,455
624,053
$ 2,136,508
0.06 %
0.15
0.86
0.22
1.19
0.34
—
0.24
Table 29 — Maturities of Time Deposits Greater than $100,000 at December 31, 2016
Weighted
Average
Maturity (dollars in thousands)
Principal
Rate
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over three months through six months . . . . . . . . . . .
Over six months through 12 months . . . . . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
27,342
9,756
15,744
65,317
118,159
0.48 %
0.29
0.39
1.72
1.14
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
Securities Sold under Agreements to Repurchase (“SSUARs”) are collateralized by securities and are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations
to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank’s control.
SSUARs decreased approximately $222 million, or 56%, during 2016, with two large corporate clients accounting for $174 million, or
78%, of the decrease. The first client transferred approximately $120 million in funds to a competing financial institution as a result
of proposed changes by the Bank to the client’s account structure. The second client reflected a decrease of $54 million during the
period due to normal seasonal cash flow needs. The substantial majority of SSUARs are indexed to immediately repricing indices such
as the FFTR.
Table 30 — Securities Sold Under Agreements to Repurchase
As of and for the Years Ended December 31, (dollars in thousands)
2016
2015
2014
2013
2012
Outstanding balance at end of period . . . . . . . . .
Weighted average interest rate at period end . . .
Average outstanding balance during the period .
Average interest rate during the period . . . . . . . .
Maximum outstanding at any month end . . . . . .
$ 173,473
$ 395,433
$ 356,108
$ 165,555
$ 250,884
0.05 %
0.02 %
0.04 %
0.04 %
0.06 %
$ 280,296
$ 379,477
$ 296,196
$ 170,386
$ 237,414
0.02 %
0.02 %
0.04 %
0.04 %
0.16 %
$ 367,373
$ 442,981
$ 408,891
$ 242,721
$ 272,057
90
Federal Home Loan Bank Advances
FHLB advances increased $103 million, or 15%, from December 31, 2015 to $803 million at December 31, 2016. The Bank obtained
a $100 million 90-day advance in December 2016 at a fixed rate of 0.74%. In addition, the Bank renewed its $10 million variable rate
advance tied to 3-month LIBOR in December 2016. Term advances totaling $142 million were repaid during 2016. Of the repaid
advances, $92 million of advances at a rate of 1.67% were paid off at maturity, while $50 million at a rate of 4.39% were terminated
early during the third quarter of 2016 with a prepayment penalty of $846,000. The Bank expects to recover the amount of this penalty
through a reduction in interest expense over what would have been the remaining original term of these advances.
The Bank held $285 million in overnight advances at a rate of 0.64% as of December 31, 2016, compared to $150 million in overnight
advances at a rate of 0.35% held at December 31, 2015. The Company’s usage of overnight FHLB advances increased during 2016
primarily due to significant growth in outstanding warehouse lines credit. Management anticipates its usage of FHLB overnight
advances will continue to correlate with fluctuations in outstanding warehouse lines in 2017.
Table 31 — Federal Home Loan Bank Advances
As of and for the Years Ended December 31, (dollars in thousands)
2016
2015
2014
2013
2012
Outstanding balance at end of period . . . . . . . . . . . . . . $ 802,500
Weighted average interest rate at period end . . . . . . . .
Average outstanding balance during the period . . . . . . $ 583,591
Average interest rate during the period . . . . . . . . . . . . .
Maximum outstanding at any month end . . . . . . . . . . . $ 987,500
$ 699,500
$ 707,500
$ 605,000
$ 542,600
1.35 %
1.77 %
1.60 %
2.42 %
2.64 %
$ 599,630
$ 584,516
$ 578,633
$ 560,659
1.87 %
1.99 %
2.24 %
2.54 %
2.65 %
$ 916,500
$ 707,500
$ 605,000
$ 789,618
Interest Rate Swaps
Interest Rate Swaps Used as Cash Flow Hedges
The Bank entered into two interest rate swap agreements during 2013 as part of its interest rate risk management strategy. The Bank
designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to
the 3-month the LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR. The
counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is
not significant.
Non-hedge Interest Rate Swaps
During the second quarter of 2015, the Bank began entering 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 8 “Interest Rate Swaps” of Part II Item 8 “Financial Statements and Supplementary Data” for further information
regarding the Bank’s interest rate swaps.
Liquidity
The Bank had a loan to deposit ratio (excluding brokered deposits) of 138% and 148% at December 31, 2016 and 2015. At
December 31, 2016 and 2015, the Company had cash and cash equivalents on-hand of $289 million and $210 million. In addition, the
Bank had available collateral to borrow an additional $378 million and $567 million from the FHLB at December 31, 2016 and 2015.
In addition to its borrowing line with the FHLB, the Bank also had unsecured lines of credit totaling $150 million and $170 million
available through various other financial institutions as of December 31, 2016 and 2015.
91
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
securities available for sale, principal paydowns on loans and MBSs 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. At December 31, 2016 and 2015, these pledged investment securities had a fair value of $232 million and $490
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.
At December 31, 2016, the Bank had approximately $623 million in deposits from 69 large non-sweep deposit relationships where the
individual relationship individually exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately
$435 million, or 14%, of the Company’s total deposit balances at December 31, 2016. 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 brokered deposits to replace withdrawn balances. Based on past experience utilizing brokered deposits, the
Bank believes it can quickly obtain brokered deposits if needed. The overall cost of gathering brokered deposits, however, could be
substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.
Due to its on-going success of growing loans and its overall use of non-core funding sources, the Bank has regularly approached, and
in some cases, has fallen outside of its internal policy limits for liquidity management, as set forth by the Bank’s Board of Directors.
Management also believes that in the near-term, as loan growth is expected to continue to outpace deposit growth, the Bank could
continue to approach and sometimes fall outside of its internal liquidity policy limits. On a long-term basis, management is focusing
its efforts on various deposit gathering strategies, including raising significant deposits through its MemoryBank brand, in order to
improve the Bank’s overall liquidity position. As of December 31, 2016, the Bank was in compliance with all Board-approved
liquidity policies.
Capital
Table 32 — Capital
Information pertaining to the Company’s capital balances and ratios follows:
December 31, (dollars in thousands, except per share data)
2016
2015
2014
2013
2012
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 604,406
28.97
Book value per share at December 31, . . . . . . . . . . . . . . .
27.89
Tangible book value per share at December 31,* . . . . . . .
0.825
Dividends declared per share - Class A Common Stock .
0.750
Dividends declared per share - Class B Common Stock .
13.32 %
Average stockholders’ equity to average total assets . . . .
Total risk based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.37
Common equity tier 1 capital . . . . . . . . . . . . . . . . . . . . . . .
14.59
Tier 1 risk based capital . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.55
Tier 1 leverage capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.54
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.09
$ 576,547
27.59
26.87
0.781
0.710
14.43 %
20.58
18.39
19.69
14.82
46
2.96
$ 558,731
26.80
26.08
0.737
0.670
15.66 %
22.17
NA
21.28
15.92
53
2.98
$ 542,793
26.09
25.35
0.693
0.630
16.15 %
26.72
NA
25.67
16.81
56
2.82
$ 536,702
25.60
24.86
1.749
1.590
14.89 %
25.28
NA
24.31
16.36
31
8.28
*See Footnote 2 of Part II, Item 6 “Selected Financial Data” for additional detail.
NA – Not applicable.
92
Total stockholders’ equity increased from $577 million at December 31, 2015 to $604 million at December 31, 2016. The increase in
stockholders’ equity was primarily attributable to net income earned during 2016 reduced by cash dividends declared and common
stock repurchases.
See Part II, Item 5. “Unregistered Sales of Equity Securities and Use of Proceeds” for additional detail regarding stock repurchases
and stock buyback programs.
Common Stock — The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on
Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share.
Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The
Class A Common shares are not convertible into any other class of Republic’s capital stock.
Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from the
Bank. 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. At December 31, 2016, the
Bank could, without prior approval, declare dividends of approximately $60 million.
Regulatory Capital Requirements — The Parent Company and the Bank are subject to various regulatory capital requirements
administered by banking regulators. 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 about components, risk weightings and other factors.
Effective January 1, 2015 the Company and the Bank became subject to the capital regulations in accordance with Basel III. These
regulations established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 Risk-Based Capital ratio
and a new capital conservation buffer. The regulations included revisions to the definition of capital and changes in the risk weighting
of certain assets. For prompt corrective action, the new regulations establish definitions of “well capitalized” as a 6.5% Common
Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio and a 5.0%
Tier 1 Leverage ratio.
Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus
payments to executive officers, the Company and Bank must hold a capital conservation buffer composed of Common Equity Tier 1
Risk-Based Capital above their minimum risk-based capital requirements. The capital conservation buffer phases in over time based
on the following schedule: a capital conservation buffer of .625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875%
effective January 1, 2018; and a fully phased in capital conservation buffer of 2.5% on January 1, 2019.
Banking regulators have categorized the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain
minimum Total Risk-Based Capital, Common Equity Tier I Risk-Based Capital, Tier I Risk-Based Capital and Tier I Leverage capital
ratios. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the
individual risk profiles of financial institutions. Republic continues to exceed the regulatory requirements for Total Risk-Based
Capital, Common Equity Tier I Risk-Based Capital, Tier I risk based capital and Tier I Leverage capital. Republic and the Bank intend
to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB, and FDIC. Formal
measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
In 2005, Republic Bancorp Capital Trust (“RBCT”), an unconsolidated trust subsidiary of Republic, was formed and issued $40
million in Trust Preferred Securities (“TPS”). The sole asset of RBCT represents the proceeds of the offering loaned to Republic in
exchange for a subordinated note with similar terms to the TPS. The RBCT TPS are treated as part of Republic’s Tier I Capital.
The subordinated note and related interest expense are included in Republic’s consolidated financial statements. The subordinated
note paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to 3-month LIBOR plus 1.42% on a quarterly basis
thereafter. The subordinated note matures on December 31, 2035 and is redeemable at the Company’s option on a quarterly basis. The
93
Company chose not to redeem the subordinated note on January 1, 2017, and is currently carrying the note at a cost of LIBOR plus
1.42%.
As a result of its acquisition of Cornerstone Bancorp, Inc. on May 17, 2016, Republic became the 100% successor owner of
Cornerstone Capital Trust 1 (“CCT1”), an unconsolidated finance subsidiary. In 2006, CCT1 issued $4 million of adjustable-rate TPS
due December 15, 2036. As permitted under the terms of CCT1’s governing documents, the Company redeemed these securities at the
par amount of approximately $4 million, without penalty, on September 15, 2016.
Off Balance Sheet Items
Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit follows:
Table 33 — Off Balance Sheet Items
December 31, 2016 (in thousands)
Maturity by Period
Greater
than one
year to
three years
Greater
than three
years to
five years
Greater
than five
years
Less than
one year
Total
Unused warehouse lines of credit . . . . . . $
Unused home equity lines of credit . . . .
Unused loan commitments - other . . . . .
Commitments to purchase loans* . . . . .
Standby letters of credit . . . . . . . . . . . . . .
Total off balance sheet items . . . . . . . $
453,110 $
22,811
442,822
3,176
5,227
927,146 $
— $
51,155
48,916
—
10,278
110,349 $
— $
50,098
25,402
—
63
75,563 $
— $
217,370
43,489
—
—
260,859 $
453,110
341,434
560,629
3,176
15,568
1,373,917
*Commitments are made through the Bank’s Correspondent Lending channel.
A portion of the unused commitments above are expected to expire or may not be fully used, therefore the total amount of
commitments above does not necessarily indicate future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client to a third party. The
terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and
extending credit. Commitments outstanding under standby letters of credit totaled $16 million and $13 million at December 31, 2016
and 2015. In addition to credit risk, the Bank also has liquidity risk associated with standby letters of credit because funding for these
obligations could be required immediately. The Bank does not deem this risk to be material.
Commitments to extend credit generally consist of unfunded lines of credit. These commitments generally have variable rates of
interest.
94
Aggregate Contractual Obligations
In addition to owned banking facilities, the Bank has entered into long-term leasing arrangements to support the ongoing activities of
the Company. The Bank also has required future payments for long-term and short-term debt as well as the maturity of time deposits.
The required payments under such commitments follow:
Table 34 — Aggregate Contractual Obligations
December 31, 2016 (in thousands)
Greater
than one
year to
three years
Less than
one year
Maturity by Period
Greater
than three
years to
five years
Greater
than five
years
Total
Deposits without a stated maturity* . . . . . . . . . . . . . . . $ 1,939,364 $
Time deposits (including brokered CDs)* . . . . . . . . . .
Federal Home Loan Bank advances* . . . . . . . . . . . . . .
Subordinated note* . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase* . . . .
Lease commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commitments** . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total contractual obligations . . . . . . . . . . . . . . . . . . . . . $ 2,726,045 $ 311,311 $ 151,919 $
82,437
217,500
—
—
8,943
2,431
109,100
490,735
—
173,473
5,809
7,564
58,067
85,000
—
—
6,331
2,521
— $
— $
— $ 1,939,364
249,604
—
803,235
10,000
41,240
41,240
173,473
—
26,468
5,385
13,134
618
57,243 $ 3,246,518
*Includes accrued interest.
**Primarily includes dividends declared on common stock, the Bank’s Supplemental Executive Retirement Plan (“SERP”), and the
Bank’s significant long-term vendor contracts.
See Footnote 9 “Deposits” of Part II Item 8 “Financial Statements and Supplementary Data” for further information regarding the
Bank’s time deposits.
FHLB advances represent the amounts that are due to the FHLB.
See Footnote 11 “Federal Home Loan Bank Advances” of Part II Item 8 “Financial Statements and Supplementary Data” for further
information regarding the Bank’s FHLB advances.
See Footnote 12 “Subordinated Note” of Part II Item 8 “Financial Statements and Supplementary Data” for further information
regarding the Bank’s subordinated note.
Securities sold under agreements to repurchase generally have indeterminate maturity periods and are predominantly included in the
less than one-year category above.
See Footnote 18 “Benefit Plans” of Part II Item 8 “Financial Statements and Supplementary Data” for further information regarding
the Bank’s SERP commitments.
Lease commitments represent the total minimum lease payments under non-cancelable operating leases.
See Footnote 21 “Transactions with Related Parties and their Affiliates” of Part II Item 8 “Financial Statements and Supplementary
Data” for further information regarding the Bank’s lease commitments.
95
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 a 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 to net interest income of instantaneous movements in interest
rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth
expectations and on the historical behavior of the Bank’s deposit and loan rates and their related balances in relation to changes in
interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model
cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net
interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of
interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market
conditions and the application and timing of various management strategies as compared to those projected in the various simulated
models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the
yield curve.
As of December 31, 2016 and 2015, a dynamic simulation model was run for increases in interest rates from “Up 100” basis points to
“Up 400” basis points. A simulation for declining interest rates as of December 31, 2016 and 2015 was not considered meaningful
and is not presented by the Bank because decreases in the Fed Funds Target Rate were considered unlikely as of December 31, 2016.
The Federal Open Market Committee raised the FFTR for the second time in 10 years during December 2016 from between 0.25%
and 0.50% to 0.50% and 0.75%, with further guidance suggesting that additional increases to the FFTR were more likely than not
during 2017.
The Bank’s dynamic simulation model as of December 31, 2016 projected improvement in the Bank’s net interest income relative to
the Base case in the Up 100 to Up 400 basis points scenarios. With the exception of the Up 100 scenario, the improvement in each of
these scenarios was greater than the projected improvement reflected in the same scenarios as of December 31, 2015. The less
favorable projection in the Up 100 scenario compared to the prior year’s simulation forecast was driven by the Bank’s use of more
conservative beta assumptions on its non-maturity deposit portfolio at December 31, 2016. While the Up 200 to Up 400 scenarios
were also impacted by the use of more conservative beta assumptions on the non-maturity deposit portfolio, this factor was
outweighed by growth in shorter-term loans during 2016, in particular the Bank’s warehouse lines of credit, which reprice monthly.
Also benefitting the December 31, 2016 scenarios when compared to the December 31, 2015 scenarios was growth in the Bank’s
deposit base during the 2016.
96
The following tables illustrate the Bank’s projected percent change from its Base net interest income as of December 31, 2016 and
2015 based on instantaneous movements in interest rates from Up 100 to Up 400 basis points equally across all points on the yield
curve. The Bank’s dynamic earnings simulation model excludes all loan fees.
Table 35 — Bank Interest Rate Sensitivity at December 31, 2016
100
Basis Points
200
Basis Points
300
Basis Points
400
Basis Points
Increase in Rates
% Change from base net interest income . . . . . . . . . . . . . .
Board policy limit on % change from base . . . . . . . . . . . .
3.80 %
(4.00)
4.30 %
(8.00)
4.60 %
(12.00)
3.80 %
(16.00)
Table 36 — Bank Interest Rate Sensitivity at December 31, 2015
100
Basis Points
200
Basis Points
300
Basis Points
400
Basis Points
Increase in Rates
% Change from base net interest income . . . . . . . . . . . . . . . .
Board policy limit on % change from base . . . . . . . . . . . . . . .
4.21 %
(5.00)%
3.82 %
(10.00)%
2.78 %
(15.00)%
(0.76)%
(20.00)%
The Board of Directors of the Bank has established separate and distinct policy limits for acceptable percent changes in the Bank’s net
interest income based on modeled changes in market interest rates. Historically, if model projections of the percent change in net
interest income fall outside Board approved limits at a given point in time or are projected to fall outside such limits based on certain
trends, the Bank has taken certain actions intended either to bring model projections back within Board approved limits or explain
how future anticipated events will correct the current situation. These actions have included, but are not limited to, restructuring of
interest earning assets and interest bearing liabilities, seeking additional fixed rate term FHLB advances, executing interest rate swaps
and modifying the pricing or terms of loans, leases and deposits. These actions have historically had a negative impact on current
earnings.
Along with the Bank’s dynamic earnings simulation model, the Board of Directors of the Bank has established separate and distinct
policy limits for acceptable changes in the Bank’s Economic Value of Equity (“EVE”) based on certain projected changes in market
interest rates. EVE represents the difference between the net present value of the Bank’s interest-earning assets and interest-bearing
liabilities at a point in time.
The Bank’s EVE calculation as of December 31, 2016 reflected a decline from the Base case in the Up 100 to Up 400 basis points
scenarios. The projected decline was less than the projected decline at December 31, 2015 for the same scenarios. Similar to the
drivers of improvement in the Bank’s dynamic earnings simulation scenarios mentioned above, the smaller decline from the Base case
in EVE compared to the prior year’s scenarios was primarily driven by growth in the Bank’s shorter-term loans and deposit base
during 2016.
97
The following tables illustrate the Bank’s EVE sensitivity as of December 31, 2016 and 2015:
Table 37 — Bank Economic Value of Equity Sensitivity for 2016
100
Basis Points
200
Basis Points
300
Basis Points
400
Basis Points
Increase in Rates
% Change from base Economic Value of Equity . . . . . . .
Board policy limit on % change from base . . . . . . . . . . . .
(4.50)%
(10.00)
(13.40)%
(20.00)
(19.00)%
(35.00)
(27.40)%
(45.00)
Table 38 — Bank Economic Value of Equity Sensitivity for 2015
% Change from base Economic Value of Equity . . . . . . . . . .
Board policy limit on % change from base . . . . . . . . . . . . . . .
(7.36)%
(10.00)%
(15.79)%
(20.00)%
(27.40)%
(35.00)%
(38.19)%
(45.00)%
100
Basis Points
200
Basis Points
300
Basis Points
400
Basis Points
Increase in Rates
98
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See the section titled “Asset/Liability Management and Market Risk” included under Part II Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Item 8. Financial Statements and Supplementary Data.
The following are included in this section:
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated balance sheets — December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of income and comprehensive income — years ended December 31, 2016, 2015 and 2014 . . . . . . . . . .
Consolidated statements of stockholders’ equity — years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of cash flows — years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Footnotes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
101
102
103
105
108
109
99
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of Republic Bancorp, Inc. (the “Company”) is responsible for the preparation, integrity, and fair presentation of the
Company’s annual consolidated financial statements. All information has been prepared in accordance with U.S. generally accepted
accounting principles and, as such, includes certain amounts that are based on Management’s best estimates and judgments.
Management is responsible for establishing and maintaining adequate internal control over financial reporting presented in conformity
with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets
that could have a material effect on the financial statements.
Two of the objectives of internal control are to provide reasonable assurance to Management and the Board of Directors that
transactions are properly authorized and recorded in the Company’s financial records, and that the preparation of the Company’s
financial statements and other financial reporting is done in accordance with U.S. generally accepted accounting principles. There are
inherent limitations in the effectiveness of internal control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to reliability of
financial statements. Furthermore, internal control can vary with changes in circumstances.
Management has made its own assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016, in relation to the criteria described in the report, Internal Control — Integrated Framework (2013), issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on its assessment, Management believes that as of December 31, 2016, the Company’s internal control was effective in
achieving the objectives stated above. Crowe Horwath LLP has provided its report on the audited 2016 and 2015 consolidated
financial statements and on the effectiveness of the Company’s internal control in their report dated March 9, 2017.
Steven E. Trager
Chairman and Chief Executive Officer
Kevin Sipes
Chief Financial Officer and Chief Accounting Officer
March 9, 2017
100
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
of Republic Bancorp, Inc.
Louisville, Kentucky
We have audited the accompanying consolidated balance sheets of Republic Bancorp, Inc. as of December 31, 2016 and 2015, and the
related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-
year period ended December 31, 2016. We also have audited Republic Bancorp, Inc.’s internal control over financial reporting as of
December 31, 2016, based on criteria established in the Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Republic Bancorp, Inc.’s management is responsible for these financial
statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Republic Bancorp, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, Republic Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Louisville, Kentucky
March 9, 2017
101
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (in thousands, except share data)
ASSETS
2016
2015
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity (fair value of $53,249 in 2016 and $39,196 in 2015) . . . . . . . . . . . . . . . . .
Mortgage loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans held for sale, at the lower of cost or fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
289,309 $
481,275
52,864
11,662
2,198
1,310
3,810,778
(32,920)
3,777,858
28,208
42,869
16,300
1,391
61,794
49,271
210,082
517,058
38,727
4,083
—
514
3,326,610
(27,491)
3,299,119
28,208
31,106
10,168
1,220
52,817
37,187
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,816,309 $ 4,230,289
LIABILITIES
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,188,755
3,160,692
971,937 $
634,863
1,852,614
2,487,477
Securities sold under agreements to repurchase and other short-term borrowings . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities and accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
173,473
802,500
41,240
33,998
395,433
699,500
41,240
30,092
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,211,903
3,653,742
Commitments and contingent liabilities (Footnote 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
STOCKHOLDERS’ EQUITY
Preferred stock, no par value, 100,000 shares authorized, . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A Common Stock, no par value, 30,000,000 shares authorized, 18,614,961 shares
(2016) and 18,651,841 shares (2015) issued and outstanding; Class B Common Stock, no
par value, 5,000,000 shares authorized, 2,245,011 shares (2016) and 2,245,250 shares
(2015) issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
4,906
138,192
460,621
687
4,915
136,910
432,673
2,049
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
604,406
576,547
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,816,309 $ 4,230,289
See accompanying footnotes to consolidated financial statements.
102
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, (in thousands, except per share data)
INTEREST INCOME:
2016
2015
2014
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
164,232
7,876
1,884
173,992
$
133,958
7,046
1,428
142,432
INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase and other short-term borrowings . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES . . . .
NONINTEREST INCOME:
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net refund transfer fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Program fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . .
Gain on call of security available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (losses) on other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NONINTEREST EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communication and transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank franchise tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advance prepayment penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BASIC EARNINGS PER SHARE:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DILUTED EARNINGS PER SHARE:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIVIDENDS DECLARED PER COMMON SHARE:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying footnotes to consolidated financial statements.
$
$
$
$
103
6,058
65
10,900
915
17,938
156,054
14,493
141,561
13,176
19,240
6,882
9,009
3,044
1,516
—
244
4,398
57,509
69,882
21,777
4,256
3,778
1,780
4,757
6,121
4,140
1,406
503
2,556
846
8,305
130,107
68,963
23,060
45,903
2.22
2.02
2.22
2.01
0.825
0.750
$
$
$
$
4,380
92
11,934
2,056
18,462
123,970
5,396
118,574
13,015
17,388
4,411
8,353
1,233
1,402
88
(301)
2,405
47,994
58,091
20,689
3,752
3,161
2,084
4,734
4,340
3,873
1,101
735
3,306
—
7,458
113,324
53,244
18,078
35,166
1.70
1.55
1.70
1.54
0.781
0.710
$
$
$
$
123,360
7,481
1,536
132,377
3,905
112
13,072
2,515
19,604
112,773
2,859
109,914
13,807
16,130
2,862
7,017
591
1,329
—
(2,218)
3,001
42,519
54,373
22,008
3,866
3,264
1,865
4,616
3,513
3,450
1,009
1,024
2,766
—
6,364
108,118
44,315
15,528
28,787
1.39
1.32
1.38
1.32
0.737
0.670
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, (in thousands)
2016
2015
2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,903 $ 35,166 $ 28,787
OTHER COMPREHENSIVE INCOME
(125)
Change in fair value of derivatives used for cash flow hedges . . . . . . . . . . . . . . . . .
Reclassification amount for derivative losses realized in income . . . . . . . . . . . . . . .
332
Change in unrealized gain (loss) on securities available for sale . . . . . . . . . . . . . . . . (2,294)
Reclassification adjustment for gain on security available for sale recognized in
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gain on security available for sale for which a portion of an
other-than-temporary impairment has been recognized in earnings . . . . . . . . . . . . .
(9)
Net unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,096)
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
734
Total other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . (1,362)
—
(514)
402
(3,160)
(1,082)
424
2,021
(88)
—
(125)
(3,485)
1,219
(2,266)
475
1,838
(644)
1,194
COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,541 $ 32,900 $ 29,981
See accompanying footnotes to consolidated financial statements.
104
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2016, 2015 and 2014
Class A
Shares
Common Stock
Class B
Shares
(in thousands)
Outstanding Outstanding Amount
Accumulated
Additional
Paid In
Capital
Retained
Earnings
Other
Total
Comprehensive Stockholders’
Income
Equity
Balance, January 1, 2014 . . . . . . .
18,541
2,260 $ 4,894 $ 133,012 $ 401,766 $
3,121 $
542,793
Net income . . . . . . . . . . . . . . . . . .
—
—
—
—
28,787
—
28,787
Net change in accumulated other
comprehensive income . . . . . . . .
Dividends declared Common
Stock:
—
—
—
—
—
1,194
1,194
Class A Shares . . . . . . . . . . . . .
Class B Shares . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
(13,680)
(1,508)
—
—
(13,680)
(1,508)
Stock options exercised, net of
shares redeemed . . . . . . . . . . . . .
Repurchase of Class A Common
Stock . . . . . . . . . . . . . . . . . . . . . .
Conversion of Class B Common
Stock to Class A Common Stock
Net change in notes receivable on
Class A Common Stock . . . . . . .
Deferred director compensation
expense - Class A Common
Stock . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation
expense - restricted stock . . . . . .
Stock based compensation
expense - options . . . . . . . . . . . .
62
—
13
1,586
(496)
—
1,103
(15)
—
(3)
(95)
(249)
—
(347)
15
(15)
—
—
—
—
—
(256)
2
—
—
187
(2)
—
—
402
—
—
—
53
—
—
—
3
—
—
—
—
—
—
—
(256)
187
405
53
Balance, December 31, 2014 . . . .
18,603
2,245 $ 4,904 $ 134,889 $ 414,623 $
4,315 $
558,731
(continued)
105
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Class A
Shares
Common Stock
Class B
Shares
(in thousands)
Outstanding Outstanding Amount
Accumulated
Additional
Paid In
Capital
Retained
Earnings
Other
Total
Comprehensive Stockholders’
Income
Equity
Balance, January 1, 2015 . . . . . . .
18,603
2,245 $ 4,904 $ 134,889 $ 414,623 $
4,315 $
558,731
Net income . . . . . . . . . . . . . . . . . .
—
—
—
—
35,166
—
35,166
Net change in accumulated other
comprehensive income . . . . . . . .
Dividends declared Common
Stock:
—
—
—
—
—
(2,266)
(2,266)
Class A Shares . . . . . . . . . . . . .
Class B Shares . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
(14,531)
(1,594)
—
—
(14,531)
(1,594)
Stock options exercised, net of
shares redeemed . . . . . . . . . . . . .
Repurchase of Class A Common
Stock . . . . . . . . . . . . . . . . . . . . . .
Net change in notes receivable on
Class A Common Stock . . . . . . .
Deferred director compensation
expense - Class A Common
Stock . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation
expense - restricted stock . . . . . .
Stock based compensation
expense - options . . . . . . . . . . . .
67
—
16
1,708
(588)
—
1,136
(22)
—
(5)
(143)
(403)
—
(551)
—
—
—
(189)
—
—
(189)
5
—
—
223
—
—
223
(1)
—
—
253
—
—
253
—
—
—
169
—
—
169
Balance, December 31, 2015 . . . .
18,652
2,245 $ 4,915 $ 136,910 $ 432,673 $
2,049 $
576,547
(continued)
106
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands)
Common Stock
Class B
Shares
Class A
Shares
Additional
Paid In
Outstanding Outstanding Amount Capital
Retained
Earnings
Accumulated
Other
Total
Comprehensive Stockholders’
Income
Equity
Balance, January 1, 2016 . . .
18,652
2,245 $ 4,915 $ 136,910 $ 432,673 $
2,049 $
576,547
Net income . . . . . . . . . . . . . . .
—
—
—
—
45,903
—
45,903
Net change in accumulated
other comprehensive
income . . . . . . . . . . . . . . . . . .
Dividends declared
Common Stock:
—
—
—
—
—
(1,362)
(1,362)
Class A Shares . . . . . . . . .
Class B Shares . . . . . . . . .
—
—
—
—
—
—
—
—
(15,359)
(1,685)
Stock options exercised, net
of shares redeemed . . . . . . .
Repurchase of Class A
Common Stock . . . . . . . . . .
Net change in notes
receivable on Class A
Common Stock . . . . . . . . . .
Deferred director
compensation expense -
Class A Common Stock . . .
Stock based compensation
expense - performance
stock units. . . . . . . . . . . . . . .
Stock based compensation
expense - restricted stock . .
Stock based compensation
expense - stock options . . . .
—
—
—
(15,359)
(1,685)
80
4
—
—
80
—
(43)
—
(9)
(287)
(911)
—
(1,207)
—
—
—
289
—
—
289
4
—
—
170
—
—
170
—
—
—
524
—
(2)
—
—
258
—
—
—
—
248
—
—
—
—
524
258
248
Balance, December 31, 2016
18,615
2,245 $ 4,906 $ 138,192 $ 460,621 $
687 $
604,406
See accompanying footnotes to consolidated financial statements.
107
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, (in thousands)
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
Amortization on investment securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion on loans, deposits and core deposit intangible, net . . . . . . . . . . . . . . . . . . .
Depreciation of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination of mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gain on sales, calls and impairment of securities . . . . . . . . . . . . . . . . . . .
Net gain realized on sale of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . .
Writedowns of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of banking center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred director compensation expense - Company Stock . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of bank owned life insurance . . . . . . . . . . . . . . . . . .
Net change in other assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Net change in cash for acquisition of Cornerstone Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls, maturities and paydowns of securities available for sale . . . . . . . . . . . .
Proceeds from calls, maturities and paydowns of securities held to maturity . . . . . . . . . . . . .
Net change in outstanding warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of non-business-acquisition loans, including premiums paid . . . . . . . . . . . . . . . . .
Net change in other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of mortgage loans transferred to held for sale . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of banking center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES:
Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in securities sold under agreements to repurchase and other short-term borrowings
Payments of Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payoff of subordinated note, net of common security interest . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from Common Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . .
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans . . . . . . . . . . . . . . . . . . . .
Transfers from loans held for investment to held for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans provided for sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying footnotes to consolidated financial statements.
$
$
$
108
2016
2015
2014
45,903
$
35,166
$
503
(2,573)
7,495
1,757
14,493
(6,656)
(216,812)
214,760
(2,835)
(380,066)
379,907
—
(514)
270
—
170
1,030
(1,516)
(659)
(298)
(7,227)
540
47,672
(9,088)
(419,254)
(19,935)
452,247
6,112
(198,710)
(51,868)
(125,756)
224
72,330
4,595
—
(7,031)
—
(296,134)
468,544
(221,960)
(292,000)
395,000
(4,000)
(1,207)
80
(16,768)
327,689
79,227
210,082
289,309
18,219
26,069
4,778
71,201
256
$
$
$
729
(2,835)
6,742
1,400
5,396
(3,915)
(160,989)
167,209
(978)
(137,551)
138,015
(88)
(956)
1,257
(28)
223
422
(1,402)
(426)
(33)
(2,785)
5,473
50,046
—
(1,512,809)
—
1,427,696
6,663
(67,298)
(117,516)
(100,660)
—
—
9,412
1,623
(5,319)
—
(358,208)
429,295
39,325
(218,000)
210,000
—
(551)
1,136
(15,839)
445,366
137,204
72,878
210,082
18,495
17,942
2,938
—
3,248
$
$
$
28,787
424
(6,263)
6,363
1,330
2,859
(2,440)
(82,457)
82,015
—
—
—
—
(883)
3,101
—
187
458
(1,329)
(535)
(197)
(2,145)
(2,570)
26,705
—
(876,854)
—
875,978
5,137
(169,855)
(235,824)
(46,383)
134
—
9,532
—
(7,759)
(25,000)
(470,894)
67,325
190,553
(188,000)
290,500
—
(347)
1,103
(14,930)
346,204
(97,985)
170,863
72,878
19,801
18,828
7,333
—
1,442
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation — The consolidated financial statements include the accounts of Republic
Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company (“RB&T” or the “Bank”)
and Republic Insurance Services, Inc. (the “Captive”). The Bank is a Kentucky-based, state chartered non-member financial institution
that provides both traditional and non-traditional banking products through four distinct operating segments using a multitude of
delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to
reach clients across the United States. The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The
Captive provides property and casualty insurance coverage to the Company and the Bank as well as 10 other third-party insurance
captives for which insurance may not be available or economically feasible. Republic Bancorp Capital Trust (“RBCT”) is a Delaware
statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc. All companies are
collectively referred to as (“Republic” or the “Company”). All significant intercompany balances and transactions are eliminated in
consolidation.
As a result of its acquisition of Cornerstone Bancorp, Inc. on May 17, 2016, Republic Bancorp, Inc. became the 100% successor
owner of Cornerstone Capital Trust 1 (“CCT1”), an unconsolidated finance subsidiary. As permitted under the terms of CCT1’s
governing documents, the Company redeemed these securities at the par amount of approximately $4 million, without penalty, on
September 15, 2016.
As of December 31, 2016, the Company was divided into four distinct operating segments: Traditional Banking, Warehouse Lending
(“Warehouse”), Mortgage Banking and Republic Processing Group (“RPG”). Management considers the first three segments to
collectively constitute “Core Bank” or “Core Banking” activities. Correspondent Lending operations and the Company’s national
branchless banking platform, MemoryBank, are considered part of the Traditional Banking segment. The RPG segment includes the
following divisions: Tax Refund Solutions (“TRS”), Republic Payment Solutions (“RPS”) and Republic Credit Solutions (“RCS”).
TRS generates the majority of RPG’s income, with the relatively smaller divisions of RPG, RPS and RCS, considered immaterial for
separate and independent segment reporting. All divisions of the RPG segment operate through the Bank.
Core Bank (includes Traditional Banking, Warehouse Lending and Mortgage Banking segments)
The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market
footprint. As of December 31, 2016, Republic had 44 full-service banking centers with locations as follows:
• Kentucky – 32
• Metropolitan Louisville – 19
• Central Kentucky – 8
• Elizabethtown – 1
• Frankfort – 1
• Georgetown – 1
• Lexington – 4
• Shelbyville – 1
• Western Kentucky – 2
• Owensboro – 2
• Northern Kentucky – 3
• Covington – 1
• Florence – 1
•
• Southern Indiana – 3
• Floyds Knobs – 1
•
Jeffersonville – 1
• New Albany – 1
Independence – 1
• Metropolitan Tampa, Florida – 6
• Metropolitan Cincinnati, Ohio – 1
109
• Metropolitan Nashville, Tennessee – 2
Republic’s headquarters are located in Louisville, which is the largest city in Kentucky based on population.
Core Banking results of operations are primarily dependent upon net interest income, which represents the difference
between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities.
Principal interest-earning Core Banking assets represent investment securities and commercial and consumer loans primarily
secured by real estate and/or personal property. Interest-bearing liabilities primarily consist of interest-bearing deposit
accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources. Federal
Home Loan Bank (“FHLB”) advances have traditionally been a significant borrowing source for the Bank.
Other sources of Core Banking income include service charges on deposit accounts, debit and credit card interchange fee
income, title insurance commissions, fees charged to clients for trust services, increases in the cash surrender value of Bank
Owned Life Insurance (“BOLI”) and revenue generated from Mortgage Banking activities. Mortgage Banking activities
represent both the origination and sale of loans in the secondary market and the servicing of loans for others, primarily the
Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”).
Core Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses,
communication and transportation costs, data processing, interchange related expenses, marketing and development
expenses, Federal Deposit Insurance Corporation (“FDIC”) insurance expense, franchise tax expense and various other
general and administrative costs. Core Banking results of operations are significantly impacted by general economic and
competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory
agencies.
The Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through
mortgage warehouse lines of credit. These credit facilities are primarily secured by single family, first lien residential real
estate loans. The credit facility enables the mortgage banking clients to close single family, first lien residential real estate
loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors
approved by the Bank or purchased by the Bank through its Correspondent Lending channel. Individual loans are expected to
remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer
than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan
remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan
directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The
remaining proceeds are credited to the mortgage-banking client.
Primarily from its Warehouse clients, the Core Bank acquires single family, first lien mortgage loans that meet the Core
Bank’s specifications through its Correspondent Lending channel. Substantially all loans purchased through the
Correspondent Lending channel are purchased at a premium. Loans acquired through the Correspondent Lending channel
generally reflect borrowers outside of the Bank’s historical market footprint, with 75% of loans acquired through this
origination channel as of December 31, 2016, secured by collateral in the state of California.
Republic Processing Group
Tax Refund Solutions division — Through its TRS division, the Bank is one of a limited number of financial institutions
that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party
tax preparers located throughout the United States, as well as tax-preparation software providers (collectively, the “Tax
Providers”). Substantially all of the business generated by the TRS division occurs in the first half of the year. The TRS
division traditionally operates at a loss during the second half of the year, during which time the division incurs costs
preparing for the upcoming year’s first quarter tax season.
110
Refund Transfers (“RTs”) are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received
the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products
because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying
authority. Fees earned on RTs, net of rebates, are reported as noninterest income under the line item “Net refund transfer
fees.”
TRS first offered its Easy Advance (“EA”) tax credit product during the first two months of 2016 with the following features:
• An advance amount of $750 per taxpayer customer;
• No EA fee charged to the taxpayer customer;
• All fees for the product were paid by the tax preparer or tax software company (collectively, the “Tax Providers”) with a
restriction prohibiting the Tax Providers from passing along the fees to the taxpayer customer;
• No requirement that the taxpayer customer pay for another bank product, such as an RT;
• Multiple funds disbursement methods, including direct deposit, prepaid card, check or Walmart Direct2Cash® product,
based on the taxpayer customer’s election;
• Repayment of the EA to the Bank was deducted from the taxpayer customer’s tax refund proceeds; and
•
If an insufficient refund to repay the EA occurred:
there was no recourse to the taxpayer customer,
o
o no negative credit reporting on the taxpayer customer, and
o no collection efforts against the taxpayer customer.
Fees paid by the Tax Providers to the Company for the EA product are reported as interest income on loans under the line item
“Loans, including fees.”
Republic Credit Solutions division — Through its RCS division, the Bank offers short-term consumer credit products. In general,
the credit products are unsecured, small dollar consumer loans with maturities of 30-days-or-more, and are dependent on various
factors including the consumer’s ability to repay.
The Company reports RCS loans originated for investment under “Loans,” while loans originated for sale are reported under
“Consumer loans held for sale.” The Company reports interest income and loan origination fees earned on RCS loans under Loans,
including fees, while any gains or losses on sale reported as noninterest income under “Program fees.”
Republic Payment Solutions division — Through its RPS division, the Bank is an issuing bank offering general-purpose reloadable
prepaid cards through third party program managers.
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.
Use of Estimates — Financial statements prepared in conformity with U.S. generally accepted accounting principles (“GAAP”)
require management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. These estimates and assumptions impact the amounts reported in the financial statements and the disclosures
provided. Actual amounts could differ from these estimates.
Concentration of Credit Risk — With the exception of loans originated through its Correspondent Lending channel, most of the
Company’s Traditional Banking business activity is with clients located in Kentucky, Indiana, Florida, and Tennessee. The
Company’s Traditional Banking exposure to credit risk is significantly affected by changes in the economy in these specific areas.
Loans originated through the Traditional Bank’s Correspondent Lending channel are primarily secured by single family, first lien
residences located outside the Company’s market footprint, with 75% of such loans secured by collateral located in the state of
California as of December 31, 2016. Furthermore, warehouse lines of credit are secured by single family, first lien residential real
estate loans originated by the Bank’s mortgage clients across the United States. As of December 31, 2016, 25% of collateral securing
warehouse lines were located in California.
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Earnings Concentration — For 2016, 2015 and 2014, approximately 20%, 13% and 12% of total Company net revenues (net interest
income plus noninterest income) were derived from the RPG segment.
For 2016, 2015 and 2014, approximately 8%, 7% and 5% of total Company net revenues (net interest income plus noninterest income)
were derived from the Company’s Warehouse segment.
Cash Flows — Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90
days and federal funds sold. Net cash flows are reported for client loan and deposit transactions, interest-bearing deposits in other
financial institutions, repurchase agreements and income taxes.
Interest-Bearing Deposits in Other Financial Institutions — Interest-bearing deposits in other financial institutions mature within
one year and are carried at cost.
Trust Assets — Property held for clients in fiduciary or agency capacities, other than trust cash on deposit at the Bank, is not included
in the consolidated financial statements since such items are not assets of the Bank.
Securities — Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of tax. Debt securities are classified as held to maturity and carried at amortized cost when management
has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold
before maturity.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are
amortized and accreted on the level-yield method without anticipating prepayments, except for mortgage backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification
method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently
when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers
the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also
assesses whether it intends to sell, or it is more-likely-than-not that it would be required to sell, a security in an unrealized loss
position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire
difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet
the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which
must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.
OTTI related to credit loss is defined as the difference between the present value of the cash flows expected to be collected and the
amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Bank compares the
present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows.
OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
Accounting for Business Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a
complement to its internal growth strategies.
The Bank accounts for acquisitions in accordance with the acquisition method as outlined in Accounting Standards Codification
(“ASC”) Topic 805, Business Combinations. The acquisition method requires: a) identification of the entity that obtains control of the
acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities
assumed, and any noncontrolling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.
112
Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their
acquisition date (“day-one”) fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The
measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it
has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the
determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market
conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are
retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically,
these recast adjustments for loans and other real estate owned may be made, as market value data, such as valuations, are received by
the Bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase
gain or goodwill.
Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the
acquisition.
Mortgage Banking Activities — Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as
determined by outstanding commitments from investors. Net gains on mortgage loans held for sale are recorded as a component of
Mortgage Banking income and represent the difference between the selling price and the carrying value of the loans sold.
Substantially all of the gains or losses on the sale of loans are reported in earnings when the interest rates on loans are locked.
Commitments to fund mortgage loans (“interest rate lock commitments”) to be sold into the secondary market and non-exchange
traded mandatory forward sales contracts (“forward contracts”) for the future delivery of these mortgage loans are accounted for as
free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the
date the Bank enters into the derivative. Generally, the Bank enters into forward contracts for the future delivery of mortgage loans
when interest rate lock commitments are entered into, in order to hedge the change in interest rates resulting from its commitments to
fund the loans. Changes in the fair values of these mortgage derivatives are included in net gains on sales of loans, which is a
component of Mortgage Banking income on the income statement.
Mortgage loans held for sale are generally sold with the mortgage servicing rights (“MSRs”) retained. When mortgage loans are sold
with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded as a component
of net servicing income within Mortgage Banking income. Fair value is based on market prices for comparable mortgage servicing
contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net
servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing
rights to be amortized into Mortgage Banking income in proportion to, and over the period of, the estimated future net servicing
income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a quarterly basis
based on the weighted average remaining life of the underlying loans.
MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is
determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms
and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is
less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular
grouping, a reduction of the valuation allowance is recorded as an increase to income. Changes in valuation allowances are reported
within Mortgage Banking income on the income statement. The fair value of the MSR portfolios is subject to significant fluctuations
as a result of changes in estimated and actual prepayment speeds and default rates.
A primary factor influencing the fair value is the estimated life of the underlying serviced loans. The estimated life of the serviced
loans is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs
generally will decline due to higher expected prepayments within the portfolio. Alternatively, during a period of rising interest rates
the fair value of MSRs generally will increase, as prepayments on the underlying loans would be expected to decline. Based on the
estimated fair value at December 31, 2016 and 2015, management determined there was no impairment within the MSR portfolio.
113
Loan servicing income is reported on the income statement as a component of Mortgage Banking income. Loan servicing income is
recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The
fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when
earned. Loan servicing income totaled $2.0 million, $1.9 million and $1.8 million for the years ended December 31, 2016, 2015 and
2014. Late fees and ancillary fees related to loan servicing are considered nominal.
Loans — The Bank’s financing receivables consist primarily of loans and a nominal amount of lease financing receivables (together
referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff
are reported at the principal balance outstanding, inclusive of purchase premiums or discounts, deferred loan fees and costs and the
Allowance. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs,
are deferred and recognized in interest income using the level-yield method. Premiums on loans held for investment acquired though
the Correspondent Lending channel are amortized into interest income on the level-yield method over the expected life of the loan.
Lease financing receivables, all of which are direct financing leases, are reported at their principal balance outstanding net of any
unearned income, deferred fees and costs and applicable Allowance. Leasing income is recognized on a basis that achieves a constant
periodic rate of return on the outstanding lease financing balances over the lease terms.
Interest income on mortgage and commercial loans is typically discontinued at the time the loan is 80 days delinquent unless the loan
is well secured and in process of collection. Past due status is based on the contractual terms of the loan, which may define past due
status by the number of days or the number of payments past due. In most cases, loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 80 days still on accrual
include both smaller balance, homogeneous loans that are collectively evaluated for impairment and individually classified impaired
loans.
Interest accrued but not received for all classes of loans placed on nonaccrual is reversed against interest income. Interest received on
such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably
assured, typically a minimum of six months of performance. Consumer and credit card loans, are not placed on nonaccrual status, but
are reviewed periodically and charged off when the loan is deemed uncollectible, generally no more than 120 days.
Loans purchased in a business acquisition are accounted for using one of the following accounting standards:
• ASC Topic 310-20, Non Refundable Fees and Other Costs, is used to value loans that have not demonstrated post
origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the
borrower. For these loans, the difference between the loan’s day-one fair value and amortized cost would be amortized or
accreted into income using the interest method.
• ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, is used to value purchased
credit impaired (“PCI”) loans. For these loans, it is probable the acquirer will be unable to collect all contractually
required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial
investment in the loan, or fair value, represent the “accretable yield,” which is recognized as interest income on a level-
yield basis over the expected cash flow periods of the loans. Additionally, the difference between contractual cash flows
and expected cash flows of PCI loans is referred to as the “non-accretable discount.”
Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming
nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are
considered in the determination of the Allowance once day-one fair values are final.
114
Management utilized the following criteria in determining which loans were classified as PCI loans for its May 17, 2016 Cornerstone
acquisition:
• Loans for which the Bank assigned a non-accretable discount
• Loans classified as nonaccrual when acquired
• Loans past due 90+ days when acquired
See additional detail regarding the Company’s acquisition of Cornerstone Bancorp, Inc. under Footnote 2 “Acquisition of
Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”
In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the
remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net
present value of cash flows expected to be received. The Bank typically accounts for PCI loans individually, as opposed to
aggregating the loans into pools based on common risk characteristics such as loan type.
Management separately monitors the PCI portfolio and on a quarterly basis reviews the loans contained within this portfolio against
the factors and assumptions used in determining the day-one fair values. In addition to its quarterly evaluation, a loan is typically
reviewed when it is modified or extended, or when material information becomes available to the Bank that provides additional insight
regarding the loan’s performance, estimated life, the status of the borrower, or the quality or value of the underlying collateral.
To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-
accretable yield established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired -
Group 1 (“PCI-1”) category, whose credit risk is considered by management equivalent to a non-PCI Special Mention loan within the
Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the
future estimated cash flows of the loan have deteriorated from management’s initial acquisition day estimate. Provisions for loan
losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial
expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the Provision to the extent
of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.
If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss
of contractual principal beyond the non-accretable discount established as part of its initial day-one evaluation, such loan would be
classified PCI-Substandard (“PCI-Sub”) within the Bank’s credit risk matrix. Management deems the risk of default and overall credit
risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI Substandard loan. PCI-Sub loans are
considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the
Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest
income.
PCI loans are placed on nonaccrual if management cannot reasonably estimate future cash flows on such loans.
If a troubled debt restructuring (“TDR”) is performed on a PCI loan, the loan is considered impaired under the applicable TDR
accounting standards and transferred out of the PCI population. The loan may require an additional Provision if its restructured cash
flows are less than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity
date are generally not considered TDRs and remain in the PCI population.
Allowance for Loan and Lease Losses (“Allowance”) — The Bank maintains an allowance for probable incurred credit losses
inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Loan losses are charged against the Allowance
when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
Allowance. Management estimates the Allowance required using historical loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors.
Allocations of the Allowance may be made for specific classes, but the entire Allowance is available for any loan that, in
management’s judgment, should be charged off.
Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit
Committee and the Board of Directors on a quarterly basis.
115
The Allowance consists of specific and general components. The specific component relates to loans that are individually classified as
impaired. The general component is based on historical loss experience adjusted for qualitative factors.
Specific Component –Loans Individually Classified as Impaired
The Bank defines impaired loans as follows:
• All loans internally rated as “Substandard,” “Doubtful” or “Loss”;
• All loans on nonaccrual status;
• All TDRs;
• All loans internally rated in a PCI category with cash flows that have deteriorated from management’s initial acquisition day
estimate; and
• Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the
definition of impaired.
Generally, loans are designated as “Classified” or “Special Mention” to ensure more frequent monitoring. These loans are reviewed to
ensure proper earning status and management strategy. If it is determined that there is serious doubt as to performance in accordance
with original or modified contractual terms, then the loan is generally downgraded and often placed on nonaccrual status.
Under GAAP, the Bank uses the following methods to measure specific loan impairment, including:
• Cash Flow Method — The recorded investment in the loan is measured against the present value of expected future cash
flows discounted at the loan’s effective interest rate. The Bank employs this method for a significant portion of its TDRs.
Impairment amounts under this method are reflected in the Bank’s Allowance as specific reserves on the respective impaired
loan. These specific reserves are adjusted quarterly based upon reevaluation of the expected future cash flows and changes in
the recorded investment.
• Collateral Method — The recorded investment in the loan is measured against the fair value of the collateral less applicable
selling costs. The Bank employs the fair value of collateral method for its impaired loans when repayment is based solely on
the sale or operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate
valuation on file. Measured impairment under this method is generally charged off unless the loan is a smaller-balance,
homogeneous mortgage loan. The Bank’s selling costs for its collateral-dependent loans typically range from 10-13% of the
fair value of the underlying collateral, depending on the asset class. Selling costs are not applicable for collateral-dependent
loans whose repayment is based solely on the operations of the underlying collateral.
In addition to obtaining appraisals at the time of origination, the Bank typically updates appraisals and/or broker price opinions
(“BPOs”) for loans with potential impairment. Updated valuations for commercial-related credits exhibiting an increased risk of loss
are typically obtained within one year of the previous valuation. Collateral values for past due residential mortgage loans and home
equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When measuring
impairment, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons,
the Bank discounts such stale valuations primarily based on age and market conditions of the underlying collateral.
General Component – Pooled Loans Collectively Evaluated
The general component of the Allowance covers loans collectively evaluated for impairment by loan class and is based on historical
loss experience, with potential adjustments for current relevant qualitative factors. Historical loss experience is determined by loan
performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller-balance, homogeneous
loans, such as consumer and residential real estate loans, are typically included in the general component but may be individually
evaluated if classified as a TDRs, on nonaccrual, or a case where the full collection of the total amount due for a such loan is
improbable or otherwise meets the definition of impaired.
116
In determining the historical loss rates for each respective loan class, management evaluates the following historical loss rate
scenarios:
• Rolling four quarter average
• Rolling eight quarter average
• Rolling twelve quarter average
• Rolling sixteen quarter average
• Rolling twenty quarter average
• Rolling twenty-four quarter average
• Rolling twenty-eight quarter average
• Rolling thirty-two quarter average
• Current year to date historical loss factor average
In order to take account of periods of economic growth and economic downturn, management generally uses the highest of the
evaluated averages above for each loan class when determining its historical loss factors.
Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation
for each class. Management assigns risk multiples to certain classes to account for qualitative factors such as:
• Changes in nature, volume and seasoning of the portfolio;
• Changes in experience, ability and depth of lending management and other relevant staff;
• Changes in the quality of the Bank’s credit review system;
• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and
recovery practices not considered elsewhere in estimating credit losses;
• Changes in the volume and severity of past due, nonperforming and classified loans;
• Changes in the value of underlying collateral for collateral-dependent loans;
• Changes in international, national, regional, and local economic and business conditions and developments that affect the
collectability of portfolios, including the condition of various market segments;
• The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
• The effect of other external factors, such as competition and legal and regulatory requirements on the level of estimated credit
losses in the Bank’s existing portfolio.
As this analysis, or any similar analysis, is an imprecise measure of loss, the Allowance is subject to ongoing adjustments. Therefore,
management will often take into account other significant factors that may be necessary or prudent in order to reflect probable
incurred losses in the total loan portfolio.
A “portfolio segment” is defined as the level at which an entity develops and documents a systematic methodology to determine its
Allowance. A “class” of loans represents further disaggregation of a portfolio segment based on risk characteristics and the entity’s
method for monitoring and assessing credit risk. In developing its Allowance methodology, the Company has identified the following
Traditional Banking portfolio segments:
Portfolio Segment 1 — Loans where the Allowance methodology is determined based on a loan review and grading system (primarily
commercial related loans and retail TDRs).
For this portfolio, the Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt, such as current financial information, historical payment experience, public information, and current economic
trends. The Bank also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). The
Bank analyzes loans individually, and based on this analysis, establishes a credit risk rating consistent with its credit risk matrix.
Portfolio Segment 2 — Loans where the Allowance methodology is driven by delinquency and nonaccrual data (primarily small
dollar, retail mortgage or consumer related).
For this portfolio, the Bank analyzes risk classes based on delinquency and/or nonaccrual status.
117
Allowance for Loans Originated Through the Republic Processing Group Segment
The RPG Allowance at December 31, 2016 and 2015 primarily related to loans originated and held for investment through the RCS
division. RCS generally originates small-dollar, short-term credit products. In some instances, the Bank originates these products, sells
90% of the balances within two days of loan origination, and retains a 10% interest.
One short-term, line-of-credit product represented the substantial majority of the RCS held-for-investment loan portfolio at December
31, 2016. For this product, management conducts an analysis of historical losses and delinquencies by month of loan origination
when determining the Allowance. For RCS’s other products, the Allowance is estimated using a method similar to Core Bank loans,
as described above. Due to their non-traditional, small-dollar and short-term nature, RCS loans generally experience higher loss rates
than Core Bank consumer products.
RPG’s TRS division first offered its EA tax-credit product during the first two months of 2016 and again during the first quarter of
2017. An Allowance for losses on EAs is estimated during the limited, short-term period the product is offered, which was through
February 29, 2016 for the first quarter 2016 tax season. During 2016, EAs were generally repaid within three weeks of origination.
Provisions for loan losses on EAs were estimated when advances were made, with all provisions made in the first quarter of 2016. No
Allowance for EAs existed as of December 31, 2016, as all EAs had been paid off or had been charged-off within 81 days of
origination. The majority of EA charge-offs were recorded during the second quarter of 2016.
See Footnote 5 “Loans and Allowance for Loan and Lease Losses” in this section of the filing for additional discussion regarding the
Company’s Allowance.
Transfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the
transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity.
Other Real Estate Owned (“OREO”) — Assets acquired through loan foreclosures are initially recorded at fair value less costs to
sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer
mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the
property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are
subsequently accounted for at lower of cost or fair value less estimated costs to sell. The Bank’s selling costs for OREO typically
range from 10-13% of each property’s fair value, depending on property class. Fair value is commonly based on recent real estate
appraisals or broker price opinions. Operating costs after acquisition are expensed.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for
commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been
reviewed and verified by the Bank. Appraisals may utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Once the appraisal is received, a member of the Bank’s Credit Administration Department
(“CAD”) reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison
with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a
back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such
collateral. Back tests are performed for each collateral class, e.g. residential real estate or commercial real estate, and may lead to
additional adjustments to the value of unliquidated collateral of similar class.
Premises and Equipment, Net — Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the related assets on the straight-line method. Estimated lives typically
range from 25 to 39 years for buildings and improvements, three to ten years for furniture, fixtures and equipment and three to five
years for leasehold improvements.
118
Federal Home Loan Bank Stock — The Bank is a member of the FHLB system. Members are required to own a certain amount of
stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost,
classified as a restricted security and annually evaluated for impairment. Because this stock is viewed as a long-term investment,
impairment is based on ultimate recovery of par value. Both cash and stock dividends are recorded as interest income.
Bank Owned Life Insurance — The Bank maintains BOLI policies on certain employees. BOLI is recorded at the amount that can
be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other
amounts due that are probable at settlement. The Bank recognizes tax-free income from the periodic increases in cash surrender value
of these policies and from death benefits in noninterest income. Credit ratings for the Bank’s BOLI carriers are reviewed at least
annually.
Goodwill and Other Intangible Assets — Goodwill resulting from business acquisitions prior to January 1, 2009 represents the
excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business acquisitions
after January 1, 2009 represents the future economic benefits arising from other assets acquired that are individually identified and
separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but tested for impairment at least annually.
The Company has selected September 30th as the date to perform its annual goodwill impairment test. Intangible assets with definite
useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with
an indefinite life on the Bank’s balance sheet.
All goodwill is attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes.
Based on its assessment, the Company believes its goodwill of $16 million and $10 million at December 31, 2016 and 2015 was not
impaired and is properly recorded in the consolidated financial.
Other intangible assets consist of core deposit intangible (“CDI”) assets arising from business acquisitions. CDI assets are initially
measured at fair value and then amortized on an accelerated method over their estimated useful lives.
Related to the Company’s May 17, 2016 acquisition of Cornerstone Bancorp, Inc., the Company maintained $1 million of CDI assets
as of December 31, 2016, with no similar intangible assets recorded as of December 31, 2015. The Cornerstone related CDI is
scheduled to amortize through 2022.
Off Balance Sheet Financial Instruments — Financial instruments include off balance sheet credit instruments, such as
commitments to fund loans and standby letters of credit. The face amount for these items represents the exposure to loss, before
considering client collateral or ability to repay. Such financial instruments are recorded upon funding. Instruments such as standby
letters of credit are considered financial guarantees and are recorded at fair value.
Derivatives —Derivatives are reported at fair value in other assets or other liabilities. The Company’s derivatives include interest rate
swap agreements. For asset/liability management purposes, the Bank uses interest rate swap agreements to hedge the exposure or to
modify the interest rate characteristic of certain immediately repricing liabilities.
The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a
hedging relationship. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss
is recorded as a component of other comprehensive income (loss). For derivatives not designated as hedges, the gain or loss is
recognized in current period earnings.
Net cash settlements on interest rate swaps are recorded in interest expense and cash flows related to the swaps are classified in the
cash flow statement the same as the interest expense and cash flows from the liabilities being hedged. The Bank formally documents
the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking
hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific
assets and liabilities on the balance sheet. The Bank also formally assesses, both at the hedge’s inception and on an ongoing basis,
whether a swap is highly effective in offsetting changes in cash flows of the hedged items. The Bank discontinues hedge accounting
when it determines that the derivative is no longer effective in offsetting changes in cash flows of the hedged item, the derivative is
settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.
119
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When
a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that
were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions
will affect earnings.
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these
instruments to meet client needs, the Bank enters into offsetting positions with dealer counterparties in order to minimize the Bank’s
interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are
reported in current year earnings.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair
value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Bank, and results
in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty
and therefore, has no credit risk.
Stock Based Compensation — For stock options and restricted stock awards issued to employees, compensation cost is recognized
based on the fair value of these awards at the date of grant. The Company utilizes a Black-Scholes model to estimate the fair value of
stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.
Compensation expense is recognized over the required service period, generally defined as the vesting period. For awards with graded
vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Income Taxes — Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized
A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit
is recorded.
Retirement Plans — 401(k) plan expense is recorded as a component of salaries and employee benefits and represents the amount of
Company matching contributions.
Earnings Per Common Share — Basic earnings per share is based on net income (in the case of Class B Common Stock, less the
dividend preference on Class A Common Stock), divided by the weighted average number of shares outstanding during the period.
Diluted earnings per share include the dilutive effect of additional potential Class A common shares issuable under stock options.
Earnings and dividends per share are restated for all stock dividends through the date of issuance of the financial statements.
Comprehensive Income — Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI includes,
net of tax, unrealized gains and losses on securities available for sale and unrealized gains and losses on cash flow hedges, which are
also recognized as a separate component of equity.
Loss Contingencies — Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded
as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not
believe there are any outstanding matters that would have a material effect on the financial statements.
Restrictions on Cash and Cash Equivalents — Republic is required by the Federal Reserve Bank (“FRB”) to maintain average
reserve balances. Cash and due from banks on the consolidated balance sheet included no required reserve balances at December 31,
2016 and 2015.
The Company’s Captive maintains cash reserves to cover insurable claims. Reserves totaled $2 million and $2 million as of December
31, 2016 and 2015.
120
Equity — Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to
common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock
issued from retained earnings to common stock and additional paid in capital. Fractional share amounts are paid in cash with a
reduction in retained earnings.
Dividend Restrictions — Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank
to Republic or by Republic to shareholders.
Fair Value of Financial Instruments — Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in Footnote 15 “Fair Value” in this section of the filing. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Segment Information — Segments represent parts of the Company evaluated by management with separate financial information.
Republic’s internal information is primarily reported and evaluated in four lines of business – Traditional Banking, Warehouse,
Mortgage Banking and RPG.
Reclassifications — Certain amounts presented in prior periods have been reclassified to conform to the current period presentation.
These reclassifications had no impact on previously reported prior periods’ net income or shareholders’ equity.
Adoption of Issued but Not Yet Effective Accounting Pronouncements:
The following Account Standard Updates (“ASUs”) were issued prior to December 31, 2016 and are considered relevant to the
Company’s financial statements:
ASU. No.
Topic
Nature of Update
Date Adoption Required
Method of Adoption
Expected Impact to
Company's Financial
Statements
2014-9 Revenue from
Contracts with
Customers
(Topic 606)
Requires that revenue from contracts with clients be
January 1, 2018
recognized upon transfer of control of a good or service in the
amount of consideration expected to be received. Changes the
accounting for certain contract costs, including whether they
may be offset against revenue in the statements of income, and
requires additional disclosures about revenue and contract
costs.
2016-1 Financial
Among other things: Requires equity investments (except
January 1, 2018
Instruments –
Overall (Topic
825-10)
those accounted for under the equity method of accounting, or
those that result in consolidation of the investee) to be
measured at fair value with changes in fair value recognized in
net income. Requires public business entities to use the exit
price notion when measuring the fair value of financial
instruments for disclosure purposes. Requires separate
presentation of financial assets and financial liabilities by
measurement category and form of financial asset (i.e.,
securities or loans and receivables). Eliminates the requirement
for public business entities to disclose the method(s) and
significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments measured at
amortized cost.
Full retrospective approach
or a modified-retrospective
approach.
Immaterial
Permits early adoption to
certain provisions.
Immaterial
2016-2 Leases (Topic
842)
Most leases are considered operating leases, which are not
accounted for on the lessees’ balance sheets. The significant
change under this ASU is that those operating leases will be
recorded on the balance sheet.
January 1, 2019
Modified-retrospective
approach, which includes a
number of optional practical
expedients.
Currently under analysis.
During 2016, the Company
began a preliminary analysis of
its operating leases.
2016-4 Liabilities –
Extinguishments
of Liabilities
(Topic 405-20)
Provides that liabilities related to the sale of prepaid stored-
value products are financial liabilities and provide a narrow
scope exception to the guidance in Subtopic 405-20 to require
that breakage for those liabilities be accounted for consistent
with the breakage guidance in Topic 606.
January 1, 2018
Modified-retrospective or a
fully retrospective approach.
Immaterial
121
ASU. No.
Topic
Nature of Update
Date Adoption Required
Method of Adoption
Expected Impact to
Company's Financial
Statements
2016-5 Derivatives and
Hedging (Topic
815)
Clarifies that a change in the counterparty to a derivative
January 1, 2017
instrument that has been designated as a hedging instrument
under Topic 815 does not, in and of itself, require
dedesignation of that hedging relationship provided that all
other hedge accounting criteria (including those in paragraphs
815-20-35-14 through 35-18 of the Accounting Standards
Codification) continue to be met.
Prospective or modified-
retrospective approach.
Immaterial
2016-9 Compensation –
Stock
Compensation
(Topic 718)
Provides simplification in areas of accounting for share-based
payments, including: the income tax consequences;
classification of awards as either equity or liabilities; and
classification on the statement of cash flows. Some of the areas
for simplification apply only to nonpublic entities.
Amends guidance on reporting credit losses for assets held at
amortized-cost basis and available-for-sale debt securities.
2016-13 Financial
Instruments –
Credit Losses
(Topic 326)
2016-15 Statement of
Cash Flows
(Topic 230)
January 1, 2017
Certain elements are applied
Immaterial
retrospectively, some
prospectively.
January 1, 2020
Modified-retrospective
Substantial, yet fully
approach.
undetermined, increase in
allowance for credit losses.
During 2016, the Company
formed a committee to
implement the transition and
also began analyzing its loan-
level data.
Provides additional guidance for preparation of a cash flow
January 1, 2018
Retrospective transition
Immaterial
statement.
unless impractical.
2016-16 Income Taxes
Requires an entity to recognize the income tax consequences
January 1, 2018
Modified-retrospective
Immaterial
(Topic 740)
of an intra-entity transfer of an asset other than inventory when
the transfer occurs. This ASU eliminates the exception for an
intra-entity transfer of an asset other than inventory.
approach.
2016-17 Statement of
Cash Flows
(Topic 230)
Requires that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents and
amounts generally described as restricted cash or restricted
cash equivalents. This ASU does not provide a definition of
restricted cash or restricted cash equivalents.
January 1, 2018
Retrospective approach.
Immaterial
122
2.
ACQUISITION OF CORNERSTONE BANCORP, INC.
OVERVIEW
On May 17, 2016, the Company completed its acquisition of Cornerstone Bancorp, Inc. (“Cornerstone”), and its wholly-owned bank
subsidiary Cornerstone Community Bank (“CCB”), for approximately $32 million in cash. The primary reason for the acquisition of
Cornerstone was to expand the Company’s footprint in the Tampa, Florida metropolitan statistical area.
ACQUISITION SUMMARY
The following table provides a summary of the assets acquired and liabilities assumed as recorded by Cornerstone, the previously
reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final recast
adjustments to those previously reported preliminary fair values, and the final fair values of those assets and liabilities as recorded by
the Company. Effective October 1, 2016, management believes it has finalized the fair values of the acquired assets and assumed
liabilities within the 12 months following the date of acquisition, as allowed by GAAP.
Summary of Assets Acquired and Liabilities Assumed
As Previously Reported
As Recorded
by Cornerstone
Fair Value
Adjustments
As Recasted
Recast
Adjustments
As Recorded
by Republic
May 17, 2016
(in thousands)
Assets acquired:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and accrued interest receivable . . . . . . . . . . . . . . .
22,707 $
329
195,136
(1,955)
193,181
224
7,770
—
3,714
7,461
658
$
—
—
(5,525) a
1,955 a
(3,570)
—
4,457 b
c
1,205
(74) d
—
—
$
—
—
13 a
—
13
—
—
—
—
—
—
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
236,044 $
2,018
$
13
$
Liabilities assumed:
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities and accrued interest payable . . . . . . . . . . . . . .
52,908 $
152,257
205,165
4,124
2,244
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211,533
$
e
f
—
92
92
—
787
879
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
24,511 $
1,139
$
Cash consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
13
$
$
22,707
329
189,624
—
189,624
224
12,227
1,205
3,640
7,461
658
238,075
52,908
152,349
205,257
4,124
3,031
212,412
25,663
(31,795)
6,132
123
Explanation of preliminary fair value adjustments:
a.
Reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the
acquiree’s recorded allowance for loan losses.
b. Reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.
c. Reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.
d. Reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes
and their basis for federal income tax purposes.
e. Reflects the fair value adjustment based on the Company’s evaluation of the assumed time deposits.
f. Reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly
attributable to the acquisition of Cornerstone.
Goodwill of approximately $6 million, which is the excess of the merger consideration over the fair value of net assets acquired, was
recorded in the Cornerstone acquisition and is the result of expected operational synergies and other factors. This goodwill is all
attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes.
With regard to the Company’s Cornerstone acquisition, pro forma financial information as if the acquisition had occurred at the
beginning of 2015 is not considered material and is not included in this filing.
124
CORNERSTONE CONTRIBUTION FOR THE REPORTING PERIOD
The Company’s consolidated statements of income include the impact of the Company’s Cornerstone acquisition for the year ended
December 31, 2016. The results of operations of the assets acquired and liabilities assumed in the Company’s Cornerstone acquisition,
inclusive of any pre-acquisition related costs, are summarized in the following table:
Year Ended December 31, 2016 (in thousands)
INTEREST INCOME:
Non-Acquisition
Related
Acquisition-Related
Total
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Taxable investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,663 $
1,331
6,994
INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES . . .
NONINTEREST INCOME:
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NONINTEREST EXPENSES:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communication and transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
362
1,931
37
2,330
4,664
327
4,337
210
133
192
535
1,822
532
186
144
44
11
49
73
364
3,225
INCOME (LOSS) BEFORE INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,647
506
1,141 $
240 a $
—
240
(14)b
—
—
(14)
254
—
254
—
—
—
—
274 c
—
10 d
—
—
617 e
20 f
138 g
135 h
1,194
(940)
(290)
(650) $
5,903
1,331
7,234
348
1,931
37
2,316
4,918
327
4,591
210
133
192
535
2,096
532
196
144
44
628
69
211
499
4,419
707
216
491
Severance payouts and signing bonuses for former Cornerstone employees.
Explanation of acquisition-related items:
a. Accretion of loan discounts.
b. Amortization of deposit premiums.
c.
d. Notices to former Cornerstone stakeholders of change in ownership and merger-related travel.
e. Primarily core system conversion-related costs.
f. Costs to update forms and supplies to RB&T brand.
g.
h.
Includes legal, audit, tax and other acquisition related consulting costs.
Includes amortization of core deposit intangible asset.
125
3.
INVESTMENT SECURITIES
Securities Available for Sale
The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) were as follows:
December 31, 2016 (in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . . . $
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act mutual fund . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
295,425 $
3,691
71,197
88,559
—
2,500
15,004
3,449
479,825 $
226 $
1,086
2,027
334
483
—
154
—
4,310 $
(1,107) $
—
(220)
(1,239)
—
(45)
—
(249)
(2,860) $
294,544
4,777
73,004
87,654
483
2,455
15,158
3,200
481,275
December 31, 2015 (in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . . . . . $
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act mutual fund. . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
286,914 $
4,037
88,968
113,972
—
1,000
15,009
3,405
513,305 $
59 $
1,095
3,395
748
173
11
16
—
5,497 $
(494) $
—
(95)
(1,052)
—
—
(103)
—
(1,744) $
286,479
5,132
92,268
113,668
173
1,011
14,922
3,405
517,058
Securities Held to Maturity
The carrying value, gross unrecognized gains and losses, and fair value of securities held to maturity were as follows:
December 31, 2016 (in thousands)
Gross
Gross
Carrying
Value
Unrecognized
Unrecognized
Gains
Losses
Fair
Value
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . . . $
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
506 $
158
27,142
25,058
52,864 $
— $
12
250
312
574 $
(2) $
—
(124)
(63)
(189) $
504
170
27,268
25,307
53,249
December 31, 2015 (in thousands)
Gross
Gross
Carrying
Value
Unrecognized
Unrecognized
Gains
Losses
Fair
Value
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . . . . . $
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
515 $
53
33,159
5,000
38,727 $
1 $
6
464
—
471 $
— $
—
—
(2)
(2) $
516
59
33,623
4,998
39,196
At December 31, 2016 and 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its
agencies, in an amount greater than 10% of stockholders’ equity.
126
Sales of Securities Available for Sale
During 2016, 2015 and 2014, there were no sales of securities available for sale.
During 2015, the Bank recognized a gross gain of $88,000 on the call of one security available for sale. The tax provision related to
the Bank’s realized gain totaled $31,000 for the year ended December 31, 2015.
Investment Securities by Contractual Maturity
The amortized cost and fair value of the investment securities portfolio by contractual maturity at December 31, 2016 follows.
Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without
call or prepayment penalties. Securities not due at a single maturity date are detailed separately.
December 31, 2016 (in thousands)
Securities
Available for Sale
Securities
Held to Maturity
Amortized
Cost
Fair
Value
Carrying
Value
Fair
Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from five years to ten years. . . . . . . . . . . . . . . . . . . . . . . . . . .
Due beyond ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . .
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act mutual fund . . . . . . . . . . . . . . . . .
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
96,102
204,327
10,000
3,449
3,691
71,197
88,559
—
2,500
479,825
$
$
96,249
203,328
10,125
3,200
4,777
73,004
87,654
483
2,455
481,275
$
$
506
5,075
19,983
—
—
158
27,142
—
—
52,864
$
$
504
5,013
20,294
—
—
170
27,268
—
—
53,249
Freddie Mac Preferred Stock
During 2008, the U.S. Treasury, the Federal Reserve Board, and the Federal Housing Finance Agency (“FHFA”) announced that the
FHFA was placing Freddie Mac under conservatorship and giving management control to the FHFA. The Bank contemporaneously
determined that its 40,000 shares of Freddie Mac preferred stock were fully impaired and recorded an OTTI charge of $2.1 million in
2008. The OTTI charge brought the carrying value of the stock to $0. During 2014, based on active trading volume of Freddie Mac
preferred stock, the Company determined it appropriate to record an unrealized gain to OCI related to its Freddie Mac preferred stock
holdings. Based on the stock’s market closing price as of December 31, 2016, the Company’s unrealized gain for its Freddie Mac
preferred stock totaled $483,000.
Corporate Bonds
During 2013 and 2016, the Bank purchased floating rate corporate bonds. The bonds were rated “investment grade” by accredited
rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 8% of the Bank’s
investment portfolio as of December 31, 2016 and 2015.
Mortgage Backed Securities and Collateralized Mortgage Obligations
At December 31, 2016, with the exception of the $4.8 million private label mortgage backed security, all other mortgage backed
securities and collateralized mortgage obligations (“CMOs”) held by the Bank were issued by U.S. government-sponsored entities and
agencies, primarily Freddie Mac and the Federal National Mortgage Association (“Fannie Mae” or “FNMA”). At December 31, 2016
and December 31, 2015, there were gross unrealized losses of $1.5 million and $1.1 million related to available for sale mortgage
backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit
quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the
securities before their anticipated recovery, management does not consider these securities to have OTTI.
127
Trust Preferred Security
During the fourth quarter of 2015, the Parent Company purchased a $3 million floating rate trust preferred security at a price of 68%
of par. The coupon on this security is based on the 3-month LIBOR + 159 basis points, giving the Parent Company an expected yield
to maturity of 4.27% when considering the discount. The Company performed an initial analysis prior to acquisition and performs
ongoing analysis of the credit risk of the underlying borrower in relation to this security.
Market Loss Analysis
Securities with unrealized losses at December 31, 2016 and 2015, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, are as follows:
December 31, 2016 (in thousands)
Securities available for sale:
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Treasury securities and U.S. Government agencies . . $
Mortgage backed securities - residential . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . .
Community Reinvestment Act mutual fund. . . . . . . . . . . .
Trust preferred security . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . $
138,002 $
9,427
37,547
2,455
3,200
190,631 $
(1,107) $
(122)
(690)
(45)
(249)
(2,213) $
— $
4,211
15,668
—
—
19,879 $
— $
(98)
(549)
—
—
(647) $
138,002 $
13,638
53,215
2,455
3,200
210,510 $
(1,107)
(220)
(1,239)
(45)
(249)
(2,860)
December 31, 2015 (in thousands)
Securities available for sale:
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Treasury securities and U.S. Government agencies . . . . $
Mortgage backed securities - residential . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . $
191,584 $
5,727
6,831
9,896
214,038 $
(433) $
(95)
(212)
(103)
(843) $
9,914 $
—
35,869
—
45,783 $
(61) $
—
(840)
—
(901) $
201,498 $
5,727
42,700
9,896
259,821 $
(494)
(95)
(1,052)
(103)
(1,744)
December 31, 2016 (in thousands)
Securities held to maturity:
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
U.S. Treasury securities and U.S. Government agencies . . $
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . $
506 $
13,315
—
13,821 $
(2) $
(124)
—
(126) $
— $
—
4,937
4,937 $
— $
—
(63)
(63) $
506 $
13,315
4,937
18,758 $
(2)
(124)
(63)
(189)
December 31, 2015 (in thousands)
Securities held to maturity:
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . $
4,998 $
4,998 $
(2) $
(2) $
—
— $
— $
— $
4,998 $
4,998 $
(2)
(2)
At December 31, 2016, the Bank’s portfolio consisted of 179 securities, 45 of which were in an unrealized loss position.
At December 31, 2015, the Bank’s portfolio consisted of 162 securities, 34 of which were in an unrealized loss position.
128
Other-Than-Temporary Impairment
Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment
securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such
an evaluation to determine whether a decline in value below amortized cost is other-than-temporary. In conducting this assessment,
the Bank evaluates a number of factors including, but not limited to the following:
• The length of time and the extent to which fair value has been less than the amortized cost basis;
• The Bank’s intent to hold until maturity or sell the debt security prior to maturity;
• An analysis of whether it is more-likely-than-not that the Bank will be required to sell the debt security before its anticipated
recovery;
• Adverse conditions specifically related to the security, an industry, or a geographic area;
• The historical and implied volatility of the fair value of the security;
• The payment structure of the security and the likelihood of the issuer being able to make payments;
• Failure of the issuer to make scheduled interest or principal payments;
• Any rating changes by a rating agency; and
• Recoveries or additional decline in fair value subsequent to the balance sheet date.
The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-
term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or
greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the
security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.
The Bank owns one private label mortgage backed security with a total carrying value of $4.8 million at December 31, 2016. This
security, with an average remaining life currently estimated at four years, is mostly backed by “Alternative A” first lien mortgage
loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as
such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurements and Disclosures.
Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair
value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer
restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based
on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate
consists of both internal and external support for this investment.
See additional discussion regarding the Bank’s private label mortgage backed security in this section of the filing under Footnote 15
“Fair Value.”
The following table presents a rollforward of the Bank’s private label mortgage backed security credit losses recognized in earnings:
Years Ended December 31, (in thousands)
2016
2015
2014
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Recovery of losses previously recorded . . . . . . . . . . . . . . . . . . . . .
Realized pass through of actual losses . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,765 $
—
—
1,765 $
1,800 $
(35)
—
1,765 $
1,941
(141)
—
1,800
Further deterioration in economic conditions could cause the Bank to record an additional impairment charge related to credit losses of
up to $3.7 million, which is the current gross amortized cost of the Bank’s remaining private label mortgage backed security.
129
Pledged Investment Securities
Investment securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other
purposes, as required or permitted by law are as follows:
December 31, (in thousands)
2016
2015
Carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
231,695 $
231,891
489,598
490,074
4.
LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and short-term, consumer loans. Mortgage loans
originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking operations,
while short-term, consumer loans originated for sale are originated and sold through the RCS division of the Company’s RPG
segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 16 “Mortgage Banking Activities” of
this section of the filing.
Consumer Loans Held for Sale, at Fair Value
During the first quarter of 2016, RCS initiated a short-term installment loan program, in which the Company sells 100% of the
receivables approximately 21 days after origination. The Company carries these loans at fair value, with the loans marked to market
on a monthly basis, with changes in their fair value reported as a component of “Program fees.”
Activity for consumer loans held for sale and carried at fair value was as follows:
Year Ended December 31, (in thousands)
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2016
—
45,274
(43,410)
334
2,198
Consumer Loans Held for Sale, at Lower of Cost or Fair Value
RCS originates, primarily for sale, both a short-term, line-of-credit product and a credit card product. The Bank sells 90% of the
balances maintained through these two products within two days of loan origination and retains a 10% interest. The Company carries
such loans at the lower of cost or fair value. The short-term, line-of-credit product represented the substantial majority of RCS activity
during the years ended December 31, 2016 and 2015, as RCS moved beyond the pilot phase for this product in June 2015. In
December 2015, RCS began piloting its credit card product. Any gains or losses on sale of such products are reported as a component
of “Program fees.”
Activity for consumer loans held for sale and carried at the lower of cost or market value was as follows:
Years Ended December 31, (in thousands)
2016
2015
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Origination of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of consumer loans held for sale . . . . . . . . . . . . . . . . .
Net gain on sale of consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
514 $
334,792
(336,497)
2,501
1,310 $
—
137,551
(138,015)
978
514
130
5.
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The composition of the loan portfolio at period end follows:
December 31, (in thousands)
Residential real estate:
$
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2015
$
1,000,148
149,028
156,605
1,023,981
36,515
119,650
265,721
13,614
585,439
341,285
32,252
13,414
803
52,579
19,744
1,081,934
249,344
116,294
824,887
35,674
66,500
229,721
8,905
386,729
289,194
7,204
11,068
685
6,473
11,998
Total loans** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,810,778
(32,920)
3,326,610
(27,491)
Total loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,777,858
$
3,299,119
*Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.
The following table reconciles the contractually receivable and carrying amounts of loans at December 31, 2016 and 2015:
December 31, (in thousands)
2016
2015
Contractual receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unearned income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized premiums(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unaccreted discounts(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unamortized deferred origination fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,816,086 $
(1,050)
1,838
(9,397)
3,301
3,810,778 $
3,329,741
(741)
3,792
(7,860)
1,678
3,326,610
(1) Relates to lease financing receivables.
(2) Predominately relate to loans acquired through the Bank’s Correspondent Lending channel.
(3)
Includes both accretable and non-accretable discounts and predominately relates to loans acquired in the Bank’s 2016 Cornerstone acquisition and 2012 FDIC-
assisted transactions.
131
Loan Purchases not Associated with a Business Acquisition
The Core Bank acquires for investment single family, first lien mortgage loans that meet the Core Bank’s specifications through its
Correspondent Lending channel. In addition, the Bank has acquired in the past unsecured consumer installment loans for investment
from a third-party originator. Such consumer loans were purchased at par and were selected by the Bank based on certain underwriting
specifications.
The table below reflects the purchase activity of single family, first lien mortgage loans and unsecured consumer loans, by class,
during 2016, 2015 and 2014.
Years Ended December 31, (in thousands)
Residential real estate:
2016
2015
2014
Owner occupied - correspondent* . . . . . . . . . . . . . . . . . . . . . . . . . . . $
47,446
$
113,232
$
230,340
Consumer:
Other consumer* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchased loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,422
51,868
$
4,284
117,516
$
5,484
235,824
*Represents origination amount, inclusive of applicable purchase premiums.
Loans Acquired in Cornerstone Acquisition
The following table summarizes loans acquired in the Company’s May 17, 2016 Cornerstone acquisition, finalized as of October 1,
2016:
(in thousands)
Residential real estate:
Contractual Receivable Non-accretable Discount
Accretable Discount
Acquisition-Day Fair Value
May 17, 2016
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,487 $
11,196
106,089
18,277
11,462
20,652
2,347
Total loans - ASC 310-20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185,510
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans - ASC 310-30 - PCI loans . . . . . . . . . . . . . . . . . . . . .
2,963
1,721
4,315
175
66
382
4
9,626
— $
—
—
—
—
—
—
—
(822)
(320)
(617)
—
(1)
(178)
(3)
(1,941)
(393) $
(101)
(1,498)
(502)
(191)
(350)
(147)
(3,182)
(15)
(167)
(197)
—
1
(11)
—
(389)
15,094
11,095
104,591
17,775
11,271
20,302
2,200
182,328
2,126
1,234
3,501
175
66
193
1
7,296
Total loans acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
195,136 $
(1,941) $
(3,571) $
189,624
132
Purchased-Credit-Impaired (“PCI”) Loans
The Bank acquired PCI loans on May 17, 2016 in its Cornerstone acquisition and during the year ended December 31, 2012 in two
FDIC-assisted transactions. PCI loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated
Credit Quality.
Management utilized the following criteria in determining which loans were classified as PCI loans for its May 17, 2016 Cornerstone
acquisition:
• Loans for which the Bank assigned a non-accretable discount
• Loans classified as nonaccrual when acquired
• Loans past due 90+ days when acquired
The following table reconciles the contractually required and carrying amounts of all PCI loans at December 31, 2016 and 2015:
December 31, (in thousands)
2016
2015
Contractually-required principal . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accretable amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretable amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
15,587 $
(1,713)
(3,600)
10,274 $
18,250
(1,582)
(4,125)
12,543
The following table presents a rollforward of the accretable amount on all PCI loans for years ended December 31, 2016, 2015 and
2014:
Years Ended December 31, (in thousands)
2016
2015
2014
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers between non-accretable and accretable . . . . . . . . . . . . . . . . . . . . . .
Net accretion into interest income on loans, including loan fees . . . . . . . . . .
Generated from acquisition of Cornerstone Bancorp, Inc. (recasted) . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(4,125) $
(206)
1,120
(389)
(3,600) $
(2,297) $
(4,055)
2,227
—
(4,125) $
(3,457)
(3,783)
4,943
—
(2,297)
133
Credit Quality Indicators
Bank procedures for assessing and maintaining credit gradings differs slightly depending on whether a new or renewed loan is being
underwritten, or whether an existing loan is being re-evaluated for potential credit quality concerns. The latter usually occurs upon
receipt of updated financial information, or other pertinent data, that would potentially cause a change in the loan grade. Specific Bank
procedures follow:
• For new and renewed commercial and industrial (“C&I”), commercial real estate (“CRE”) and construction and land
development loans, the Bank’s CAD assigns the credit quality grade to the loan.
• Commercial loan officers are responsible for monitoring their respective loan portfolios and reporting any adverse material
changes to the senior management. When circumstances warrant a review and possible change in the credit quality grade,
loan officers are required to notify the Bank’s CAD.
• A senior officer meets monthly with commercial loan officers to discuss the status of past due loans and possible classified
loans. These meetings are designed to give loan officers an opportunity to identify existing loans that should be downgraded.
• Monthly, members of senior management along with managers of Commercial Lending, CAD, Accounting, Special Assets
and Retail Collections attend a Special Asset Committee (“SAC”) meeting. The SAC reviews all C&I and CRE, classified,
and impaired loans and discusses the relative trends and current status of these assets. In addition, the SAC reviews all
classified and impaired retail residential real estate loans and all classified and impaired home equity loans. SAC also reviews
the actions taken by management regarding credit quality grades, foreclosure mitigation, loan extensions, troubled debt
restructurings and collateral repossessions. Based on the information reviewed in this meeting, the SAC approves all specific
loan loss allocations to be recognized by the Bank within the Allowance analysis.
• All new and renewed warehouse lines of credit are approved by the Executive Loan Committee. The CAD assigns the initial
credit quality grade to warehouse facilities. Monthly, members of senior management review warehouse lending activity
including data associated with the underlying collateral to the Warehouse facilities, i.e., the mortgage loans associated with
the balances drawn. Key performance indicators monitored include average days outstanding for each draw, average Fair
Isaac Corporation (“FICO”) credit report score for the underlying collateral, average loan-to-value (“LTV”) for the
underlying collateral and other factors deemed relevant.
On at least an annual basis, the Bank’s internal loan review department analyzes all aggregate lending relationships with outstanding
balances greater than $1 million that are internally classified as “Special Mention,” “Substandard,” “Doubtful” or “Loss.” In addition,
on an annual basis, the Bank analyzes a sample of “Pass” rated loans.
The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such
as current financial information, historical payment experience, public information, and current economic trends. The Bank also
considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). The Bank analyzes loans
individually, and based on this analysis, establishes a credit risk rating. The Bank uses the following definitions for risk ratings:
Risk Grade 1 — Excellent (Pass): Loans fully secured by liquid collateral, such as certificates of deposit, reputable bank
letters of credit, or other cash equivalents; loans fully secured by publicly traded marketable securities where there is no
impediment to liquidation; or loans to any publicly held company with a current long-term debt rating of A or better.
Risk Grade 2 — Good (Pass): Loans to businesses that have strong financial statements containing an unqualified opinion
from a Certified Public Accounting firm and at least three consecutive years of profits; loans supported by unaudited
financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship
with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans that are guaranteed
or otherwise backed by the full faith and credit of the U.S. government or an agency thereof, such as the Small Business
Administration; or loans to publicly held companies with current long-term debt ratings of Baa or better.
134
Risk Grade 3 — Satisfactory (Pass): Loans supported by financial statements (audited or unaudited) that indicate average
or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some
weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but
which may be susceptible to deterioration if adverse factors are encountered.
Risk Grade 4 — Satisfactory/Monitored (Pass): Loans in this category are considered to be of acceptable credit quality,
but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other
uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The
level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the
proper level of management supervision.
Risk Grade 5 — Special Mention: Loans that possess some credit deficiency or potential weakness that deserves close
attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting
the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is
indicative of an unwarranted level of risk and (2) credit weaknesses are considered potential and are not defined impairments
to the primary source of repayment.
Purchased Credit Impaired Loans - Group 1 (“PCI-1”): To the extent that a PCI loan’s performance does not reflect an
increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one
evaluation, such loan would be classified in the Purchased Credit Impaired - Group 1 (“PCI-1”) category, whose credit risk is
considered by management equivalent to a non-PCI “Special Mention” loan within the Bank’s credit rating matrix. PCI-1
loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows
of the loan have deteriorated from management’s initial acquisition day estimate. Provisions are made for impaired PCI-1
loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any
improvement in the expected performance of a PCI-1 loan would result in a reversal of the Provision to the extent of prior
charges and then an adjustment to accretable yield, which would have a positive impact on interest income.
Purchased Credit Impaired Loans — Substandard (“PCI-Sub”): If during the Bank’s periodic evaluations of its PCI loan
portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-
accretable yield established as part of its initial day-one evaluation, such loan would be classified PCI-Substandard (“PCI-
Sub”) within the Bank’s credit risk matrix. Management deems the risk of default and overall credit risk of a PCI-Sub loan
to be greater than a PCI-1 loan and more analogous to a non-PCI “Substandard” loan within the Bank’s credit rating matrix.
PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result
in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a
positive impact on interest income.
Risk Grade 6 — Substandard: One or more of the following characteristics may be exhibited in loans classified as
Substandard:
• Loans that possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of
repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan
is collected without loss.
• Loans are inadequately protected by the current net worth and paying capacity of the obligor.
• The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as
collateral liquidation or guarantees.
• Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.
• Unusual courses of action are needed to maintain a high probability of repayment.
• The borrower is not generating enough cash flow to repay loan principal, however, it continues to make interest
payments.
• The Bank is forced into a subordinated or unsecured position due to flaws in documentation.
• The Bank is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.
• There is significant deterioration in market conditions to which the borrower is highly vulnerable.
135
Risk Grade 7 — Doubtful: One or more of the following characteristics may be present in loans classified as Doubtful:
• Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these
weaknesses make full collection of principal highly improbable.
• The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of
repayment.
• The possibility of loss is high but because of certain important pending factors, which may strengthen the loan, loss
classification is deferred until the exact status of repayment is known.
Risk Grade 8 — Loss: Loans are considered uncollectible and of such little value that continuing to carry them as assets is
not feasible. Loans will be classified “Loss” when it is neither practical nor desirable to defer writing off or reserving all or a
portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
For all real estate and consumer loans, including small-dollar RGP loans, that do not meet the scope above, the Bank uses a grading
system based on delinquency and nonaccrual status. Loans that are 90 days or more past due or on nonaccrual are graded Substandard.
Occasionally, a real estate loan below scope may be graded as “Special Mention” or “Substandard” if the loan is cross-collateralized
with a classified C&I or CRE loan.
Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming
nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are
considered in the determination of the Allowance once day-one fair values are final.
Management separately monitors PCI loans, and on at least a quarterly basis, reviews them against the factors and assumptions used in
determining day-one fair values. In addition to its quarterly evaluation, a PCI loan is typically reviewed when it is modified or
extended, or when information becomes available to the Bank that provides additional insight regarding the loan’s performance, the
status of the borrower, or the quality or value of the underlying collateral.
If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting
standards and transferred out of the PCI population. The loan may require an additional Provision if its restructured cash flows are less
than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are
generally not considered TDRs and remain in the PCI population.
136
The following tables include loans by risk category based on the Bank’s internal analysis performed:
December 31, 2016
(in thousands)
Residential real estate:
Pass
Special
Mention* Substandard*
Purchased Purchased
Credit
Impaired
Doubtful / Loans -
Group 1
Credit
Impaired
Loans -
Loss
Substandard Loans**
Total
Rated
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . .
Construction & land development . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
— $ 21,344 $
—
—
1,005,622
36,515
118,769
264,274
13,614
585,439
—
—
656
7,086
—
90
1,270
—
256
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
13,117 $
—
1,115
4,224
—
791
154
—
1,763
82
—
—
—
166
— $
—
—
—
—
—
—
—
—
—
218 $
—
523
7,049
—
—
23
—
—
94
—
—
—
—
—
—
—
—
—
1
2,267 $
—
—
—
—
—
—
—
—
99
36,946
—
2,294
1,023,981
36,515
119,650
265,721
13,614
585,439
2,212
—
—
—
—
—
82
—
—
—
167
Total rated loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,024,233 $ 30,702 $
21,412 $
— $
7,908 $
2,366 $ 2,086,621
December 31, 2015
(in thousands)
Residential real estate:
Pass
Special
Mention* Substandard*
Purchased Purchased
Credit
Impaired
Doubtful / Loans -
Group 1
Credit
Impaired
Loans -
Substandard
Loss
Total
Rated
Loans**
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 24,301 $
—
—
803,369
35,674
63,750
227,344
8,905
386,729
—
—
860
5,070
—
96
936
—
—
21
14,577 $
—
1,557
6,530
—
2,621
194
—
—
2,296
—
—
—
—
—
—
—
—
—
28
—
—
—
—
58
— $
—
—
—
—
—
—
—
—
—
560 $
—
785
9,918
—
33
1,247
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
39,438
—
3,202
824,887
35,674
66,500
229,721
8,905
386,729
2,317
—
—
—
—
—
—
—
—
—
86
Total rated loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,525,771 $ 31,312 $
27,833 $
— $ 12,543 $
— $ 1,597,459
*At December 31, 2016 and 2015, Special Mention loans included $2 million and $180,000 and Substandard loans included $928,000 and $1 million, which were
removed from PCI accounting in accordance with ASC 310-30-35-13 due to a post-acquisition troubled debt restructuring.
**The above tables excludes all non-classified residential real estate, home equity and consumer loans at the respective period ends.
137
Subprime Lending
Both the Traditional Banking segment and the RPG segment of the Company have certain classes of loans that are considered to be
“subprime” strictly due to the credit score of the borrower at the time of origination.
Traditional Bank loans considered subprime totaled approximately $50 million and $51 million at December 31, 2016 and 2015.
Approximately $13 million and $14 million of the outstanding Traditional Bank subprime loan portfolio at December 31, 2016 and
2015 were originated for Community Reinvestment Act (“CRA”) purposes. Management does not consider these loans to possess
significantly higher credit risk due to other underwriting qualifications.
The RCS division of the RPG segment originates both a short-term line-of-credit product and a credit card product. The Bank sells
90% of the balances maintained through these two products within two days of loan origination and retains a 10% interest. Both of
these products are unsecured and made to borrowers with subprime or near prime credit scores. The aggregate outstanding balance
held-for-investment for these two portfolios totaled $20 million and $7 million at December 31, 2016 and 2015.
Allowance for Loan and Lease Losses
Activity in the Allowance follows:
December 31, (in thousands)
2016
2015
2014
Allowance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
27,491 $
24,410 $
23,026
Charge-offs - Core Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs - RPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries - Core Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries - RPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries - Core Banking . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries - RPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision - Core Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision - RPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,382)
(8,474)
(11,856)
1,573
1,219
2,792
(1,809)
(7,255)
(9,064)
3,945
10,548
14,493
(3,001)
(971)
(3,972)
1,362
295
1,657
(1,639)
(676)
(2,315)
3,065
2,331
5,396
(3,558)
(5)
(3,563)
1,506
582
2,088
(2,052)
577
(1,475)
3,392
(533)
2,859
Allowance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
32,920 $
27,491 $
24,410
138
The following tables present the activity in the Allowance by portfolio class for the years ended December 31, 2016, 2015 and 2014:
Year Ended
December 31, 2016 (in thousands)
Owner
Occupied
Occupied
Nonowner
Correspondent Occupied
Commercial
Real Estate
Residential Real Estate
Owner
Commercial
Real Estate -
Purchased
Whole Loans
Construction &
Land Development
Commercial &
Industrial
Lease
Financing
Receivables
Beginning balance . . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . .
8,301 $
(1,148)
(416)
421
623 $
(250)
—
—
1,052 $
79
—
8
7,636 $
768
(514)
152
36 $
—
—
—
1,303 $
513
(44)
78
1,455 $
259
(330)
127
89
47
—
—
Ending balance . . . . . . . . . . . . . . . $
7,158 $
373 $
1,139 $
8,042 $
36 $
1,850 $
1,511 $
136
(continued)
Warehouse
Lines of
Credit
Home
Equity
RPG
Loans
Credit
Cards
Consumer
Overdrafts
Automobile
Loans
Other
Consumer
Total
Beginning balance . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . .
967 $
497
—
—
2,996 $
961
(351)
151
1,699 $
10,548
(8,474)
1,219
448 $
154
(164)
52
351 $
898
(816)
242
56 $
481
(12)
1
$
479
686
(735)
341
27,491
14,493
(11,856)
2,792
Ending balance . . . . . . . . . . . . . . $
1,464 $
3,757 $
4,992 $
490 $
675 $
526 $
771
$
32,920
Year Ended
December 31, 2015 (in thousands)
Owner
Occupied
Residential Real Estate
Owner
Occupied
Correspondent
Nonowner
Occupied
Commercial
Real Estate
Commercial
Real Estate -
Purchased
Whole Loans
Construction &
Land Development
Commercial &
Industrial
Lease
Financing
Receivables
Beginning balance . . . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . .
8,565 $
50
(622)
308
567 $
56
—
—
837 $
331
(126)
10
7,740 $
344
(546)
98
34 $
2
—
—
926 $
377
—
—
1,167 $
282
(56)
62
Ending balance . . . . . . . . . . . . . . . . $
8,301 $
623 $
1,052 $
7,636 $
36 $
1,303 $
1,455 $
25
64
—
—
89
(continued)
Warehouse
Lines of
Credit
Home
Equity
RPG
Loans
Credit
Cards
Automobile
Overdrafts
Loans
Other
Consumer
Total
Consumer
Beginning balance . . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . .
799 $
168
—
—
2,730 $
584
(466)
148
44 $
2,331
(971)
295
285 $
256
(146)
53
382 $
255
(598)
312
32 $
24
—
—
$
277
272
(441)
371
24,410
5,396
(3,972)
1,657
Ending balance . . . . . . . . . . . . . . . $
967 $
2,996 $
1,699 $
448 $
351 $
56 $
479
$
27,491
139
Year Ended
December 31, 2014 (in thousands)
Owner
Occupied
Residential Real Estate
Owner Occupied - Nonowner
Occupied
Correspondent
Commercial
Real Estate
Real Estate -
Purchased
Whole Loans
Construction &
Land Development
Commercial &
Industrial
Lease
Financing
Receivables
Commercial
Beginning balance . . . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . .
7,816 $
1,448
(836)
137
— $
567
—
—
1,023 $
(28)
(185)
27
8,309 $
144
(868)
155
34 $
—
—
—
1,296 $
(441)
(18)
89
1,089 $
(16)
(20)
114
Ending balance . . . . . . . . . . . . . . . . $
8,565
567 $
837 $
7,740 $
34 $
926 $
1,167
—
25
—
—
25
(continued)
Warehouse
Lines of
Credit
Home
Equity
RPG
Loans
Credit
Cards
Automobile
Overdrafts
Loans
Other
Consumer
Total
Consumer
Beginning balance . . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . .
449 $
350
—
—
2,396 $
699
(548)
183
— $
(533)
(5)
582
289 $
49
(88)
35
199 $
383
(591)
391
54 $
(22)
—
—
$
72
234
(404)
375
23,026
2,859
(3,563)
2,088
Ending balance . . . . . . . . . . . . . . . $
799 $
2,730 $
44 $
285 $
382
32 $
277
$
24,410
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans and nonperforming assets and select credit quality ratios follows:
December 31, (dollars in thousands)
2016
2015
Loans on nonaccrual status* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans past due 90-days-or-more and still on accrual** . . . . . . . . . . . . . . . . . . . . . . . . .
$
15,892
167
$ 21,712
224
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,059
1,391
17,450
$
21,936
1,220
$ 23,156
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans (including OREO) . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.42 %
0.46
0.36
0.66 %
0.70
0.55
Credit Quality Ratios - Core Bank:
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total loans (including OREO) . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.42 %
0.46
0.36
0.66 %
0.70
0.55
*Loans on nonaccrual status include impaired loans.
**Loans past due 90-days-or-more and still accruing consist of PCI loans or smaller balance consumer loans.
140
The following table presents the recorded investment in nonaccrual loans and loans past due 90-days-or-more and still on accrual by
class of loans:
December 31, (in thousands)
Residential real estate:
Nonaccrual
2016
2015
Past Due 90-Days-or-More
and Still Accruing Interest*
2016
2015
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
10,955 $
—
852
2,725
—
77
154
—
—
1,069
—
—
—
—
60
15,892 $
13,197 $
—
935
3,941
—
1,589
194
—
—
1,793
—
—
—
—
63
21,712 $
— $
—
—
—
—
—
—
—
—
—
82
—
—
—
85
167 $
—
—
—
224
—
—
—
—
—
—
—
—
—
—
—
224
* Loans past due 90-days-or-more and still accruing consist of PCI loans or smaller balance consumer loans.
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous
loans that are individually evaluated for impairment and classified impaired loans. Nonaccrual loans are typically returned to accrual
status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months
and future contractual payments are reasonably assured. TDRs on nonaccrual status are reviewed for return to accrual status on an
individual basis, with additional consideration given to performance under the modified terms.
141
The Bank considers the performance of the loan portfolio and its impact on the Allowance. For residential and consumer loan classes,
the Bank also evaluates credit quality based on the aging status of the loan and by payment activity. The following tables present the
recorded investment in residential and consumer loans based on payment activity as of December 31, 2016 and 2015:
December 31, 2016
(in thousands)
Owner
Occupied
Nonowner
Occupied -
Correspondent Occupied
Home
Equity
RPG
Loans
Credit
Cards
Overdrafts
Automobile
Loans
Other
Consumer
Residential Real Estate
Owner
Consumer
Performing . . . . . . . . . . . . . . . . . . . .
Nonperforming . . . . . . . . . . . . . . . . .
$
989,193
10,955
$
149,028
—
$
155,753
852
$
340,216
1,069
$
32,170
82
$
13,414
—
$
803
—
$
52,579
—
$
19,599
145
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,000,148
$
149,028
$
156,605
$
341,285
$
32,252
$
13,414
$
803
$
52,579
$
19,744
December 31, 2015
(in thousands)
Owner
Occupied
Occupied -
Nonowner
Correspondent Occupied
Home
Equity
RPG
Loans
Credit
Cards
Overdrafts
Residential Real Estate
Owner
Consumer
Automobile
Loans
Other
Consumer
Performing . . . . . . . . . . . . . . . . . . . . .
Nonperforming . . . . . . . . . . . . . . . . . .
$
1,068,737
13,197
$
249,344
—
$
115,359
935
$
287,401
1,793
$
7,204
—
$
11,068
—
$
$
685
—
6,473
—
$
11,935
63
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,081,934
$
249,344
$
116,294
$
289,194
$
7,204
$
11,068
$
685
$
6,473
$
11,998
Delinquent Loans
The following tables present the aging of the recorded investment in loans by class of loans:
December 31, 2016
(dollars in thousands)
30 - 59
Days
Delinquent
60 - 89
Days
Delinquent
90 or More
Days
Delinquent*
Total
Delinquent**
Total
Current
Total
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . .
Nonowner occupied . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . .
Commercial real estate - purchased
whole loans . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . .
Commercial & industrial . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . .
$
1,696
—
—
8
—
—
342
—
—
316
1,751
14
159
—
114
337
—
—
—
—
—
—
—
—
160
304
4
1
—
106
$
2,521
—
46
417
$
4,554
—
46
425
$
995,594 $ 1,000,148
149,028
149,028
156,605
156,559
1,023,981
1,023,556
—
—
—
—
—
494
82
—
1
—
85
—
—
342
—
—
970
2,137
18
161
—
305
36,515
119,650
265,379
13,614
585,439
340,315
30,115
13,396
642
52,579
19,439
36,515
119,650
265,721
13,614
585,439
341,285
32,252
13,414
803
52,579
19,744
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Delinquency ratio*** . . . . . . . . . . . . . . .
4,400
$
0.12 %
912
$
0.02 %
3,646
$
0.10 %
8,958
$ 3,801,820 $ 3,810,778
0.24 %
*All loans past due 90 days-or-more, excluding PCI loans, were on nonaccrual status.
**Delinquent status may be determined by either the number of days past due or number of payments past due.
***Represents total loans 30-days-or-more past due divided by total loans.
142
December 31, 2015
(dollars in thousands)
30 - 59
Days
Delinquent
60 - 89
Days
Delinquent
90 or More
Days
Delinquent*
Total
Delinquent**
Total
Current
Total
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . . . .
Nonowner occupied . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . .
Commercial real estate - purchased
whole loans . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . .
Commercial & industrial . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . .
$
$
1,960
—
14
178
1,044
—
—
—
—
—
299
—
—
206
246
10
133
—
42
—
—
—
—
—
1
—
2
—
—
60
$
3,878
—
39
933
—
1,500
—
—
—
1,186
—
—
—
—
—
6,882
—
53
1,111
—
1,500
299
—
—
1,393
246
12
133
—
102
$ 1,075,052 $ 1,081,934
249,344
116,294
824,887
249,344
116,241
823,776
35,674
65,000
229,422
8,905
386,729
287,801
6,958
11,056
552
6,473
11,896
35,674
66,500
229,721
8,905
386,729
289,194
7,204
11,068
685
6,473
11,998
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Delinquency ratio*** . . . . . . . . . . . . . . . .
3,088
$
0.09 %
1,107
$
0.03 %
7,536
$
0.23 %
11,731
$ 3,314,879 $ 3,326,610
0.35 %
*All loans past due 90 days-or-more, excluding PCI loans, were on nonaccrual status.
**Delinquent status may be determined by either the number of days past due or number of payments past due.
***Represents total loans 30-days-or-more past due divided by total loans.
Impaired Loans
Information regarding the Bank’s impaired loans follows:
December 31, (in thousands)
2016
2015
2014
Loans with no allocated Allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans with allocated Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
21,416 $
31,268
26,143 $
39,980
32,560
53,620
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
52,684 $
66,123 $
86,180
Amount of the Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average of individually impaired loans during the year . . . . . . . . . . . . . . .
Interest income recognized during impairment . . . . . . . . . . . . . . . . . . . . . .
Cash basis interest income recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,925 $
56,981
1,466
—
5,427 $
74,482
1,882
—
5,564
92,428
4,279
—
Approximately $4 million and $7 million of impaired loans at December 31, 2016 and 2015 were PCI loans. Approximately $3
million and $1 million of impaired loans at December 31, 2016 and 2015 were formerly PCI loans which became classified as
“impaired” through a post-acquisition troubled debt restructuring.
143
The following tables present the balance in the Allowance and the recorded investment in loans by portfolio class based on
impairment method as of December 31, 2016 and 2015:
Residential Real Estate
Owner
Owner
Occupied
Occupied -
Nonowner
Correspondent Occupied
Commercial
Real Estate
December 31, 2016 (in thousands)
Allowance:
Ending Allowance balance:
Individually evaluated for
Commercial
Real Estate -
Purchased
Whole Loans Land Development
Construction &
Lease
Commercial & Financing
Receivables
Industrial
impairment, excluding PCI loans . $
3,203 $
— $
65 $
532 $
— $
120 $
227 $
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . .
3,797
373
1,067
7,465
PCI loans with post acquisition
impairment . . . . . . . . . . . . . . . . .
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . .
158
—
—
—
7
—
45
—
36
—
—
1,730
1,284
—
—
—
—
—
136
—
—
Total ending Allowance: . . . . . . . . . . . . $
7,158 $
373 $
1,139 $
8,042 $
36 $
1,850 $
1,511 $
136
Loans:
Impaired loans individually evaluated,
excluding PCI loans . . . . . . . . . . . . . $
31,908 $
— $
1,601 $
11,769 $
— $
882 $
686 $
—
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . .
965,755
149,028
154,481
1,005,163
36,515
118,768
265,012
13,614
PCI loans with post acquisition
impairment . . . . . . . . . . . . . . . . . . .
2,297
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . . . .
188
—
—
268
255
1,164
5,885
—
—
—
—
—
23
—
—
Total ending loan balance . . . . . . . . . . . $
1,000,148 $
149,028 $
156,605 $
1,023,981 $
36,515 $
119,650 $
265,721 $
13,614
(continued)
Allowance:
Warehouse
Lines of
Credit
Home
Equity
RPG
Loans
Credit
Cards
Consumer
Overdrafts
Automobile
Loans
Other
Consumer
Total
Ending Allowance balance:
Individually evaluated for impairment,
excluding PCI loans . . . . . . . . . . . . $
Collectively evaluated for impairment
PCI loans with post acquisition
impairment . . . . . . . . . . . . . . . . . .
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . . .
— $
1,464
433 $
3,225
— $
4,992
— $
490
— $
675
— $
526
$
36
735
4,616
27,995
—
—
99
—
—
—
—
—
—
—
—
—
—
—
309
—
Total ending Allowance: . . . . . . . . . . . . . $
1,464 $
3,757 $
4,992 $
490 $
675 $
526 $
771
$
32,920
Loans:
Impaired loans individually evaluated,
excluding PCI loans . . . . . . . . . . . . . . $
— $
1,929 $
— $
— $
— $
— $
81
$
48,856
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . . .
585,439
339,163
32,252
13,414
803
52,579
19,662
3,751,648
PCI loans with post acquisition
impairment . . . . . . . . . . . . . . . . . . . .
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . . . . .
—
—
99
94
—
—
—
—
—
—
—
—
—
1
3,828
6,446
Total ending loan balance . . . . . . . . . . . . $
585,439 $
341,285 $
32,252 $
13,414 $
803 $
52,579 $
19,744
$ 3,810,778
144
Residential Real Estate
Owner
Owner
Occupied
Occupied -
Nonowner
Correspondent Occupied
Commercial
Real Estate
Commercial
Real Estate -
Purchased
Whole Loans Land Development
Construction &
Commercial &
Industrial
Lease
Financing
Receivables
December 31, 2015 (in thousands)
Allowance:
Ending Allowance balance:
Individually evaluated for impairment,
excluding PCI loans . . . . . . . . . . . . $
Collectively evaluated for impairment
PCI loans with post acquisition
impairment . . . . . . . . . . . . . . . . . .
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . . .
3,820 $
4,471
— $
623
78 $
878
339 $
6,806
— $
36
159 $
1,144
196 $
1,137
10
—
—
—
96
—
491
—
—
—
—
—
122
—
—
89
—
—
89
Total ending Allowance: . . . . . . . . . . . . . $
8,301 $
623 $
1,052 $
7,636 $
36 $
1,303 $
1,455 $
Loans:
Impaired loans individually evaluated,
excluding PCI loans . . . . . . . . . . . . . $
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . . .
PCI loans with post acquisition
impairment . . . . . . . . . . . . . . . . . . . .
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . . . . .
39,041 $
— $
2,351 $
12,441 $
— $
2,717 $
322 $
—
1,042,334
249,344
113,158
802,528
35,674
63,750
228,151
8,905
65
494
—
—
785
—
4,806
5,112
—
—
—
33
1,193
55
—
—
Total ending loan balance. . . . . . . . . . . . . $
1,081,934 $
249,344 $
116,294 $
824,887 $
35,674 $
66,500 $
229,721 $
8,905
Warehouse
Lines of
Credit
Home
Equity
RPG
Loans
Credit
Cards
Consumer
Overdrafts
(continued)
Allowance:
Ending Allowance balance:
Individually evaluated for impairment,
Automobile
Loans
Other
Consumer
Total
excluding PCI loans . . . . . . . . . . . . . $
Collectively evaluated for impairment .
— $
967
100 $
2,896
— $
1,699
— $
448
— $
351
— $
56
$
16
463
4,708
22,064
PCI loans with post acquisition
impairment . . . . . . . . . . . . . . . . . . .
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
—
—
719
—
Total ending Allowance: . . . . . . . . . . . . . . $
967 $
2,996 $
1,699 $
448 $
351 $
56 $
479
$
27,491
Loans:
Impaired loans individually evaluated,
excluding PCI loans . . . . . . . . . . . . . . $
— $
2,316 $
— $
— $
— $
— $
86
$
59,274
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . . . .
PCI loans with post acquisition impairment
PCI loans without post acquisition
impairment . . . . . . . . . . . . . . . . . . . . .
386,729
—
286,878
—
—
—
7,204
—
—
11,068
—
—
685
—
—
6,473
—
—
11,912
—
3,254,793
6,849
—
5,694
Total ending loan balance. . . . . . . . . . . . . . $
386,729 $
289,194 $
7,204 $
11,068 $
685 $
6,473 $
11,998
$ 3,326,610
145
The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2016, 2015 and 2014.
The difference between the “Unpaid Principal Balance” and “Recorded Investment” columns represents life-to-date partial write
downs/charge-offs taken on individual impaired credits.
(in thousands)
Impaired loans with no related allowance recorded:
Residential real estate:
As of
December 31, 2016
Twelve Months Ended
December 31, 2016
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
Cash Basis
Interest
Income
Recognized
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with an allowance recorded:
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,727 $
—
1,399
6,610
—
476
67
—
—
1,358
12,629 $
—
1,376
5,536
—
476
67
—
—
1,287
—
—
—
—
45
21,595
—
491
7,397
—
405
619
—
—
742
—
—
—
—
45
21,576
—
493
7,397
—
406
619
—
—
741
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,361
—
73
577
—
120
227
—
—
532
13,219 $
—
1,293
6,462
—
476
115
—
—
1,674
140 $
—
20
106
—
20
7
—
—
15
—
—
—
—
70
22,867
—
799
8,592
—
421
621
—
—
331
—
—
—
—
—
782
—
24
292
—
19
1
—
—
39
—
—
—
—
37
54,968 $
—
—
—
—
36
52,684 $
—
—
—
—
35
4,925 $
—
—
—
—
41
56,981 $
—
—
—
—
1
1,466 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
146
(in thousands)
As of
December 31, 2015
Twelve Months Ended
December 31, 2015
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
Cash Basis
Interest
Income
Recognized
Impaired loans with no related allowance recorded:
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with an allowance recorded:
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14,287 $
—
1,978
7,406
—
2,067
18
—
—
2,263
13,256 $
—
1,928
6,743
—
2,067
18
—
—
2,087
—
—
—
—
44
25,896
—
1,231
10,546
—
650
1,497
—
—
258
—
—
—
—
44
25,850
—
1,208
10,504
—
650
1,497
—
—
229
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,830
—
174
830
—
159
318
—
—
100
10,907 $
—
2,234
9,653
—
2,096
1,682
—
—
2,222
100 $
—
31
170
—
19
3
—
—
23
—
—
—
—
32
28,917
—
2,004
11,378
—
664
2,351
—
—
292
—
—
—
—
—
885
—
60
469
—
36
81
—
—
4
—
—
—
—
42
68,183 $
—
—
—
—
42
66,123 $
—
—
—
—
16
5,427 $
—
—
—
—
50
74,482 $
—
—
—
—
1
1,882 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
147
(in thousands)
Impaired loans with no related allowance recorded:
Residential real estate:
As of
December 31, 2014
Twelve Months Ended
December 31, 2014
Unpaid
Principal
Balance
Recorded
Investment
Allowance
Allocated
Cash Basis
Average
Recorded
Investment
Interest
Income
Recognized
Interest
Income
Recognized
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired loans with an allowance recorded:
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owner occupied - correspondent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate - purchased whole loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,598 $
—
2,368
17,282
—
2,144
3,943
—
—
1,969
6,196 $
—
2,215
16,248
—
2,144
3,943
—
—
1,814
—
—
—
—
—
36,361
—
2,755
12,653
—
483
1,534
—
—
452
—
—
—
—
—
35,794
—
2,727
12,614
—
483
1,534
—
—
406
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,301
—
165
1,278
—
187
367
—
—
225
6,745 $
—
1,758
16,809
—
2,118
4,047
—
—
1,839
—
—
—
—
—
35,121
—
4,685
16,722
—
498
1,495
—
—
518
351 $
—
130
912
—
165
252
—
—
105
—
—
—
—
—
1,350
—
172
672
—
26
115
—
—
25
—
—
—
—
62
88,604 $
—
—
—
—
62
86,180 $
—
—
—
—
41
5,564 $
—
—
—
—
73
92,428 $
—
—
—
—
4
4,279 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
148
Troubled Debt Restructurings
A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank
would not otherwise have considered. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is
performed of the probability that the borrower will be in payment default on any of their debt in the foreseeable future without the
modification. This evaluation is performed in accordance with the Bank’s internal underwriting policy.
All TDRs are considered “Impaired,” including PCI loans subsequently restructured. The majority of the Bank’s commercial related
and construction TDRs involve a restructuring of financing terms such as a reduction in the payment amount to require only interest
and escrow (if required) and/or extending the maturity date of the debt. The substantial majority of the Bank’s residential real estate
TDR concessions involve reducing the client’s loan payment through a rate reduction for a set period based on the borrower’s ability
to service the modified loan payment. Retail loans may also be classified as TDRs due to legal modifications, such as bankruptcies.
Nonaccrual loans modified as TDRs typically remain on nonaccrual status and continue to be reported as nonperforming loans for a
minimum of six months. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the
borrower’s financial condition and ability and willingness to service the modified debt. At December 31, 2016 and 2015, $10 million
and $12 million of TDRs were on nonaccrual status.
Detail of TDRs differentiated by loan type and accrual status follows:
Troubled Debt
Restructurings on
Nonaccrual Status
Troubled Debt
Restructurings on
Accrual Status
Total
Troubled Debt
Restructurings
December 31, 2016 (dollars in thousands)
Residential real estate . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . .
Total troubled debt restructurings . . . . . . .
December 31, 2015 (dollars in thousands)
Residential real estate . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . .
Commercial & industrial . . . . . . . . . . . . . . . . .
Total troubled debt restructurings . . . . . . . . . .
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
79 $
6
1
1
87 $
7,199
2,430
77
154
9,860
198 $
17
4
2
221 $
21,554
8,835
804
533
31,726
277 $
23
5
3
308 $
28,753
11,265
881
687
41,586
Troubled Debt
Restructurings on
Nonaccrual Status
Troubled Debt
Restructurings on
Accrual Status
Total
Troubled Debt
Restructurings
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
74 $
9
2
1
86 $
7,365
3,324
1,589
194
12,472
233 $
17
6
5
261 $
27,844
8,008
1,128
128
37,108
307 $
26
8
6
347 $
35,209
11,332
2,717
322
49,580
149
The Bank considers a TDR to be performing to its modified terms if the loan is in accrual status and not past due 30 days-or-more as
of the reporting date. A summary of the categories of TDR loan modifications outstanding and respective performance under modified
terms at December 31, 2016 and 2015 follows:
December 31, 2016 (dollars in thousands)
Residential real estate loans (including home equity
loans):
Troubled Debt
Restructurings
Performing to
Modified Terms
Troubled Debt
Restructurings
Not Performing to
Modified Terms
Total
Troubled Debt
Restructurings
Number of Recorded
Number of Recorded
Number of Recorded
Loans
Investment
Loans
Investment
Loans
Investment
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal modification . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total residential TDRs . . . . . . . . . . . . . . . . . . . . . . .
2 $
148
7
17
174
155
18,125
616
806
19,702
1 $
57
7
38
103
493
6,213
306
2,039
9,051
3 $
205
14
55
277
648
24,338
922
2,845
28,753
Commercial related and construction/land
development loans:
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial TDRs . . . . . . . . . . . . . . . . . . . . . .
Total troubled debt restructurings . . . . . . . . . . . . . . . .
5
8
10
23
197 $
2,666
4,769
2,737
10,172
29,874
1
2
5
8
111 $
413
228
2,020
2,661
11,712
6
10
15
31
308 $
3,079
4,997
4,757
12,833
41,586
December 31, 2015 (dollars in thousands)
Residential real estate loans (including home equity
loans):
Troubled Debt
Restructurings
Performing to
Modified Terms
Troubled Debt
Restructurings
Not Performing to
Modified Terms
Total
Troubled Debt
Restructurings
Number of Recorded
Number of Recorded
Number of Recorded
Loans
Investment
Loans
Investment
Loans
Investment
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total residential TDRs . . . . . . . . . . . . . . . . . . . . . . . .
2 $
183
9
30
224
631
24,734
789
1,226
27,380
— $
46
7
30
83
—
5,650
771
1,408
7,829
2 $
229
16
60
307
631
30,384
1,560
2,634
35,209
Commercial related and construction/land development
loans:
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial TDRs . . . . . . . . . . . . . . . . . . . . . . .
Total troubled debt restructurings . . . . . . . . . . . . . . . . . . .
6
10
12
28
252 $
1,517
5,021
2,726
9,264
36,644
1
3
8
12
95 $
481
727
3,899
5,107
12,936
7
13
20
40
347 $
1,998
5,748
6,625
14,371
49,580
As of December 31, 2016 and 2015, 72% and 74% of the Bank’s TDRs were performing according to their modified terms. The Bank
had provided $4 million and $5 million of specific reserve allocations to clients whose loan terms have been modified in TDRs as of
December 31, 2016 and 2015. The Bank had no commitments to lend any additional material amounts to its existing TDR
relationships at December 31, 2016 and 2015.
150
A summary of the categories of TDR loan modifications and respective performance as of December 31, 2016, 2015 and 2014 that
were modified during the years ended December 31, 2016, 2015 and 2014 follows:
Troubled Debt
Restructurings
Performing to
Modified Terms
Troubled Debt
Restructurings
Not Performing to
Modified Terms
Total
Troubled Debt
Restructurings
Number of Recorded
Number of Recorded
Number of Recorded
December 31, 2016 (dollars in thousands)
Residential real estate loans (including home equity
loans):
Interest only payments . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal modification . . . . . . . . . . . . . . . . . . . . . . . . . .
Total residential TDRs . . . . . . . . . . . . . . . . . . . . .
Commercial related and construction/land
development loans:
Interest only payments . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial TDRs . . . . . . . . . . . . . . . . . . . .
Total troubled debt restructurings . . . . . . . . . . . . . .
Loans
Investment
Loans
Investment
Loans
Investment
1 $
6
—
4
11
146
566
—
319
1,031
— $
3
—
7
10
—
149
—
741
890
1 $
9
—
11
21
146
715
—
1,060
1,921
2
2
1
5
16 $
1,718
749
465
2,932
3,963
—
1
1
2
12 $
—
135
1,429
1,564
2,454
2
3
2
7
28 $
1,718
884
1,894
4,496
6,417
Troubled Debt
Restructurings
Performing to
Modified Terms
Troubled Debt
Restructurings
Not Performing to
Modified Terms
Total
Troubled Debt
Restructurings
Number of Recorded
Number of Recorded
Number of Recorded
Loans
Investment
Loans
Investment
Loans
Investment
December 31, 2015 (dollars in thousands)
Residential real estate loans (including home equity
loans):
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal modification . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total residential TDRs . . . . . . . . . . . . . . . . . . . . . .
1 $
17
—
3
21
617
2,148
—
153
2,918
— $
5
2
4
11
—
519
43
162
724
1 $
22
2
7
32
617
2,667
43
315
3,642
Commercial related and construction/land
development loans:
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial TDRs . . . . . . . . . . . . . . . . . . . . .
Total troubled debt restructurings . . . . . . . . . . . . . . . . .
3
1
4
8
29 $
465
815
716
1,996
4,914
—
—
4
4
15 $
—
—
1,898
1,898
2,622
3
1
8
12
44 $
465
815
2,614
3,894
7,536
The tables above are inclusive of loans that were TDRs at the end of previous years and were re-modified, e.g., a maturity date extension during the current year.
151
December 31, 2014 (dollars in thousands)
Loans
Investment
Loans
Investment
Performing to
Modified Terms
Not Performing to
Modified Terms
Troubled Debt
Restructurings
Number of Recorded
Number of Recorded
Number of Recorded
Investment
Loans
Residential real estate loans (including home equity
loans):
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal modification . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total residential TDRs . . . . . . . . . . . . . . . . . . . . . .
Commercial related and construction/land
development loans:
Interest only payments . . . . . . . . . . . . . . . . . . . . . . . .
Rate reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal modification . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial TDRs . . . . . . . . . . . . . . . . . . . . .
Total troubled debt restructurings . . . . . . . . . . . . . . . . .
— $
21
5
20
46
—
2,274
820
1,846
4,940
4 $
11
1
15
31
389
1,773
28
559
2,749
4 $
32
6
35
77
389
4,047
848
2,405
7,689
4
9
7
—
20
66 $
1,185
4,411
1,102
—
6,698
11,638
2
2
2
—
6
37 $
385
584
1,726
—
2,695
5,444
6
11
9
—
26
103 $
1,570
4,995
2,828
—
9,393
17,082
The table above is inclusive of loans that were TDRs at the end of previous years and were re-modified, e.g., a maturity date extension during the current year.
As of December 31, 2016, 2015 and 2014, 62%, 65% and 68% of the Bank’s TDRs that occurred during the years ended December
31, 2016, 2015 and 2014 were performing according to their modified terms. The Bank provided approximately $377,000, $300,000
and $1 million in specific reserve allocations to clients whose loan terms were modified in TDRs during 2016, 2015 and 2014.
There was no significant change between the pre and post modification loan balances at December 31, 2016, 2015 and 2014.
152
The following tables present loans by class modified as troubled debt restructurings within the previous 12 months of December 31,
2016, 2015 and 2014 and for which there was a payment default during 2016, 2015 and 2014:
(dollars in thousands)
Residential real estate:
Owner occupied . . . . . . . . . . . . . . . .
Owner occupied - correspondent . .
Nonowner occupied . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . .
Commercial real estate - purchased
whole loans . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . .
Commercial & industrial . . . . . . . . . . .
Lease financing receivables . . . . . . . . .
Warehouse lines of credit . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . .
Consumer:
RPG loans . . . . . . . . . . . . . . . . . . . . .
Credit cards . . . . . . . . . . . . . . . . . . .
Overdrafts . . . . . . . . . . . . . . . . . . . . .
Automobile loans . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . .
2016
2015
2014
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Years Ended December 31,
5 $
—
—
—
—
1
—
—
—
1
—
—
—
—
—
498
—
—
—
—
86
—
—
—
286
—
—
—
—
—
12 $
—
—
2
724
—
—
1,704
10 $
—
6
7
1,894
—
580
3,429
—
—
1
—
—
—
—
—
—
—
—
—
—
194
—
—
—
—
—
—
—
—
—
1
1
—
—
—
—
—
—
—
—
—
101
207
—
—
—
—
—
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 $
870
15 $
2,622
25 $
6,211
153
Foreclosures
The following table presents the carrying amount of foreclosed properties held at December 31, 2016 and 2015 as a result of the Bank
obtaining physical possession of such properties:
December 31, (in thousands)
2016
2015
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,391 $
—
—
478
442
300
Total other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,391 $
1,220
The following table presents the recorded investment in consumer mortgage loans secured by residential real estate properties for
which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction as of December
31, 2016 and 2015:
December 31, (in thousands)
2016
2015
Recorded investment in consumer residential real estate mortgage
loans in the process of foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,677 $
4,602
Easy Advances
The Company’s RPG segment offered its new EA product through the TRS division during the first quarter of 2016. TRS originated
$123 million in EAs during the first quarter of 2016. The provision for loss on EAs equated to 2.47% of total EA originations for the
year ended December 31, 2016. The Company based its 2016 provision for loss on EAs on prior year tax refund funding patterns with
adjustments based on current year tax refund funding patterns. At December 31, 2016, all EAs originated had been either charged-off
or collected.
Information regarding EAs follows:
Year Ended December 31, (dollars in thousands)
2016
Easy Advances originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for Easy Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Easy Advances net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Easy Advances net charge-offs to total Easy Advances
originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,230
3,048
3,048
2.47 %
154
6.
PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and equipment follows:
December 31, (in thousands)
2016
2015
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,365 $ 3,055
25,447
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,066
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,830
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,398
Total premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
47,292
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,869 $ 31,106
36,140
38,911
17,246
—
98,662
55,793
The Company held three former banking centers for sale as of December 31, 2016. The Company closed its Hudson, Florida banking
center in January 2015 and has held the property for sale since closing. In addition, the Company obtained two Florida-based, former
banking centers in its May 17, 2016 Cornerstone acquisition. The Company carried all three former banking centers for sale at a value
of $2 million, inclusive of accumulated depreciation, at December 31, 2016.
In July 2015, the Company sold its banking center in Elizabethtown, Kentucky and recognized a $28,000 gain on the transaction. The
premises of the banking center were carried at approximately $1 million, which equated to the total cost of the premises less accumulated
depreciation.
Depreciation expense related to premises and equipment follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,495 $
6,742 $
6,363
7.
GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
A progression of the balance for goodwill follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquired goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,168 $
6,132
—
16,300 $
10,168 $
—
—
10,168 $
10,168
—
—
10,168
The goodwill balance relates entirely to the Company’s Traditional Banking operations. The Bank did not record any goodwill
associated with its 2012 FDIC-assisted acquisitions.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2016 and 2015, the
Company’s Core Banking reporting unit had positive equity and the Company elected to perform a qualitative assessment to
determine if it was more-likely-than-not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The
qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair
value. Therefore, the Company did not complete the two-step impairment test as of December 31, 2016, 2015 and 2014.
155
The Company recorded a $1 million core deposit intangible (“CDI”) asset in association with its May 17, 2016 Cornerstone
acquisition. For the years ending December 31, 2016, 2015 and 2014, aggregate CDI amortization expense follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Core deposit amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
135 $
— $
—
8.
INTEREST RATE SWAPS
Interest rate swap derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value
of a derivative depends on whether it has been designated and qualifies as part of a cash flow hedging relationship. For a derivative
designated as a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss is recorded as a component of other
comprehensive income (“OCI”). For derivatives not designated as hedges, the gain or loss is recognized in current period earnings.
Interest Rate Swaps Used as Cash Flow Hedges
The Bank entered into two interest rate swap agreements (“swaps”) during 2013 as part of its interest rate risk management strategy.
The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB
advances tied to the 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month
LIBOR. The counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the
swap contracts is not significant.
The swaps were determined to be fully effective during all periods presented; therefore, no amount of ineffectiveness was included in
net income. The aggregate fair value of the swaps is recorded in other liabilities with changes in fair value recorded in OCI. The
amount included in AOCI would be reclassified to current earnings should the hedge no longer be considered effective. The Bank
expects the hedges to remain fully effective during the remaining term of the swaps.
The following table reflects information about swaps designated as cash flow hedges as of December 31, 2016 and 2015:
(dollars in thousands)
Notional
Amount
Pay
Rate
Receive
Rate
Term
December 31, 2016
Assets /
(Liabilities)
Unrealized
Gain (Loss)
AOCI
December 31, 2015
Assets /
(Liabilities)
Unrealized
Gain (Loss)
in AOCI
Interest rate swap on money market deposits. . . $
Interest rate swap on FHLB advance . . . . . . . .
$
10,000
10,000
20,000
2.17 % 1M LIBOR 12/2013 - 12/2020
2.33 % 3M LIBOR 12/2013 - 12/2020
$
$
(186) $
(207)
(393) $
(121) $
(135)
(256) $
(289) $
(311)
(600) $
(188)
(202)
(390)
The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income
during the years ended December 31, 2016, 2015 and 2014:
Years Ended December 31, (in thousands)
2016
2015
2014
Interest rate swap on money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest rate swap on FHLB advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense on swap transactions . . . . . . . . . . . . . . . . . . . . . . . . $
168 $
164
332 $
198 $
204
402 $
201
223
424
156
The following table presents the net gains (losses) recorded in accumulated OCI and the consolidated statements of income relating to
the swaps for the years ended December 31, 2016, 2015 and 2014:
Years Ended December 31, (in thousands)
2016
2015
2014
Losses recognized in OCI on derivative (effective portion) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(125)
$
(514)
$ (1,082)
Losses reclassified from OCI on derivative (effective portion) . . . . . . . . . . . . . . . . . . . . . . . . .
(332)
(402)
(424)
Gains (losses) recognized in income on derivative (ineffective portion) . . . . . . . . . . . . . . . . . .
—
—
—
The estimated net amount of the existing losses that are reported in accumulated OCI at December 31, 2016 that is expected to be
reclassified into earnings within the next 12 months is $240,000.
Non-hedge Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these
instruments to meet client needs, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These
swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year
earnings.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair
value of a derivative instrument contract is positive, this generally indicates that the counter party or client owes the Bank, and results
in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty,
and therefore, has no credit risk.
A summary of the Bank’s interest rate swaps related to clients as of December 31, 2016 and 2015 is included in the following table:
December 31, (in thousands)
2016
Notional
Amount
Fair Value
2015
Notional
Amount
Fair Value
Interest rate swaps with Bank clients . . . . . . . . . . . . . . . . . . . . . . . $
Offsetting interest rate swaps with institutional swap dealer . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
31,553 $
31,553
63,106 $
156 $
(55)
101 $
25,927 $
25,927
51,854 $
400
(400)
—
The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with dealer counterparties
when such net loss positions exceed $250,000. The fair value of cash or investment securities pledged as collateral by the Bank to
cover such net loss positions totaled $1.8 million and $1.5 million at December 31, 2016 and 2015.
157
9.
DEPOSITS
Ending deposit balances at December 31, 2016 and 2015 were as follows:
December 31, (in thousands)
2016
2015
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Individual retirement accounts* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits, $250 and over* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other certificates of deposit* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered certificates of deposit* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
872,709
541,622
360,597
164,410
42,642
37,200
140,894
28,681
783,054
501,059
200,126
117,408
36,016
42,775
127,878
44,298
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,188,755
971,937
1,852,614
634,863
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,160,692
$
2,487,477
*Represents a time deposit.
The following table summarizes deposits acquired in the Company’s May 17, 2016 Cornerstone acquisition, finalized as of October 1,
2016:
(in thousands)
Contractual Principal
Fair Value Adjustment
Acquisition-Day Fair Value
May 17, 2016
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Money market accounts . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Individual retirement accounts* . . . . . . . . . . . . . . .
Time deposits, $250 and over* . . . . . . . . . . . . . . . . .
Other certificates of deposit* . . . . . . . . . . . . . . . . . .
59,507 $
53,773
12,352
3,897
3,385
19,343
Total interest-bearing deposits . . . . . . . . . . . . . . . . .
Total noninterest-bearing deposits . . . . . . . . . . . . .
152,257
52,908
— $
—
—
13
12
67
92
—
59,507
53,773
12,352
3,910
3,397
19,410
152,349
52,908
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
205,165 $
92 $
205,257
*Represents a time deposit.
Time deposits at or above the FDIC insured limit of $250,000 are presented in the table below:
December 31, (in thousands)
2016
2015
Time deposits of $250 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,200 $ 42,775
158
At December 31, 2016, the scheduled maturities and weighted average rate of all time deposits, including brokered certificates of
deposit, were as follows:
Year (dollars in thousands)
Weighted
Average
Rate
Principal
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,890
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,505
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,932
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,248
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,819
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 249,417
0.40 %
1.27
1.78
1.84
1.65
1.68
1.09
10.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase agreements
and overnight liabilities to deposit clients arising from the Bank’s treasury management program. While comparable to deposits in their
transactional nature, these overnight liabilities to clients are in the form of repurchase agreements. Repurchase agreements collateralized
by securities are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a
safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. Should the fair value of currently pledged
securities fall below the associated repurchase agreements, the Bank would be required to pledge additional securities. To mitigate the
risk of under collateralization, the Bank typically pledges at least two percent more in securities than the associated repurchase
agreements. All such securities are under the Bank’s control.
At December 31, 2016 and 2015, all securities sold under agreements to repurchase had overnight maturities. Additional information
regarding securities sold under agreements to repurchase follows:
December 31, (dollars in thousands)
2016
2015
Outstanding balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rate at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
173,473
$
395,433
0.05 %
0.02 %
Fair value of securities pledged:
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . . . . . . . . .
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
116,025
45,894
41,155
203,074
$
$
244,707
82,666
130,821
458,194
Additional information regarding securities sold under agreements to repurchase for the years ended December 31, 2016, 2015 and
2014 follows:
Years Ended December 31, (dollars in thousands)
2016
2015
2014
Average outstanding balance during the period . . . . . . . . . . . . . . . . . . . .
Average interest rate during the period . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum outstanding at any month end during the period . . . . . . . . . .
$
280,296
$
379,477
0.02 %
0.02 %
$
367,373
$
442,981
$
$
296,196
0.04
408,891
159
11.
FEDERAL HOME LOAN BANK ADVANCES
At December 31, 2016 and 2015, FHLB advances were as follows:
December 31, (dollars in thousands)
2016
2015
Overnight advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest rate advance indexed to 3-Month LIBOR plus 0.14% due on
December 20, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed interest rate advances with a weighted average interest rate of 1.46% due
through 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Putable fixed interest rate advances with a weighted average interest rate of
4.39% due through 2017* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
285,000
$
150,000
10,000
457,500
$
50,000
802,500
$
10,000
439,500
100,000
699,500
*On a quarterly basis, the FHLB has the right to require payoff of these advances by the Bank at no penalty.
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than
maturity. The Company incurred an $846,000 prepayment penalty on the payoff of $50 million in FHLB advances during 2016, with
no similar penalty incurred in 2015 and 2014.
FHLB advances are collateralized by a blanket pledge of eligible real estate loans. At December 31, 2016 and 2015, Republic had
available borrowing capacity of $378 million and $567 million, respectively, from the FHLB. In addition to its borrowing capacity
with the FHLB, Republic also had unsecured lines of credit totaling $150 million and $170 million available through various other
financial institutions as of December 31, 2016 and 2015.
Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such
advances are detailed below:
Year (dollars in thousands)
Weighted
Average
Rate
Principal
2017 (Overnight) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,000
2017 (Term) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
205,000
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117,500
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,000
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,000
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 802,500
0.64 %
1.78
1.53
1.80
1.78
1.86
NA
2.14
1.35
NA - Not applicable
160
Due to their nature, the Bank considers average balance information more meaningful than period end balances for its overnight
borrowings from the FHLB. Information regarding short-term overnight FHLB advances follows:
December 31, (dollars in thousands)
2016
2015
Outstanding balance at end of period . . . . . . . . . . . . . . . . $
Weighted average interest rate at end of period . . . . . . . .
285,000 $
0.64 %
150,000
0.35 %
Years Ended December 31, (dollars in thousands)
2016
2015
2014
Average outstanding balance during the period . . . . . . . . . . . . . . $
Average interest rate during the year . . . . . . . . . . . . . . . . . . . . . . .
Maximum outstanding at any month end during the period . . . . $
91,087 $
0.43 %
495,000 $
63,327
$
0.17 %
387,000
$
15,756
0.20 %
198,000
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
December 31, (in thousands)
2016
2015
First lien, single family residential real estate . . . . $
Home equity lines of credit . . . . . . . . . . . . . . . . . . .
Multi-family commercial real estate . . . . . . . . . . . .
1,172,161 $
300,681
14,913
1,346,663
272,863
10,227
161
12.
SUBORDINATED NOTE
In 2005, Republic Bancorp Capital Trust (“RBCT”), an unconsolidated trust subsidiary of Republic, was formed and issued $40
million in Trust Preferred Securities (“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 TPS are treated as part of Republic’s Tier I Capital.
The subordinated note and related interest expense are included in Republic’s consolidated financial statements. The subordinated
note paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to LIBOR + 1.42% thereafter. The subordinated
note matures on December 31, 2035 and is now redeemable at the Company’s option on a quarterly basis. The Company chose not to
redeem the subordinated note on January 1, 2017, and carried the note at a cost of LIBOR + 1.42% at December 31, 2016.
As a result of its acquisition of Cornerstone Bancorp, Inc. on May 17, 2016, Republic became the 100% successor owner of
Cornerstone Capital Trust 1 (“CCT1”), an unconsolidated finance subsidiary. In 2006, CCT1 issued $4 million of adjustable-rate TPS
due December 15, 2036. As permitted under the terms of CCT1’s governing documents, Republic redeemed these securities at the par
amount of approximately $4 million, without penalty, on September 15, 2016.
13.
OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. These financial
instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these
instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all
instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be
required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as
personal property and real estate of individual clients or guarantors.
The Company also extends binding commitments to clients and prospective clients. Such commitments assure a borrower of financing
for a specified period of time at a specified rate. Additionally, the Company makes binding purchase commitments to third party loan
correspondent originators. These commitments assure that the Company will purchase a loan from such correspondent originators at a
specific price for a specific period of time. The risk to the Company under such loan commitments is limited by the terms of the
contracts. For example, the Company may not be obligated to advance funds if the client’s financial condition deteriorates or if the
client fails to meet specific covenants.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may
demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market
interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire
unused, the total amount of outstanding commitments at any point in time may not require future funding. These commitments
generally have variable rates of interest.
The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments for each year ended:
December 31, (in thousands)
2016
2015
Unused warehouse lines of credit . . . . . . . . . . . . . . .
Unused home equity lines of credit . . . . . . . . . . . . . .
Unused loan commitments - other . . . . . . . . . . . . . . .
Commitments to purchase loans* . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . .
Total commitments . . . . . . . . . . . . . . . . . . . . . . . .
$
$
453,110 $
341,434
560,629
3,176
15,568
1,373,917 $
304,379
282,007
329,232
22,590
12,740
950,948
*Commitments are made through the Company’s Correspondent Lending channel.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party.
The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and
extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because
funding for these obligations could be required immediately. The Company does not deem this risk to be material.
162
14.
STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL MATTERS
Common Stock — The Company’s Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per
share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per
share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis.
The Class A Common shares are not convertible into any other class of Republic’s capital stock.
Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from the
Bank. 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. At December 31, 2016, the
Bank could, without prior approval, declare dividends of approximately $60 million.
Regulatory Capital Requirements — The Parent Company and the Bank are subject to various regulatory capital requirements
administered by banking regulators. 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 about components, risk weightings and other factors.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2016 and 2015,
the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that management believes have changed the institution’s category.
Effective January 1, 2015 the Company and the Bank became subject to the capital regulations in accordance with Basel III. These
regulations established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 Risk-Based Capital ratio
and a new capital conservation buffer. The regulations included revisions to the definition of capital and changes in the risk weighting
of certain assets. For prompt corrective action, the new regulations establish definitions of “well capitalized” as a 6.5% Common
Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio and a 5.0%
Tier 1 Leverage ratio.
Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus
payments to executive officers, the Company and Bank must hold a capital conservation buffer composed of Common Equity Tier 1
Risk-Based Capital above their minimum Risk-Based Capital requirements. The capital conservation buffer phases in over time based
on the following schedule: a capital conservation buffer of .625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875%
effective January 1, 2018; and a fully phased in capital conservation buffer of 2.5% on January 1, 2019.
163
Actual
Minimum Requirement
for Capital Adequacy
Purposes
Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions
(dollars in thousands)
Amount Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2016
Total capital to risk weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . $ 655,908
553,905
Republic Bank & Trust Company . . . . . . . . . . . .
16.37 % $
13.86
320,540
319,785
8.00 %
8.00
$
NA
399,731
NA
10.00 %
Common equity tier 1 capital to risk weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . .
Tier 1 (core) capital to risk weighted assets
584,530
520,985
14.59
13.03
180,304
179,879
4.50
4.50
NA
259,825
NA
6.50
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . .
622,988
520,985
15.55
13.03
240,405
239,839
6.00
6.00
NA
319,785
NA
8.00
Tier 1 leverage capital to average assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . .
622,988
520,985
13.54
11.34
184,087
183,698
4.00
4.00
NA
229,622
NA
5.00
Actual
Minimum Requirement
for Capital Adequacy
Purposes
Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2015
Total capital to risk weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . .
$
631,820
494,575
20.58 % $
16.12
245,556
245,426
8.00 %
8.00
NA
306,782
$
NA
10.00 %
Common equity tier 1 capital to risk weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . .
564,329
467,084
18.39
15.23
138,125
138,052
4.50
4.50
NA
199,408
NA
6.50
Tier 1 (core) capital to risk weighted assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . .
604,329
467,084
19.69
15.23
184,167
184,069
6.00
6.00
NA
245,426
NA
8.00
Tier 1 leverage capital to average assets
Republic Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Republic Bank & Trust Company . . . . . . . . . . . . . .
604,329
467,084
14.82
11.46
163,114
163,018
4.00
4.00
NA
203,772
NA
5.00
164
15.
FAIR VALUE
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of
the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities available for sale: Quoted market prices in an active market are available for the Bank’s Community Reinvestment Act
(“CRA”) mutual fund investment and fall within Level 1 of the fair value hierarchy.
Except for the Bank’s CRA mutual fund investment, its private label mortgage backed security and its TRUP investment, the fair
value of securities available for sale is typically determined by matrix pricing, which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the
securities’ relationship to other benchmark quoted securities (Level 2 inputs).
The Bank’s private label mortgage backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security
in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an
income valuation model (present value model) approach in determining the fair value of this security.
See in this section of the filing under Footnote 3 “Investment Securities” for additional discussion regarding the Bank’s private label
mortgage backed security.
The Company acquired its TRUP investment in November 2015 and considered the most recent bid price for the same instrument to
approximate market value at December 31, 2016. The Company’s TRUP investment is considered highly illiquid and also valued
using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.
Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary
market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.
Consumer loans held for sale, at fair value: During 2016, RCS initiated a short-term installment loan program and elected to carry
all loans originated through this program at fair value. Such loans are generally sold within 21 days of origination, with their fair value
based on contractual terms, Level 3 inputs.
Mortgage Banking derivatives: Mortgage Banking derivatives used in the ordinary course of business primarily consist of
mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s
derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The
pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by
the Bank. Forward contracts and rate-lock loan commitments are classified as Level 2 in the fair value hierarchy.
Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest
rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are
also received from the relevant counterparty and validated against the Company’s calculations. The Company has considered
counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its
interest rate swap liabilities.
165
Impaired loans: Collateral-dependent impaired loans generally reflect partial charge-downs to their respective fair value, which is
commonly based on recent real estate appraisals or broker price opinions (“BPOs”). These appraisals or BPOs may utilize a single
valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely
made in the process by the independent experts to adjust for differences between the comparable sales and income data available.
Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-
real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports,
adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and
management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-
dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Other real estate owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell
when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated
costs to sell. Fair value is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single
approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the
process by the independent experts to adjust for differences between the comparable sales and income data available. Such
adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for collateral-dependent impaired loans, impaired premises and other real estate owned are performed by certified general
appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses
have been reviewed and verified by the Bank. Once the appraisal is received, a member of the Bank’s Credit Administration
Department reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison
with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a
back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such
collateral. Back tests are performed for each collateral class, e.g., residential real estate or commercial real estate, and may lead to
additional adjustments to the value of unliquidated collateral of similar class.
Mortgage servicing rights: On a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as
compared to carrying amount. If the carrying amount of an individual grouping exceeds fair value, impairment is recorded and the
respective individual tranche is carried at fair value. If the carrying amount of an individual grouping does not exceed fair value,
impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method.
The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can
generally be validated against available market data (Level 2). There were no MSR tranches carried at fair value at December 31,
2016 and 2015.
166
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Bank has
elected the fair value option, are summarized below:
(in thousands)
Financial assets:
Securities available for sale:
Fair Value Measurements at
December 31, 2016 Using:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . . .
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act mutual fund . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
—
—
—
—
—
2,455
—
—
$
294,544
—
73,004
87,654
483
—
15,158
—
$
—
4,777
—
—
—
—
—
3,200
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,455
$
470,843
$
7,977
$
Mortgage loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate lock loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Mandatory forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
—
—
—
$
11,662
—
299
204
305
$
—
2,198
—
—
—
Financial liabilities:
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$
597
$
—
$
(in thousands)
Financial assets:
Securities available for sale:
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Fair Value Measurements at
December 31, 2015 Using:
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
U.S. Treasury securities and U.S. Government agencies . . . . . . . . . . . . . . .
Private label mortgage backed security . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage backed securities - residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act mutual fund . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate lock loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial liabilities:
Mandatory forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
—
—
—
—
—
1,011
—
—
1,011
—
—
—
—
—
$
$
$
$
286,479
—
92,268
113,668
173
—
14,922
—
507,510
4,083
306
400
25
1,000
$
$
$
$
—
5,132
—
—
—
—
—
3,405
8,537
—
—
—
—
—
$
$
$
$
294,544
4,777
73,004
87,654
483
2,455
15,158
3,200
481,275
11,662
2,198
299
204
305
597
Total
Fair
Value
286,479
5,132
92,268
113,668
173
1,011
14,922
3,405
517,058
4,083
306
400
25
1,000
All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2 or 3
assets during the years ended December 31, 2016 and 2015.
167
The following table presents a reconciliation of the Bank’s Private Label Mortgage Backed Security measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the periods ended December 31, 2016, 2015 and 2014:
Private Label Mortgage Backed Security
Years Ended December 31, (in thousands)
2016
2015
2014
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total gains or losses included in earnings:
Net change in unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery of actual losses previously recorded . . . . . . . . . . . . . . . . . . . .
Principal paydowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,132 $
5,250 $
5,485
(9)
—
(346)
4,777 $
(125)
35
(28)
5,132 $
475
141
(851)
5,250
The fair value of the Bank’s single private label mortgage backed security is supported by analysis prepared by an independent third
party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying
mortgages, including consideration of geographic location, original loan-to-value and the weighted average FICO score of the
borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of
default, and prepayment probabilities) and 3) discounted cash flow modeling.
The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage backed security are
prepayment rates, probability of default and loss severity in the event of default. Significant fluctuations in any of those inputs in
isolation would result in a significantly different fair value measurement.
The following tables present quantitative information about recurring Level 3 fair value measurements at December 31, 2016 and
2015:
December 31, 2016 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable Inputs
Range
Private label mortgage backed security . . . . . $ 4,777 Discounted cash flow (1) Constant prepayment rate 2.0% - 6.5%
(2) Probability of default
3.0% - 9.0%
(3) Loss severity
60% - 90%
December 31, 2015 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable Inputs
Range
Private label mortgage backed security . . . . . . . . $ 5,132 Discounted cash flow (1) Constant prepayment rate 0.0% - 6.5%
(2) Probability of default
3.0% - 9.0%
(3) Loss severity
60% - 90%
168
Trust Preferred Security
The Company invested in its TRUP in November 2015. The following table presents a reconciliation of the Company’s TRUP
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ending December 31, 2016
and 2015:
December 31, 2016 (in thousands)
2016
2015
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses included in earnings:
Net change in unrealized loss . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,405
$
—
(205)
—
3,200
—
3,405
3,405
$
$
The fair value of the Company’s TRUP investment is based on the most recent bid price for this instrument, as provided by a third-
party broker.
Mortgage Loans Held for Sale
The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes
that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the
loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more nor on nonaccrual
as of December 31, 2016 and 2015.
As of December 31, 2016 and 2015, the aggregate fair value, contractual balance (including accrued interest), and unrealized gain was
as follows:
December 31, (in thousands)
2016
2015
Aggregate fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
11,662 $
11,568
94
4,083
3,993
90
The total amount of gains and losses from changes in fair value of mortgage loans held for sale included in earnings for 2016, 2015
and 2014 are presented in the following table:
Years Ended December 31, (in thousands)
2016
2015
2014
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
200 $
4
204 $
219 $
(33)
186 $
183
34
217
169
Consumer Loans Held for Sale
During the first quarter of 2016, RCS initiated a short-term installment loan program and elected to carry all loans originated through
this program at fair value. Such loans are generally sold within 21 days of origination, with their fair value based on contractual terms.
Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None
of these loans were past due 90-days-or-more or on nonaccrual as of December 31, 2016.
A reconciliation of the Company’s consumer loans held for sale measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2016 is included in Footnote 4 of this section of the filing.
The significant unobservable inputs in the fair value measurement of the Bank’s short-term installment loans are the net contractual
premiums and level of loans sold at a discount price. Significant fluctuations in any of those inputs in isolation would result in a
significantly lower/higher fair value measurement.
The following table presents quantitative information about recurring Level 3 fair value measurement inputs for short-term installment
loans as of December 31, 2016:
December 31, 2016 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable Inputs
Range
Consumer loans held for sale . . . . . . . . . . . . . . . . $ 2,198 Contractual Terms
(1) Net Premium
0.9%
(2) Discounted Sales
5.0%
As of December 31, 2016, the aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair
value, was as follows:
December 31, (in thousands)
2016
Aggregate fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,198
2,084
114
Year Ended December 31, (in thousands)
2016
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
700
114
814
170
Assets measured at fair value on a non-recurring basis are summarized below:
(in thousands)
Impaired loans:
Residential real estate:
for Identical
Assets
(Level 1)
Fair Value Measurements at
December 31, 2016 Using:
Quoted Prices in Significant
Active Markets
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
—
—
—
—
—
$ —
—
—
—
—
$
—
—
$ —
—
$
$
$
$
$
4,787
8
2,643
426
7,864
400
400
$
$
$
$
4,787
8
2,643
426
7,864
400
400
(in thousands)
Impaired loans:
Residential real estate:
Fair Value Measurements at
December 31, 2015 Using:
Quoted Prices in Significant
Active Markets
for Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair
Value
Owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonowner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
—
—
—
—
—
—
—
—
—
$ —
—
—
—
—
$
$ —
—
—
—
$
$
$
$
$
3,631
689
3,443
1,245
9,008
128
442
300
870
$
$
$
$
3,631
689
3,443
1,245
9,008
128
442
300
870
* The difference between the carrying value and the fair value of impaired loans measured at fair value is reconciled in a subsequent
table of this Footnote.
171
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair
value on a non-recurring basis at December 31, 2016 and 2015:
December 31, 2016 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted
Average)
Impaired loans - residential real estate
owner occupied
Impaired loans - residential real estate
nonowner occupied
$ 4,787 Sales comparison approach Adjustments
0% - 53% (6%)
determined for
differences between
comparable sales
$
8 Sales comparison approach Adjustments
0% (0%)
determined for
differences between
comparable sales
Impaired loans - commercial real estate
$ 1,214 Sales comparison approach Adjustments
3% - 49% (30%)
determined for
differences between
comparable sales
Impaired loans - commercial real estate
$ 1,429 Income approach
Adjustments for
17% (17%)
differences between
net operating income
expectations
Impaired loans - home equity
$
426 Sales comparison approach Adjustments
0% - 29% (16%)
determined for
differences between
comparable sales
Other real estate owned - residential real
estate
$
400 Sales comparison approach Adjustments
17% (17%)
determined for
differences between
comparable sales
172
December 31, 2015 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted
Average)
Impaired loans - residential real estate owner
occupied
$ 3,631 Sales comparison approach Adjustments determined
for differences between
comparable sales
0% - 53% (7%)
Impaired loans - residential real estate
nonowner occupied
$
689 Sales comparison approach Adjustments determined
for differences between
comparable sales
0% - 1% (1%)
Impaired loans - commercial real estate
$ 1,839 Sales comparison approach Adjustments determined
for differences between
comparable sales
0% - 58% (19%)
Impaired loans - commercial real estate
$ 1,604 Income approach
Adjustments for
17% (17%)
differences between net
operating income
expectations
Impaired loans - home equity
$ 1,245 Sales comparison approach Adjustments determined
for differences between
comparable sales
0% - 29% (20%)
Other real estate owned - residential real
estate
Other real estate owned - commercial real
estate
$
$
128 Sales comparison approach Adjustments determined
for differences between
comparable sales
18% (18%)
442 Sales comparison approach Adjustments determined
for differences between
comparable sales
12% - 23% (13%)
Other real estate owned - construction & land
development
$
300 Sales comparison approach Adjustments determined
for differences between
comparable sales
49% (49%)
173
Impaired Loans
Collateral-dependent impaired loans are generally measured for impairment using the fair value for reasonable disposition of the
underlying collateral. The Bank’s practice is to obtain new or updated appraisals or BPOs on the loans subject to the initial impairment
review and then to evaluate the need for an update to this value on an as necessary or possibly annual basis thereafter (depending on
the market conditions impacting the value of the collateral). The Bank may discount the valuation amount as necessary for selling
costs and past due real estate taxes. If a new or updated appraisal or BPO is not available at the time of a loan’s impairment review,
the Bank may apply a discount to the existing value of an old valuation to reflect the property’s current estimated value if it is believed
to have deteriorated in either: (i) the physical or economic aspects of the subject property or (ii) material changes in market conditions.
The impairment review generally results in a partial charge-off of the loan if fair value less selling costs are below the loan’s carrying
value. Impaired loans that are collateral-dependent are classified within Level 3 of the fair value hierarchy when impairment is
determined using the fair value method.
Impaired collateral-dependent loans are as follows:
December 31, (in thousands)
2016
2015
Carrying amount of loans measured at fair value . . . . . . . . . . . . . . $
Estimated selling costs considered in carrying amount . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,963 $
936
(35)
7,864 $
8,162
946
(100)
9,008
Years Ended December 31, (in thousands)
2016
2015
2014
Provisions for loss on collateral-dependent, impaired loans . . . . . . . . . . . . . . .
$
552 $
88 $
729
Other Real Estate Owned
Other real estate owned, which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value
at the reporting date. Fair value is determined from external appraisals or BPOs using judgments and estimates of external
professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3.
Details of other real estate owned carrying value and write downs follow:
December 31, (in thousands)
2016
2015
2014
Other real estate owned carried at fair value. . . . . . . . . . . . . . . . . . . . . .
Other real estate owned carried at cost . . . . . . . . . . . . . . . . . . . . . . . . . .
Total carrying value of other real estate owned . . . . . . . . . . . . . . . . . . .
Other real estate owned write-downs during the years ended . . . . . . . .
$
$
$
400 $
991
1,391 $
270 $
870 $
350
1,220 $
1,257 $
9,188
2,055
11,243
3,101
174
The carrying amounts and estimated fair values of financial instruments, at December 31, 2016 and 2015 are as follows:
(in thousands)
Fair Value Measurements at
December 31, 2016:
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair
Value
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans held for sale, at the lower of cost or fair value . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
289,309 $
481,275
52,864
11,662
2,198
1,310
3,777,858
28,208
10,356
289,309 $
2,455
—
—
—
—
—
—
—
— $
— $
470,843
53,249
11,662
—
1,310
—
—
10,356
7,977
—
—
2,198
—
3,757,698
—
—
289,309
481,275
53,249
11,662
2,198
1,310
3,757,698
NA
10,356
Liabilities:
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Transaction deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase and other short-term borrowings
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
971,937
1,939,338
249,417
173,473
802,500
41,240
948
— $
—
—
—
—
—
—
971,937
1,939,338
248,684
173,473
798,594
30,821
948
— $
—
—
—
—
—
—
971,937
1,939,338
248,684
173,473
798,594
30,821
948
NA - Not applicable
(in thousands)
Fair Value Measurements at
December 31, 2015:
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair
Value
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans held for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans held for sale, at the lower of cost or fair value . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
210,082 $
517,058
38,727
4,083
514
3,299,119
28,208
9,233
210,082 $
1,011
—
—
—
—
—
—
— $
— $
507,510
39,196
4,083
514
—
—
9,233
8,537
—
—
—
3,332,608
—
—
210,082
517,058
39,196
4,083
514
3,332,608
NA
9,233
Liabilities:
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Transaction deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase and other short-term borrowings . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
634,863
1,601,647
250,967
395,433
699,500
41,240
1,229
— $
—
—
—
—
—
—
634,863
1,601,647
250,882
395,433
708,722
33,358
1,229
— $
—
—
—
—
—
—
634,863
1,601,647
250,882
395,433
708,722
33,358
1,229
NA - Not applicable
175
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have
not been considered in any of the Bank’s estimates.
The assumptions used in the estimation of the fair value of the Company’s financial instruments are explained below. Where quoted
market prices are not available, fair values are based on estimates using discounted cash flow and other valuation techniques.
Discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash
flows. The following fair value estimates cannot be substantiated by comparison to independent markets and should not be considered
representative of the liquidation value of the Company’s financial instruments, but rather a good-faith estimate of the fair value of
financial instruments held by the Company.
In addition to those previously disclosed, the following methods and assumptions were used by the Company in estimating the fair
value of its financial instruments:
Cash and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values and are classified as
Level 1.
Consumer loans held for sale, at lower of cost or fair value – Consumer loans held for sale at the lower of cost or fair value constitute
short-term consumer loans generally sold within two business days of origination. The carrying amounts of these loans, due to their
short-term nature, approximate fair value and result in a Level 2 classification.
Loans, net of Allowance — The fair value of loans is calculated using discounted cash flows by loan type resulting in a Level 3
classification. The discount rate used to determine the present value of the loan portfolio is an estimated market rate that reflects the
credit and interest rate risk inherent in the loan portfolio without considering widening credit spreads due to market illiquidity. The
estimated maturity is based on the Bank’s historical experience with repayments adjusted to estimate the effect of current market
conditions. The Allowance is considered a reasonable discount for credit risk. The methods utilized to estimate the fair value of loans
do not necessarily represent an exit price.
Federal Home Loan Bank stock — It is not practical to determine the fair value of FHLB stock due to restrictions placed on its
transferability.
Accrued interest receivable/payable — The carrying amounts of accrued interest, due to their short-term nature, approximate fair
value and result in a Level 2 classification.
Deposits — Fair values for time deposits have been determined using discounted cash flows. The discount rate used is based on
estimated market rates for deposits of similar remaining maturities and are classified as Level 2. The carrying amounts of all other
deposits, due to their short-term nature, approximate their fair values and are also classified as Level 2.
Securities sold under agreements to repurchase and other short-term borrowings — The carrying amount for securities sold under
agreements to repurchase and other short-term borrowings generally maturing within ninety days approximates its fair value resulting
in a Level 2 classification.
Federal Home Loan Bank advances — The fair value of the FHLB advances is obtained from the FHLB and is calculated by
discounting contractual cash flows using an estimated interest rate based on the current rates available to the Company for debt of
similar remaining maturities and collateral terms resulting in a Level 2 classification.
Subordinated note — The fair value for the subordinated note is calculated using discounted cash flows based upon current market
spreads to London Interbank Borrowing Rate (“LIBOR”) for debt of similar remaining maturities and collateral terms resulting in a
Level 2 classification.
The fair value estimates presented herein are based on pertinent information available to management as of the respective period ends.
Although management is not aware of any factors that would dramatically affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements since that date and, therefore, estimates of fair value
may differ significantly from the amounts presented.
176
16.
MORTGAGE BANKING ACTIVITIES
Mortgage Banking activities primarily include residential mortgage originations and servicing.
Activity for mortgage loans held for sale was as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Origination of mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . .
Transferred from held for investment to held for sale . . . . . . . . . . . . . .
Proceeds from the sale of mortgage loans held for sale . . . . . . . . . . . .
Net gain on sale of mortgage loans held for sale . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,083 $
216,812
71,201
(287,090)
6,656
11,662 $
6,388 $
160,989
—
(167,209)
3,915
4,083 $
3,506
82,457
—
(82,015)
2,440
6,388
Mortgage loans serviced for others are not reported as assets. The Bank serviced loans for others, primarily FHLMC, totaling $971
million and $883 million at December 31, 2016 and 2015. Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Custodial escrow account
balances maintained in connection with serviced loans were approximately $7 million and $6 million at December 31, 2016 and 2015.
The following table presents the components of Mortgage Banking income:
Years Ended December 31, (in thousands)
2016
2015
2014
Net gain realized on sale of mortgage loans held for sale . . . . . . . . . . . . . . . . . . . $
Net gain realized on sale of mortgage loans transferred from held for
investment to held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in fair value recognized on loans held for sale . . . . . . . . . . . . . . . . . .
Net change in fair value recognized on rate lock loan commitments . . . . . . . . . .
Net change in fair value recognized on forward contracts . . . . . . . . . . . . . . . . . . .
Net gain recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,129
4
(8)
53
6,656
—
(33)
57
9
3,915
5,478 $
3,882 $
2,278
Loan servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net servicing income recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Mortgage Banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,983
(1,757)
226
6,882 $
1,896
(1,400)
496
4,411 $
Activity for capitalized mortgage servicing rights was as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,912 $
2,025
(1,757)
5,180 $
4,813 $
1,499
(1,400)
4,912 $
5,409
734
(1,330)
4,813
There was no balance or activity in the valuation allowance for capitalized mortgage servicing rights for the years ended
December 31, 2016, 2015 and 2014.
177
—
34
173
(45)
2,440
1,752
(1,330)
422
2,862
Other information relating to mortgage servicing rights follows:
December 31, (dollars in thousands)
2016
2015
Fair value of mortgage servicing rights portfolio . . . . . . . . . . . $
Monthly prepayment rate of unpaid principal balance* . . . . .
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average default rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average life in years . . . . . . . . . . . . . . . . . . . . . . . . .
7,478
104% - 419%
13%
1.50%
6.75
$
7,242
105% - 369%
10%
1.50%
6.38
* Rates are applied to individual tranches with similar characteristics.
Estimated future amortization expense of the MSR portfolio (net of any applicable impairment charge) follows; however, actual
amortization expense will be impacted by loan payoffs and changes in estimated lives that occur during each respective year:
Year
(in thousands)
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,030
1,029
991
871
566
473
220
5,180
Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and
interest rate lock loan commitments. Mandatory forward contracts represent future commitments to deliver loans at a specified price
and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan
commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest
rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional
amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is
limited to the amounts required to be received or paid.
Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such
agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could
potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of
exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors.
The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost
related to counterparty default.
The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the
fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank
enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will
fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely,
offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the
exposure to losses on rate loan lock commitments and loans held for sale due to market interest rate fluctuations. The net effect of
derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate
volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time
period required to close and sell loans.
178
The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives as
of the period ends presented:
December 31, (in thousands)
Included in Mortgage loans held for sale:
2016
Notional
Amount
Fair Value
2015
Notional
Amount
Fair Value
Mortgage loans held for sale, at fair value . . . . . . . . . . . . .
$
11,568 $
11,662 $
3,993 $
4,083
Included in other assets:
Rate lock loan commitments . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory forward contracts . . . . . . . . . . . . . . . . . . . . . . .
$
19,521 $
25,618
299 $
204
21,580 $
—
306
—
Included in other liabilities:
Mandatory forward contracts . . . . . . . . . . . . . . . . . . . . . . .
$
— $
— $
19,232 $
25
17.
STOCK PLANS AND STOCK BASED COMPENSATION
In January 2015, the Company’s Board of Directors adopted the Republic Bancorp, Inc. 2015 Stock Incentive Plan (the “2015 Plan”),
which became effective April 23, 2015 when the Company’s shareholders approved the 2015 Plan. The 2015 Plan replaced the
Company’s 2005 Stock Incentive Plan, which expired on March 15, 2015.
The number of authorized shares under the 2015 Plan is fixed at 3,000,000, with such number subject to adjustment in the event of
certain events, such as stock dividends, stock splits, or the like. There is a minimum three-year vesting period for awards granted to
employees under the 2015 Plan that vest based solely on the completion of a specified period of service, with options generally
exercisable five to six years after the issue date. Stock options generally must be exercised within one year from the date the options
become exercisable and have an exercise price that is at least equal to the fair market value of the Company’s stock on their grant date.
All shares issued under the above-mentioned plans were from authorized and reserved unissued shares. The Company has a sufficient
number of authorized and reserved unissued shares to satisfy all anticipated option exercises. There are no Class B stock options
outstanding or available for exercise under the Company’s plans.
Stock Options
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation
model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate.
Expected volatilities are based on historical volatility of Republic’s stock and other factors. Expected dividends are based on dividend
trends and the market price of Republic’s stock price at grant. Republic uses historical data to estimate option exercises and employee
terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve at the time of grant.
All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the
service period (generally the vesting period) in the consolidated financial statements based on their fair values.
The fair value of stock options granted was determined using the following weighted average assumptions as of grant date:
Years Ended December 31,
2016
2015
2014
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . .
Expected life of options (in years) . . . . . . . . . . . . . . . . . . . .
Estimated fair value per share . . . . . . . . . . . . . . . . . . . . . . .
$
1.43 %
3.16 %
20.17 %
5
3.27
$
1.54 %
3.06 %
22.66 %
5
3.58
$
2.11 %
3.18 %
30.20 %
6
5.16
179
The following table summarizes stock option activity from January 1, 2015 through December 31, 2016:
Outstanding, January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . .
Options
Class A
Shares
155,000 $
323,400
(97,750)
(57,250)
323,400 $
323,400 $
5,000
(4,000)
(11,800)
312,600 $
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
20.15
24.51
19.77
21.43
24.40
24.40
26.43
20.12
24.47
24.49
4.70 $
650,000
3.77 $
4,705,807
Fully vested and expected to vest . . . . . . . . . . . . . . . . . . . . . . .
Exercisable (vested) at December 31, 2016 . . . . . . . . . . . . . . .
312,600 $
4,000 $
24.49
20.77
3.77 $
0.22 $
4,705,807
75,080
Information related to the stock options during each year follows:
Years Ended December 31, (in thousands, except per share data)
2016
2015
2014
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash received from options exercised, net of shares redeemed . . . . . . . . . . . .
Weighted-average fair value per share of options granted . . . . . . . . . . . . . . . .
18 $
80
3.27
581 $
1,136
3.58
356
1,103
5.16
Loan balances of non-executive officer employees that were originated solely to fund stock option exercises were as follows:
December 31, (in thousands)
2016
2015
Outstanding loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
371 $
660
180
Restricted Stock Awards
Restricted stock awards generally vest five to six years after issue, with accelerated vesting due to “change in control” or “death or
disability of a participant” as defined and outlined in the 2015 Plan.
The following table summarizes restricted stock activity from January 1, 2015 through December 31, 2016:
Outstanding, January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earned and issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, December 31, 2015 . . . . . . . . . . . . . . . . . . . . .
Restricted
Stock Awards
Class A Shares
80,500
2,500
(4,000)
—
79,000
Weighted-Average
$
Grant Date Fair Value
19.85
25.19
19.85
—
20.02
$
Outstanding, January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earned and issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, December 31, 2016 . . . . . . . . . . . . . . . . . . . .
Fully vested and expected to vest . . . . . . . . . . . . . . . . . . . .
Vested at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . .
79,000
—
(2,000)
—
77,000
77,000
—
$
$
$
$
20.02
—
19.85
—
20.02
20.02
—
The fair value of the restricted stock awards is based on the closing stock price on the date of grant with the associated expense
amortized to compensation expense over the vesting period, generally five to six years.
Performance Stock Units
The Company first granted performance stock units (“PSUs”) under the 2015 Plan in January 2016. Shares of stock underlying the
PSUs may be earned over a four-year performance period commencing on January 1, 2017 and ending on December 31, 2020 as
follows:
•
•
If the Company achieves a Return on Average Assets (“ROAA”), as defined in the award agreement, of 1.25% for a calendar
year in the performance period, then between March 1st and March 15th of the following year, provided that the recipient is
still employed in good standing on the payment date, the Company will issue shares of fully-vested stock to the
participant equal to 50% of the number of the PSUs initially granted to the participant; and
If the ROAA of 1.25% is met again at the end of another calendar year during the remaining term of the performance period,
the Company will similarly issue fully vested stock in an amount equal to the remaining 50% of the initial PSUs granted to
the participant.
181
The following table summarizes PSU activity from January 1, 2016 through December 31, 2016:
Performance
Stock Units
Class A Shares
Weighted-Average
Grant Date Fair Value
Outstanding, January 1, 2016 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earned and issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, December 31, 2016 . . . . . . . . . . . . . . . . .
— $
55,000
—
—
55,000 $
Fully vested and expected to vest . . . . . . . . . . . . . . . . .
Vested at December 31, 2016 . . . . . . . . . . . . . . . . . . . .
55,000 $
— $
—
23.13
—
—
23.13
23.13
—
Expense Related to Stock Incentive Plans
The Company recorded expense related to stock incentive plans for the years ended December 31, 2016, 2015 and 2014 as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Stock option expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock award expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance stock unit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
248 $
258
524
1,030 $
169 $
253
—
422 $
53
405
—
458
Unrecognized expenses related to unvested awards (net of estimated forfeitures) under stock incentive plans are estimated as follows:
Year Ended (in thousands)
Stock
Options
Restricted
Performance
Stock Awards
Stock Units
Total
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
253 $
251
143
32
1
—
680 $
258 $
120
12
8
2
—
400 $
528 $
220
—
—
—
—
748 $
1,039
591
155
40
3
—
1,828
182
Director Deferred Compensation
In November 2004, the Company’s Board of Directors approved a Non-Qualified Deferred Compensation Plan (the “Plan”). The Plan
governs the deferral of board and committee fees of non-employee members of the Board of Directors. Members of the Board of
Directors may defer up to 100% of their board and committee fees for a specified period ranging from two to five years. The value of
the deferred director compensation account is deemed “invested” in Company stock and is immediately vested. On a quarterly basis,
the Company reserves shares of Republic’s stock within the Company’s stock option plan for ultimate distribution to Directors at the
end of the deferral period.
The following table presents information on director deferred compensation shares reserved for the periods shown:
Years ended December 31,
2016
2015
2014
Weighted
Average Market Shares
Shares
Deferred Price at Date of Deferred
Class A
Deferral
Class A
Weighted
Average Market Shares
Price at Date of Deferred
Class A
Deferral
Weighted
Average Market
Price at Date of
Deferral
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . .
62,253 $
Awarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,208
Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,306)
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,155 $
22.12 58,604 $
29.99
8,586
21.13 (4,937)
22.94 62,253 $
21.56 53,136 $
25.24
7,783
21.00 (2,315)
22.12 58,604 $
21.23
23.61
20.76
21.56
Director deferred compensation has been expensed as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Director deferred compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
170 $
223 $
187
183
18.
BENEFIT PLANS
401 (k) Plan
Republic maintains a 401(k) plan for eligible employees. All employees become eligible for the plan as soon as administratively
feasible following their date of hire. Participants in the plan have the option to contribute from 1% to 75% of their annual eligible
compensation, up to the maximum allowed by the Internal Revenue Service (“IRS”). The Company matches 100% of participant
contributions up to 1% and an additional 75% for participant contributions between 2% and 5% of each participant’s annual eligible
compensation. Participants are fully vested after two years of employment.
Republic also contributes bonus contributions in addition to the aforementioned matching contributions if the Company achieves
certain operating goals. Normal and bonus contributions for each of the periods ended were as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Employer matching contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discretionary employer bonus matching contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,803 $
582
1,517 $
—
1,419
—
Supplemental Executive Retirement Plan
In association with its May 17, 2016 Cornerstone acquisition, the Company inherited a Supplemental Executive Retirement Plan
(“SERP”). The SERP requires the Company to pay monthly benefits following retirement of the SERP’s four participants. The
Company accrues the present value of such benefits on a monthly basis. The SERP liability was approximately $2 million at
December 31, 2016. Expense under the SERP was $81,000 for the year ended December 31, 2016.
19.
INCOME TAXES
Allocation of federal income tax between current and deferred portion is as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Current expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,295 $ 18,108 $ 22,143
2,469
1,125
465
Deferred expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,753)
53
(8,637)
(447)
23,060 $ 18,078 $ 15,528
(1,262)
107
Effective tax rates differ from federal statutory rate of 35% applied to income before income taxes due to the following:
Years Ended December 31,
2016
2015
2014
Federal statutory rate times financial statement income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of:
35.00 % 35.00 % 35.00 %
State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General business tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nontaxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.49
(0.33)
(2.12)
0.39
33.43
1.50
(0.43)
(2.68)
0.56
33.95
2.96
(0.67)
(2.80)
0.55
35.04
184
Year-end deferred tax assets and liabilities were due to the following:
December 31, (in thousands)
Deferred tax assets:
2016
2015
Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,824 $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partnership losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OREO writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition fair value adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,733
5,417
—
746
879
19
138
1,379
2,237
27,372
9,595
3,913
1,574
1,289
750
842
20
210
—
2,061
20,254
Deferred tax liabilities:
Unrealized investment securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New market tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(711)
(4,296)
(162)
(1,870)
(1,436)
(831)
(138)
(1,127)
(10,571)
(1,314)
(4,315)
(317)
(1,781)
(552)
(707)
—
(374)
(9,360)
Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,166 $
(1,635)
(1,564)
9,330
*The Company has federal and state net operating loss carryforwards (acquired in the Cornerstone acquisition) of $10.2 million
(federal) and $7.2 million (state). These carryforwards begin to expire in 2030 for both federal and state purposes. The use of these
federal and state carryforwards are each limited under IRC Section 382 to $722,000 annually for federal and $709,000 annually for
state. The Company also has a Kentucky net operating loss of $26.6 million, which began to expire in 2013. The Company maintains
a valuation allowance, as it does not anticipate generating taxable income in Kentucky to utilize these carryforwards prior to
expiration. Finally, the Company has AMT credit carryforwards (acquired in the Cornerstone acquisition) of $84,000 with no
expiration date.
185
Unrecognized Tax Benefits
The Company has not filed tax returns in certain jurisdictions where it has conducted limited lending activity but had no offices;
therefore, the Company is open to examination for all years in which the lending activity has occurred. The Company adopted the
provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, on January 1, 2007 and recognized a liability for the amount
of tax which would be due to those jurisdictions should it be determined that income tax filings were required. It is the Company’s
policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions based on tax related to the current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions due to the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,800 $
268
—
(90)
(340)
(143)
1,495 $
1,977 $
109
15
—
(301)
—
1,800 $
1,381
81
750
—
(235)
—
1,977
Of the 2016 total, $972,000 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the
effective income tax rate in future periods. The Company plans on recognizing a tax benefit of $357,000 during the first quarter of
2017 as the statute of limitations related to one jurisdiction has closed.
Amounts related to interest and penalties recorded in the income statements for the years ended December 31, 2016, 2015 and 2014
and accrued on the balance sheets as of December 31, 2016, 2015 and 2014 are presented below:
Years Ended December 31, (in thousands)
2016
2015
2014
Interest and penalties recorded in the income statement as a component of income tax expense . . . . . . . . . . . . . . . $
Interest and penalties accrued on balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(290) $
557
19 $
847
260
827
The Company files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax
examinations by taxing authorities for all years prior to and including 2012.
The Company completed an IRS examination of its 2013 corporate income tax return during 2016 and was notified that the
examination resulted in no significant adjustments to the Company’s tax liability.
186
20.
EARNINGS PER SHARE
Class A and Class B shares participate equally in undistributed earnings. The difference in earnings per share between the two classes
of common stock results solely from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on
Class B Common Stock. See Footnote 14, “Stockholders’ Equity and Regulatory Capital Matters” of this section of the filing.
A reconciliation of the combined Class A and Class B Common Stock numerators and denominators of the earnings per share and
diluted earnings per share computations is presented below:
Years Ended December 31, (in thousands, except per share data)
2016
2015
2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
45,903 $
35,166 $
28,787
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shares outstanding including dilutive securities . . . . . . . . . . . . . . . .
20,942
12
20,954
20,861
81
20,942
20,804
95
20,899
Basic earnings per share:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.22 $
2.02
1.70 $
1.55
Diluted earnings per share:
Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.22 $
2.01
1.70 $
1.54
1.39
1.32
1.38
1.32
Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:
Years Ended December 31,
2016
2015
2014
Antidilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average antidilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
3,125
318,400
216,621
16,250
15,419
187
21.
TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES
Republic leases office facilities under operating leases from limited liability companies in which Republic’s Chairman/Chief
Executive Officer and President are partners. Rent expense under these leases was as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Rent expense under leases from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,791 $
3,706 $
3,646
Total minimum lease commitments under non-cancelable operating leases are as follows:
Year (in thousands)
Affiliate
Other
Total
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,508
2,949
2,165
1,945
1,477
1,780
13,824 $
2,301
2,106
1,723
1,502
1,407
3,605
12,644 $
5,809
5,055
3,888
3,447
2,884
5,385
26,468
A director of Republic Bancorp, Inc. is the President and Chief Executive Officer of a company that leases space to the Company.
Fees paid by the Company totaled $15,000, $15,000 and $16,000 for years ended December 31, 2016, 2015 and 2014.
A director of Republic Bancorp, Inc. is designated as a staff attorney with a local law firm. While this director has an arrangement
where a percentage of revenues paid to the law firm by certain clients is remitted to him, fees paid to the law firm by the Company are
not included in this arrangement. Fees paid by the Company to this law firm totaled $183,000, $183,000 and $160,000 in 2016, 2015
and 2014.
A director of the Bank is an executive of two consulting firms and a local chamber of commerce. Fees paid by the Company to these
entities totaled $122,000, $101,000 and $66,000 in 2016, 2015 and 2014.
A director of the Bank is a partner of an accounting firm that received fees from the Company of $1,000, $2,000 and $9,000 in 2016,
2015 and 2014.
Loans made to executive officers and directors of Republic and their related interests during 2016 were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Effect of changes in composition of related parties . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
52,070
(6,185)
21,618
(29,549)
37,954
(in thousands)
Deposits from executive officers, directors, and their affiliates totaled $81 million and $82 million at December 31, 2016 and 2015.
By an agreement dated December 14, 1989, as amended August 8, 1994, the Company entered into a split-dollar insurance agreement
with a trust established by the Company’s deceased former Chairman, Bernard M. Trager. Pursuant to the agreement, from 1989
through 2002 the Company paid $690,000 in total annual premiums on the insurance policies held in the trust. The policies are joint-
life policies payable upon the death of Mrs. Jean Trager, as the survivor of her husband Bernard M. Trager. The cash surrender value
of the policies was approximately $2.1 million and $2.1 million as of December 31, 2016 and 2015.
188
Pursuant to the terms of the trust, the beneficiaries of the trust will each receive the proceeds of the policies after the repayment of the
$690,000 of indebtedness to the Company. The aggregate amount of such unreimbursed premiums constitutes indebtedness from the
trust to the Company and is secured by a collateral assignment of the policies. As of December 31, 2016 and 2015, the net death
benefit under the policies was approximately $3.5 million. Upon the termination of the agreement, whether by the death of Mrs.
Trager or earlier cancellation, the Company is entitled to be repaid by the trust the amount of indebtedness outstanding at that time.
22.
OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
Years Ended December 31, (in thousands)
2016
2015
2014
Available for Sale Securities:
Change in unrealized gain (loss) on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reclassification adjustment for gain on security available for sale recognized in earnings . . . . . . . . . . . . . . . . . .
Change in unrealized gain on security available for sale for which a portion of an other-than-temporary
impairment has been recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flow Hedges:
Change in fair value of derivatives used for cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification amount for derivative losses realized in income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,294) $
—
(3,160) $
(88)
(9)
(2,303)
807
(1,496)
(125)
332
207
(73)
134
(125)
(3,373)
1,181
(2,192)
(514)
402
(112)
38
(74)
2,021
—
475
2,496
(875)
1,621
(1,082)
424
(658)
231
(427)
Total other comprehensive income (loss) components, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,362) $
(2,266) $
1,194
Significant amounts reclassified out of each component of accumulated OCI for the years ended December 31, 2016, 2015 and 2014:
Years Ended December 31, (in thousands)
Affected Line Items in the Consolidated
Statements of Income
Available for Sale Securities:
Gain on call of security available for sale . . . . . . . . . . . Noninterest income
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income
Cash Flow Hedges:
Interest rate swap on money market deposits . . . . . . . . . Interest expense on deposits
Interest rate swap on FHLB advance . . . . . . . . . . . . . . . Interest expense on FHLB advances
Total derivative losses on cash flow hedges . . . . . . . . . Total interest expense
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense
Net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income
Amounts Reclassified From
Accumulated Other
Comprehensive Income
2015
2014
2016
$
— $
—
—
88 $
(31)
57
—
—
—
(168)
(164)
(332)
116
(216)
(198)
(204)
(402)
141
(261)
(201)
(223)
(424)
70
(354)
Net of tax, total all reclassification amounts . . . . . . . . . Net income
$
(216) $
(204) $
(354)
189
The following is a summary of the accumulated OCI balances, net of tax:
(in thousands)
December 31, 2015
2016
Change
December 31, 2016
Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized gain on security available for sale for which a portion of an other-than-temporary
impairment has been recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on cash flow hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,727 $
(1,490) $
712
(390)
2,049 $
(6)
134
(1,362) $
237
706
(256)
687
(in thousands)
December 31, 2014
2015
Change
December 31, 2015
Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized gain on security available for sale for which a portion of an other-than-temporary
impairment has been recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on cash flow hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,839 $
(2,112) $
792
(316)
4,315 $
(80)
(74)
(2,266) $
1,727
712
(390)
2,049
23.
PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
December 31, (in thousands)
2016
2015
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,755 $ 132,711
3,405
Security available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
479,302
Investment in bank subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,851
Investment in non-bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,945
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,200
541,972
2,982
6,838
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 650,747 $ 623,214
Liabilities and Stockholders’ Equity:
Subordinated note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,240 $ 41,240
5,427
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
576,547
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,101
604,406
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 650,747 $ 623,214
190
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, (in thousands)
2016
2015
2014
Income and expenses:
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,114 $
162
45
915
446
17,340 $
17
45
2,056
568
17,960
394
18,354
27,549
14,778
876
15,654
19,512
16,676
2
45
2,515
392
13,816
976
14,792
13,995
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
45,903 $
35,166 $
28,787
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
44,541 $
32,900 $
29,981
STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands)
2016
2015
2014
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
45,903 $
35,166 $
Accretion of investment security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director deferred compensation - Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Acquisition of Cornerstone Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Republic Insurance Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of security available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Payoff of subordinated note, net of common security interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from Common Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(44)
(27,549)
103
(1,366)
(313)
16,734
(31,795)
—
—
(31,795)
(4,000)
(1,207)
80
(16,768)
(21,895)
(4)
(19,512)
108
1,853
201
17,812
—
—
(3,401)
(3,401)
—
(551)
1,136
(15,839)
(15,254)
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(36,956)
(843)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132,711
133,554
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
95,755 $
132,711 $
28,787
—
(13,995)
98
3,834
(1,500)
17,224
—
(246)
—
(246)
—
(347)
1,103
(14,930)
(14,174)
2,804
130,750
133,554
191
24.
SEGMENT INFORMATION
Reportable segments are determined by the type of products and services offered and the level of information provided to the chief
operating decision maker, who uses such information to review performance of various components of the business (such as banking
centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.
As of December 31, 2016, the Company was divided into four distinct business operating segments: Traditional Banking, Warehouse,
Mortgage Banking and RPG. Management considers the first three segments to collectively constitute “Core Bank” or “Core
Banking” activities. Correspondent Lending operations and the Company’s national branchless banking platform, MemoryBank, are
considered part of Traditional Banking operations. The RPG segment includes the following divisions: TRS, RPS and RCS. TRS
generates the majority of RPG’s income, with the relatively smaller divisions of RPG, RPS and RCS, considered immaterial for
separate and independent segment reporting. All divisions of the RPG segment operate through the Bank.
The nature of segment operations and the primary drivers of net revenues by reportable segment are provided below:
Segment:
Nature of Operations:
Primary Drivers of Net Revenues:
Traditional Banking. . . . . . . . . . . . . . . .
Core
Banking
Warehouse Lending. . . . . . . . . . . . . . . .
Mortgage Banking . . . . . . . . . . . . . . . . .
Republic Processing Group . . . . . . . . . .
Loans, investments and deposits
Mortgage warehouse lines of credit
Gain on sale of loans and servicing fees
Net refund transfer fees
Provides traditional banking products to
clients primarily in its market footprint via
its network of banking centers and to
clients outside of its market footprint
primarily via its Digital and Correspondent
Lending delivery channels.
Provides short-term, revolving credit
facilities to mortgage bankers across the
United States.
Primarily originates, sells and services
long-term, single family, first lien
residential real estate loans primarily to
clients in its market footprint.
The TRS division facilitates the receipt and
payment of federal and state tax refund
products. The RPS division offers general-
purpose reloadable cards. The RCS
division offers short-term credit products.
RPG products are primarily provided to
clients outside of the Bank’s market
footprint.
The accounting policies used for Republic’s reportable segments are the same as those described in the summary of significant
accounting policies. Segment performance is evaluated using operating income. Goodwill is allocated to the Traditional Banking
segment. Income taxes are generally allocated based on income before income tax expense unless specific segment allocations can be
reasonably made. Transactions among reportable segments are made at carrying value.
192
Segment information for the years ended December 31, 2016, 2015 and 2014 is as follows:
Year Ended December 31, 2016
Core Banking
(dollars in thousands)
Traditional Warehouse
Banking
Lending
Mortgage
Banking
Total
Core
Banking
Republic
Processing
Total
Group
Company
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $
121,692
$
16,529
$
200
$
138,421
$
17,633 $
156,054
Provision for loan and lease losses . . . . . . . . . . . . .
3,448
497
—
3,945
10,548
14,493
Net refund transfer fees . . . . . . . . . . . . . . . . . .
Mortgage banking income . . . . . . . . . . . . . . . .
Program fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . .
—
—
—
26,090
26,090
—
—
—
18
18
—
6,882
—
360
7,242
—
6,882
—
26,468
33,350
19,240
—
3,044
1,875
24,159
19,240
6,882
3,044
28,343
57,509
Total noninterest expenses . . . . . . . . . . . . . . . . . . .
108,360
3,142
4,688
116,190
13,917
130,107
Income before income tax expense . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
35,974
11,015
24,959
$
12,908
4,798
8,110
Segment end of period assets . . . . . . . . . . . . . . . . . $ 4,169,557
$
584,916
2,754
964
1,790
51,636
16,777
34,859
$
$
17,327
6,283
11,044 $
68,963
23,060
45,903
17,453
$ 4,771,926
$
44,383 $
4,816,309
$
$
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . .
3.26 %
3.59 %
NM
3.30 %
NM
3.65 %
Year Ended December 31, 2015
Core Banking
(dollars in thousands)
Traditional Warehouse
Banking
Lending
Mortgage
Banking
Total
Core
Banking
Republic
Processing
Total
Group
Company
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $
108,303
$
12,209
$
219
$
120,731
$
3,239 $
123,970
Provision for loan and lease losses . . . . . . . . . . . . . .
2,897
168
—
3,065
2,331
5,396
Net refund transfer fees . . . . . . . . . . . . . . . . . . .
Mortgage banking income . . . . . . . . . . . . . . . . .
Program fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on call of security available for sale . . . . . .
Other noninterest income . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . .
—
—
—
88
23,670
23,758
—
—
—
—
24
24
—
4,411
—
—
248
4,659
—
4,411
—
88
23,942
28,441
17,388
—
1,233
—
932
19,553
17,388
4,411
1,233
88
24,874
47,994
Total noninterest expenses . . . . . . . . . . . . . . . . . . . .
93,740
2,526
4,918
101,184
12,140
113,324
Income (loss) before income tax expense . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $
35,424
11,505
23,919
$
9,539
3,575
5,964
$
(40)
(14)
(26)
44,923
15,066
29,857
$
$
8,321
3,012
5,309 $
53,244
18,078
35,166
Segment end of period assets . . . . . . . . . . . . . . . . . . $
3,809,526
$
386,414
$
9,348
$ 4,205,288
$
25,001 $
4,230,289
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . .
3.20 %
3.58 %
NM
3.24 %
NM
3.27 %
193
Year Ended December 31, 2014
Core Banking
(dollars in thousands)
Traditional Warehouse
Banking
Lending
Mortgage
Banking
Total
Core
Banking
Republic
Processing
Total
Group
Company
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $
104,832
$
7,428
$
183
$
112,443
$
330 $
112,773
Provision for loan and lease losses . . . . . . . . . . . . . .
3,042
350
—
3,392
(533)
2,859
Net refund transfer fees . . . . . . . . . . . . . . . . . . .
Mortgage banking income . . . . . . . . . . . . . . . . .
Program fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . .
—
—
—
21,489
21,489
—
—
—
12
12
—
2,862
—
244
3,106
—
2,862
—
21,745
24,607
16,130
—
591
1,191
17,912
16,130
2,862
591
22,936
42,519
Total noninterest expenses . . . . . . . . . . . . . . . . . . . .
90,713
1,857
3,881
96,451
11,667
108,118
Income (loss) before income tax expense . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $
32,566
11,251
21,315
$
5,233
1,831
3,402
$
(592)
(207)
(385)
37,207
12,875
24,332
$
Segment end of period assets . . . . . . . . . . . . . . . . . . $ 3,404,323
$
319,153
$
11,593
$
3,735,069
7,108
2,653
4,455 $
44,315
15,528
28,787
11,944 $
3,747,013
$
$
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . .
3.32 %
3.77 %
NM
3.35 %
NM
3.33 %
Segment assets are reported as of the respective period ends while income and margin data are reported for the respective periods.
NM ---Not Meaningful
194
25.
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2016, 2015 and 2014.
$
$
(dollars in thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses(2) . . . . . .
Net interest income after provision . . . . . . . .
Noninterest income(3) . . . . . . . . . . . . . . . . .
Noninterest expenses(4) . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share:
Class A Common Stock . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . .
Diluted earnings per share:
Class A Common Stock . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . .
Dividends declared per common share:
Class A Common Stock . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . .
(dollars in thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses. . . . . . . . . .
Net interest income after provision . . . . . . . . .
Noninterest income(3) . . . . . . . . . . . . . . . . . .
Noninterest expenses(4) . . . . . . . . . . . . . . . . .
Income before income tax expense . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share:
Class A Common Stock . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . .
Diluted earnings per share:
Class A Common Stock . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . .
Dividends declared per common share:
Class A Common Stock . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . .
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter(1)
2016
$
45,903
4,258
41,645
5,004
36,641
10,485
32,166
14,960
4,960
10,000
0.48
0.44
0.48
0.44
0.209
0.190
$
43,934
4,536
39,398
2,489
36,909
11,301
33,534
14,676
4,848
9,828
0.47
0.43
0.47
0.43
0.209
0.190
$
40,140
4,563
35,577
1,814
33,763
10,802
31,866
12,699
4,359
8,340
0.40
0.37
0.40
0.37
0.209
0.190
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter(1)
2015
$
36,842
4,376
32,466
2,074
30,392
7,717
26,847
11,262
3,844
7,418
0.36
0.33
0.36
0.33
0.198
0.180
$
36,107
4,683
31,424
2,233
29,191
7,806
28,238
8,759
3,119
5,640
0.27
0.25
0.27
0.25
0.198
0.180
$
35,722
4,664
31,058
904
30,154
9,485
27,165
12,474
4,154
8,320
0.40
0.37
0.40
0.36
0.198
0.180
44,015
4,581
39,434
5,186
34,248
24,921
32,541
26,628
8,893
17,735
0.86
0.78
0.85
0.77
0.198
0.180
33,761
4,739
29,022
185
28,837
22,986
31,074
20,749
6,961
13,788
0.66
0.65
0.66
0.64
0.187
0.170
195
(1) The first quarters of 2016 and 2015 were significantly impacted by the TRS division of RPG.
(2) Provision expense:
The relatively higher levels of provision expense during the first and fourth quarters of 2016 were driven primarily by provision expense
at the RPG segment. Provision expense at RPG was $4.7 million during the first quarter of 2016 and was primarily driven by the TRS
division’s EA product. Provision expense at RPG was $3.3 million during the fourth quarter of 2016 and was primarily driven by short-
term consumer loans originated through the RCS division of RPG.
(3) Noninterest income:
During the third quarter of 2016, the Company recorded a $1.1 million gain on the bulk-loan sale of approximately $71 million of its
correspondent loan portfolio.
(4) Noninterest expenses:
During the fourth quarters of 2016 and 2015, the Company reversed $1.7 million and $2.3 million of incentive compensation accruals
based on revised payout estimates.
During the third quarter of 2015, the Company reversed $450,000 of incentive compensation accruals based on revised payout
estimates.
During the third quarter of 2016, The Company incurred an $846,000 prepayment penalty on payoff of $50 million in FHLB advances.
196
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.’s management, with the
participation of the Company’s Chairman/Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures
were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of the
Company’s fiscal year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, internal
control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting and on the Financial Statements, thereon are set forth under Part II Item 8
“Financial Statements and Supplementary Data.”
Item 9B. Other Information.
None
197
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item appears under the headings “PROPOSAL ONE: ELECTION OF DIRECTORS,”
“SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” and “THE BOARD OF DIRECTORS AND ITS
COMMITTEES” of the Proxy Statement of Republic Bancorp, Inc. (“Republic” or the “Company”) for the 2016 Annual Meeting of
Shareholders (“Proxy Statement”) to be held April 20, 2017, all of which is incorporated herein by reference.
Set forth below is certain information with respect to the Company’s executive officers:
Name
Age
Position with the Company
Steven E. Trager . . . . . . . . . .
A. Scott Trager . . . . . . . . . . .
Kevin Sipes . . . . . . . . . . . . . .
William R. Nelson . . . . . . . .
Anthony T. Powell . . . . . . . .
Steven E. DeWeese . . . . . . . .
Robert J. Arnold . . . . . . . . . .
John Rippy . . . . . . . . . . . . . .
Juan Montano . . . . . . . . . . . .
56 Chairman and Chief Executive Officer (“CEO”)
64 Vice Chair and President
45 Executive Vice President, Chief Financial Officer (“CFO”) and Chief Accounting Officer
53 President, Republic Processing Group
49 Executive Vice President, Republic Bank & Trust Company
48 Executive Vice President, Republic Bank & Trust Company
58 Senior Vice President, Republic Bank & Trust Company
56 Senior Vice President, Republic Bank & Trust Company
47 Senior Vice President, Republic Bank & Trust Company
Executive officers of the Company are elected by the Board of Directors and serve at the pleasure of the Board of Directors. Steven E.
Trager and A. Scott Trager are cousins.
Steven E. Trager began serving as Chairman and CEO of Republic in 2012 and has served as Chairman and CEO of Republic Bank &
Trust Company (the “Bank”) since 1998. From 1994 to 1997 he served as Vice Chairman of the Company. From 1994 to 1998 he
served as Secretary, and from 1998 to 2012 he served as President and CEO of Republic.
A. Scott Trager has served as President of Republic since 2012 and as President of the Company since 1984. From 1994 to 2012, he
served as Vice Chairman of Republic.
Kevin Sipes joined the Company in 1995 and has served as Executive Vice President and Treasurer of Republic and the Company
since 2002 and CFO of Republic and the Company since 2000. He began serving as Chief Accounting Officer of the Company in
2000.
William R. Nelson has served as President of Republic Processing Group since 2007. He previously served as Director of
Relationship Management of HSBC, Taxpayer Financial Services, in 2004 and was promoted to Group Director — Independent
Program in 2006 through 2007. He previously served as Director of Sales, Marketing and Customer Service with RPG from 1999
through 2004.
Anthony T. Powell joined the Company in 1999 as VP. In 2001, he was promoted to SVP and Senior Commercial Lending Officer. In
2005, he was promoted to SVP and Managing Director of Business Banking. In 2015, he assumed responsibility for the Retail
Banking division of the Company and was named SVP and Chief Credit and Retail Officer. In January 2017, he was named EVP and
Chief Lending Officer.
Steven E. DeWeese joined the Company in 1990 and has held various positions within the Company since then. In 2000, he was
promoted to SVP. In 2003, he was promoted to Managing Director of Business Development. In 2006, he was promoted to
Managing Director of Retail Banking, and in January, 2010 he was promoted to Executive Vice President of the Company. In 2015,
he was named the Company’s Managing Director of Private and Business Banking.
Robert J. Arnold joined the Company in 2006 as SVP and Chief Operating Officer of Commercial Banking. In 2015 he was named the
Company’s Managing Director of Commercial and Corporate Banking.
198
John Rippy joined the Company in 2005 as SVP and Risk Management Officer. In 2009, he was named SVP and Chief Legal and
Compliance Officer. In 2013, he was named SVP and Chief Risk Management Officer.
Juan Montano joined the Company in 2009 as SVP and Managing Director of Finance. In 2015, he was named SVP and Managing
Director of Mortgage Lending.
Item 11. Executive Compensation.
The information required by this Item appears under the sub-heading “Director Compensation” and under the headings “CERTAIN
INFORMATION AS TO MANAGEMENT” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION”
of the Proxy Statement all of which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table sets forth information regarding Republic’s Common Stock that may be issued upon exercise of options, warrants
and rights under all equity compensation plans as of December 31, 2016. There were no equity compensation plans not approved by
security holders at December 31, 2016.
(1)
(2)
(3)
Number of Securities Remaining
Available for Future Issuance
Plan Category
Number of Securities to be Issued Weighted-Average Exercise Price Under Equity Compensation Plans
Upon Exercise of Outstanding
of Outstanding Options, Warrants (Excluding Securities Reflected in
Options, Warrants and Rights
Column (1))
and Rights
2015 Stock Incentive Plan . . . . . . . . . . . . . . . .
2005 Stock Incentive Plan . . . . . . . . . . . . . . . .
358,100 $
86,500
24.26
24.88
2,641,900
—
Column (1) above represents options issued for Class A Common Stock only. Options for Class B Common Stock have been
authorized but are not issued.
Additional information required by this Item appears under the heading “SHARE OWNERSHIP” of the Proxy Statement, which is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this Item is under the headings “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION” and “CERTAIN OTHER RELATIONSHIPS AND RELATED TRANSACTIONS” of the Proxy Statement, all of
which is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information required by this Item appears under the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” of the
Proxy Statement which is incorporated herein by reference.
199
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements:
The following are included under Item 8 “Financial Statements and Supplementary Data:”
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets — December 31, 2016 and 2015
Consolidated statements of income and comprehensive income — years ended December 31, 2016, 2015 and 2014
Consolidated statements of stockholders’ equity — years ended December 31, 2016, 2015 and 2014
Consolidated statements of cash flows — years ended December 31, 2016, 2015 and 2014
Notes to consolidated financial statements
(a)(2) Financial Statements Schedules:
Financial statement schedules are omitted because the information is not applicable.
(a)(3) Exhibits:
The Exhibit Index of this report is incorporated herein by reference. The management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 15(b) are noted in the Exhibit Index.
200
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
REPUBLIC BANCORP, INC.
March 10, 2017
By: Steven E. Trager
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated.
/s/ Steven E. Trager
Steven E. Trager
/s/ A. Scott Trager
A. Scott Trager
/s/ Kevin Sipes
Kevin Sipes
/s/ Craig A. Greenberg
Craig Greenberg
/s/ Michael T. Rust
Michael T. Rust
/s/ Mark A. Vogt
Mark A. Vogt
/s/ R. Wayne Stratton
R. Wayne Stratton
/s/ Susan Stout Tamme
Susan Stout Tamme
Chairman, Chief Executive Officer
March 10, 2017
and Director
President and Director
March 10, 2017
Chief Financial Officer and
Chief Accounting Officer
Director
Director
Director
Director
Director
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
201
INDEX TO EXHIBITS
No.
Description
3(i)
3(ii)
4.1
4.2
10.01*
10.02*
10.03*
10.04*
10.05*
10.06*
10.07*
10.08*
10.09*
10.10*
Articles of Incorporation of Registrant, as amended (Incorporated by reference to Exhibit 3(i) to the Registrant’s Form
8-K filed October 13, 2016 (Commission File Number: 0-24649))
Amended Bylaws (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 10-Q for the quarter ended September
30, 2006 (Commission File Number: 0-24649))
Provisions of Articles of Incorporation of Registrant defining rights of security holders (see Articles of Incorporation, as
amended, of Registrant incorporated as Exhibit 3(i) herein)
Agreement Pursuant to Item 601 (b)(4)(iii) of Regulation S-K (Incorporated by reference to Exhibit 4.2 of the
Registrant’s Form 10-K for the year ended December 31, 1997 (Commission File Number: 33-77324))
Officer Compensation Continuation Agreement with Steven E. Trager, dated January 12, 1995 (Incorporated by
reference to Exhibit 10.1 to Registrant’s Form 10-K for the year ended December 31, 1995 (Commission File Number:
33-77324))
Officer Compensation Continuation Agreement, as amended and restated, with Steven E. Trager effective January 1,
2006 (Incorporated by reference to Exhibit 10.34 of Registrant’s Form 10-K for the year ended December 31, 2005
(Commission File Number: 0-24649))
Officer Compensation Continuation Agreement, as amended, with Steven E. Trager effective February 15, 2006
(Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed February 21, 2006 (Commission File Number:
0-24649))
Officer Compensation Continuation Agreement, as amended and restated, with Steven E. Trager effective April 30,
2008 (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended March 31, 2008
(Commission File Number: 0-24649))
Officer Compensation Continuation Agreement with A. Scott Trager, dated January 12, 1995 (Incorporated by reference
to Exhibit 10.5 to Registrant’s Form 10-K for the year ended December 31, 1995 (Commission File Number: 33-77324))
Officer Compensation Continuation Agreement, as amended and restated, with A. Scott Trager effective January 1, 2006
(Incorporated by reference to Exhibit 10.35 of Registrant’s Form 10-K for the year ended December 31, 2005
(Commission File Number: 0-24649))
Officer Compensation Continuation Agreement, as amended, with A. Scott Trager effective February 15, 2006
(Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed February 21, 2006 (Commission File Number:
0-24649))
Officer Compensation Continuation Agreement, as amended and restated, with A. Scott Trager effective April 30, 2008
(Incorporated by reference to Exhibit 10.3 of Registrant’s Form 10-Q for the quarter ended March 31, 2008
(Commission File Number: 0-24649))
Officer Compensation Agreement with A. Scott Trager, effective March 21, 2012 (Incorporated by reference to
Exhibit 10.3 of Registrant’s Form 10-Q for the quarter ended March 31, 2012 (Commission File Number: 0-24649))
Officer Compensation Continuation Agreement with Kevin Sipes, dated June 15, 2001 (Incorporated by reference to
Exhibit 10.23 of Registrant’s Form 10-Q for the quarter ended June 30, 2001 (Commission File Number: 0-24649))
202
No.
Description
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19
10.20
10.21
10.22
10.23
10.24
Officer Compensation Continuation Agreement, as amended and restated, with Kevin Sipes effective January 1, 2006
(Incorporated by reference to Exhibit 10.38 of Registrant’s Form 10-K for the year ended December 31, 2005
(Commission File Number: 0-24649))
Officer Compensation Continuation Agreement, as amended, with Kevin Sipes effective February 15, 2006
(Incorporated by reference to Exhibit 10.5 of Registrant’s Form 8-K filed February 21, 2006 (Commission File Number:
0-24649))
Officer Compensation Continuation Agreement, as amended and restated, with Kevin Sipes effective April 30, 2008
(Incorporated by reference to Exhibit 10.4 of Registrant’s Form 10-Q for the quarter ended March 31, 2008
(Commission File Number: 0-24649))
Officer Compensation Agreement with Kevin Sipes, effective March 21, 2012 (Incorporated by reference to
Exhibit 10.1 of Registrant’s Form 10-Q for the quarter ended March 31, 2012 (Commission File Number: 0-24649))
Officer Compensation Agreement with Kevin Sipes, effective March 21, 2012 (Incorporated by reference to
Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended March 31, 2012 (Commission File Number: 0-24649))
Officer Compensation Agreement with Kevin Sipes, effective November 7, 2012 (Incorporated by reference to
Exhibit 10.1 of Registrant’s Form 10-Q for the quarter ended September 30, 2012 (Commission File Number: 0-24649))
Officer Compensation Agreement with Kevin Sipes, effective November 7, 2012 (Incorporated by reference to
Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended September 30, 2012 (Commission File Number: 0-24649))
Death Benefit Agreement with Bernard M. Trager dated September 10, 1996 (Incorporated by reference to Exhibit 10.9
to Registrant’s Form 10-K for the year ended December 31, 1996 (Commission File Number: 33-77324))
Split Dollar Insurance Policy with Citizens Fidelity Bank and Trust Company as the Trustee of the Bernard Trager
Irrevocable Trust, dated December 14, 1989, as amended August 8, 1994 (Incorporated by reference to Exhibit 10.70 to
Registrant’s Form 10-K for the year ended December 31, 2012 (Commission File Number: 33-77324))
Right of First Offer Agreement by and among Republic Bancorp, Inc., Teebank Family Limited Partnership, Bernard M.
Trager and Jean S. Trager. (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed September 19,
2007 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 1982, relating to 2801
Bardstown Road, Louisville (Incorporated by reference to Exhibit 10.11 of Registrant’s Form 10-Q for the quarter ended
March 31, 1998 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 2008, relating to 2801
Bardstown Road, Louisville (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed June 9, 2008
(Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Teeco Properties, dated April 1, 1995, relating to property at 601
West Market Street (Incorporated by reference to exhibit 10.10 of Registrant’s Form 10-Q for the quarter ended
March 31, 1998 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Teeco Properties, dated October 1, 1996, relating to property at
601 West Market Street (Incorporated by reference to exhibit 10.10 of Registrant’s Form S-1 (Commission File
Number: 333-56583))
203
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Lease extension between Republic Bank & Trust Company and Teeco Properties, dated September 25, 2001, relating to
property at 601 West Market Street (Incorporated by reference to exhibit 10.25 of Registrant’s Form 10-Q for the
quarter ended September 30, 2001 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Teeco Properties, dated May 1, 2002, relating to property at 601
West Market Street (Incorporated by reference to exhibit 10.1 of Registrant’s Form 10-Q for the quarter ended
March 31, 2002 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Teeco Properties, dated October 1, 2005, relating to property at
601 West Market Street, Louisville, KY (Floor 4), amending and modifying previously filed exhibit 10.1 of Registrant’s
Form 10-Q for the quarter ended March 31, 2002 (Incorporated by reference to exhibit 10.1 of Registrant’s Form 10-Q
for the quarter ended September 30, 2005 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Teeco Properties, as of October 1, 2006, relating to property at 601
West Market Street, Louisville, KY. (Incorporated by reference to exhibit 10.1 of Registrant’s Form 8-K filed
September 25, 2006 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Teeco Properties, as of July 8, 2008, as amended, relating to
property at 601 West Market Street (Floors 1,2,3,5 and 6), Louisville, KY. (Incorporated by reference to exhibit 10.1 of
Registrant’s Form 10-Q for the quarter ended June 30, 2008 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Teeco Properties, as of July 8, 2008, as amended, relating to
property at 601 West Market Street (Floor 4), Louisville, KY. (Incorporated by reference to exhibit 10.2 of Registrant’s
Form 10-Q for the quarter ended June 30, 2008 (Commission File Number: 0-24649))
Assignment of Lease relating to property at 601 West Market Street (Floors 1,2,3,5 and 6), Louisville, KY.
(Commission File Number: 0-24649))
Assignment of Lease relating to property at 601 West Market Street (Floor 4), Louisville, KY. (Commission File
Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 3, 1993, as amended, relating to
661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.12 of Registrant’s Form 10-Q for
the quarter ended March 31, 1998 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 1999, as amended, relating to
661 South Hurstbourne Parkway (Incorporated by reference to Exhibit 10.17 of Registrant’s Form 10-Q for the quarter
ended June 30, 1999 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 2000, as amended, relating to
661 South Hurstbourne Parkway (Incorporated by reference to Exhibit 10.21 of Registrant’s Form 10-K for the year
ended December 31, 1999 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated July 1, 2003, as amended, relating to 661
South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 10-Q for the
quarter ended June 30, 2003 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 2, 1993, as amended, relating to
661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.16 of Registrant’s Form 10-K for
the year ended December 31, 2003 (Commission File Number: 0-24649))
204
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 1, 1995, as amended, relating
to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.18 of Registrant’s Form 10-K
for the year ended December 31, 2003 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 16, 1996, as amended, relating
to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.19 of Registrant’s Form 10-K
for the year ended December 31, 2003 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated January 21, 1998, as amended, relating to
661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.20 of Registrant’s Form 10-K for
the year ended December 31, 2003 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 11, 1998, as amended, relating
to 661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.21 of Registrant’s Form 10-K
for the year ended December 31, 2003 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated February 1, 2004, as amended, relating to
661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 10-Q for
the quarter ended March 31, 2004 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated September 1, 2005, as amended, relating
to 661 South Hurstbourne Parkway, Louisville, KY, amending and modifying previously filed exhibit 10.12 of
Registrant’s Form 10-Q for the quarter ended March 31, 1998 (Incorporated by reference to Exhibit 10.2 of Registrant’s
Form 10-Q for the quarter ended September 30, 2005 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated July 1, 2008, as amended, relating to 661
South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed
June 9, 2008 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 14, 2015, as amended, relating to
661 South Hurstbourne Parkway, Louisville (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 10K for the
quarter ended September 30, 2015 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated November 17, 1997, as amended, relating
to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.18 of Registrant’s Form 10-Q for the quarter ended
March 31, 1998 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated August 1, 1999, as amended, relating to
9600 Brownsboro Road (Incorporated by reference to Exhibit 10.18 of Registrant’s Form 10-Q for the quarter ended
June 30, 1999 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated October 30, 1999, as amended, relating to
9600 Brownsboro Road (Incorporated by reference to Exhibit 10.20 of Registrant’s Form 10-K for the year ended
December 31, 1999 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated May 1, 2003, as amended, relating to 9600
Brownsboro Road (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended June 30,
2003 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated November 1, 2005, as amended, relating
to 9600 Brownsboro Road (Incorporated by reference to Exhibit 10.33 of Registrant’s Form 10-K for the year ended
December 31, 2005 (Commission File Number: 0-24649))
Assignment and Assumption of Lease by Republic Bank & Trust Company with the consent of Jaytee Properties, dated
May 1, 2006, relating to 9600 Brownsboro Road, Louisville, KY. (Incorporated by reference to Exhibit 10.1 of
Registrant’s Form 10-Q for the quarter ended June 30, 2006 (Commission File Number: 0-24649))
205
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61*
10.62*
10.63*
10.64*
10.65*
10.66*
Lease between Republic Bank & Trust Company and Jaytee Properties, dated January 17, 2008, as amended, relating to
9600 Brownsboro Road, Louisville, KY (Incorporated by reference to Exhibit 10.40 of Registrant’s Form 10-K for the
year ended December 31, 2007 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated January 15, 2014, as amended, relating to
9600 Brownsboro Road (Incorporated by reference to Exhibit 10.47 of Registrant’s Form 10-K for the year ended
December 31, 2013 (Commission File Number: 0-24649))
Ground lease between Republic Bank & Trust Company and Jaytee Properties, relating to 9600 Brownsboro Road, dated
January 17, 2008, as amended, relating to 9600 Brownsboro Road, Louisville, KY (Incorporated by reference to
Exhibit 10.41 of Registrant’s Form 10-K for the year ended December 31, 2007 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated June 27, 2008, relating to
200 South Seventh Street, Louisville, KY. (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed
July 1, 2008 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated January 31, 2011, relating to
200 South Seventh Street, Louisville, KY (Incorporated by reference to Exhibit 10.66 of the Registrant’s Form 10-K for
the year ended December 31, 2010 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated May 1, 2013, relating to 200
South Seventh Street, Louisville, KY (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q for the
quarter ended June 30, 2013 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated January 15, 2014, as
amended, relating to 200 South Seventh Street, Louisville, KY (Incorporated by reference to Exhibit 10.54 of
Registrant’s Form 10-K for the year ended December 31, 2013 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated March 18, 2015, as amended,
relating to 200 South Seventh Street, Louisville, KY. (Incorporated by reference to Exhibit 10.1 of Registrant’s
Form 10-Q for the quarter ended March 31, 2015 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated September 30, 2015, as
amended, relating to 200 South Seventh Street, Louisville, KY. (Incorporated by reference to Exhibit 10.2 of
Registrant’s Form 10-Q for the quarter ended September 30, 2015 (Commission File Number: 0-24649))
Form of Stock Option Agreement for Directors and Executive Officers (Incorporated by reference to Exhibit 10.2 of
Registrant’s Form 10-Q for the quarter ended September 30, 2004 (Commission File Number: 0-24649))
2005 Stock Incentive Plan (Incorporated by reference to Form 8-K filed March 18, 2005 (Commission File Number: 0-
24649))
2005 Stock Incentive Plan Amendment Number 1 (Incorporated by reference to Exhibit 10.61 of Registrant’s Form 10-
K for the year ended December 31, 2008 (Commission File Number: 0-24649))
2005 Stock Incentive Plan Amendment, as amended November 14, 2012 (Incorporated by reference to Exhibit 10.1 of
Registrant’s Form 8-K filed November 19, 2012 (Commission File Number: 0-24649))
2015 Stock Incentive Plan (Incorporated by reference to Annex A of Registrant’s 2015 Proxy Statement (Commission
File Number: 0-24649))
Option Award Agreement for 2015 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of Registrant’s
Form 10-Q for the quarter ended June 30, 2015 (Commission File Number: 0-24649))
206
10.67*
10.68*
10.69*
10.70*
10.71*
10.72*
10.73*
10.74*
10.75*
10.76*
10.77
10.78*
10.79
21
23
Restricted Stock Award Agreement for 2015 Stock Incentive Plan (Incorporated by reference to Exhibit 10.2 of
Registrant’s Form 10-Q for the quarter ended June 30, 2015 (Commission File Number: 0-24649))
Performance Stock Unit Award Agreement for 2015 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of
Registrant’s Form 8-K filed January 27, 2016 (Commission File Number: 0-24649))
Restricted Stock Award Agreement, as amended November 14, 2012 (Incorporated by reference to Exhibit 10.2 of
Registrant’s Form 8-K filed November 19, 2012 (Commission File Number: 0-24649))
Republic Bancorp, Inc. 401(k)/Profit Sharing Plan and Trust (Incorporated by reference to Form S-8 filed December 28,
2005 (Commission File Number: 0-24649))
Republic Bancorp, Inc. 401(k) Retirement Plan, as Amended and Restated, effective April 1, 2011 (Incorporated by
reference to Form 11-K for the year ended December 31, 2011 (Commission File Number: 0-24649))
Republic Bancorp, Inc. 401(k) Retirement Plan, as Amended and Restated, effective January 1, 2015 (Incorporated by
reference to Exhibit 23.2 of Form 11-K for the year ended December 31, 2014 (Commission File Number: 0-24649))
Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred Compensation and the
Republic Bank & Trust Company Non-Employee Director and Key Employee Deferred Compensation Plan (as adopted
November 18, 2004) (Incorporated by reference to Form S-8 filed November 30, 2004 (Commission File Number: 333-
120857))
Republic Bancorp, Inc. and Subsidiaries Non-Employee Director and Key Employee Deferred Compensation Plan Post-
Effective Amendment No. 1 (Incorporated by reference to Form S-8 filed April 13, 2005 (Commission File Number:
333-120857))
Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred Compensation, as
amended and restated as of March 16, 2005 (Incorporated by reference to Form 8-K filed March 18, 2005 (Commission
File Number: 333-120857))
Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred Compensation as
amended and restated as of March 19, 2008 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 10-Q for the
quarter ended March 31, 2008 (Commission File Number: 0-24649))
Junior Subordinated Indenture, Amended and Restated Trust Agreement, and Guarantee Agreement (Incorporated by
reference to Exhibit 4.1 of Registrant’s Form 8-K filed August 19, 2005 (Commission File Number: 0-24649))
Cash Bonus Plan for Acquisitions, effective November 7, 2012 (Incorporated by reference to Exhibit 10.3 of
Registrant’s Form 10-Q for the quarter ended September 30, 2012 (Commission File Number: 0-24649))
Purchase and Assumption Agreement — Whole Bank; All Deposits, among the Federal Deposit Insurance Corporation,
receiver of Tennessee Commerce Bank, Franklin, Tennessee, the Federal Deposit Insurance Corporation and Republic
Bank & Trust Company, dated as of January 27, 2012 (Incorporated by reference to Exhibit 2.1 of Registrant’s Form 8-
K filed February 1, 2012 (Commission File Number: 0-24649))
Subsidiaries of Republic Bancorp, Inc.
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Principal Executive Officer, pursuant to the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002
207
32**
101
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
Interactive data files: (i) Consolidated Balance Sheets at December 31, 2016 and 2015, (ii) Consolidated Statements of
Income and Comprehensive Income for the years ended December 31, 2016, 2015 and 2014, (iii) Consolidated
Statement of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014, (iv) Consolidated Statements
of Cash Flows for the years ended December 31, 2016, 2015 and 2014 and (v) Notes to Consolidated Financial
Statements.
*
pursuant to Item 15(b).
Denotes management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise
**
subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934.
208