LETTER TO SHAREHOLDERS
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Valued Shareholders,
I am delighted to report to you a successful year for Republic
Bancorp, Inc. (“Republic,” the “Company,” “we,” “us”). I believe our
2018 operating results further advanced us down the long-term path
of being a more efficient and diversified company as we continue to
enhance our elite-level performance. Please allow me to share with
you our strong financial results, strategic achievements, and cultural
milestones for the year just ended.
STEVE TRAGER
Chairman and Chief Executive Officer
Strong Financial Results
Driven by growth in net interest income and noninterest
income, our pre-tax net income grew a solid 20% to $94.3
million in 2018, making it the fourth consecutive year that
growth in our pre-tax net income exceeded 10%.
Our Core Bank net interest margin continued to rise in
2018, expanding 15 basis points to 3.70%. This expansion,
complemented by a $210 million, or 6%, increase in aver-
age Core Bank loans drove a $15.8 million, or 10%, increase
in our Core Bank net interest income in 2018.
From the end of 2017 to the end of 2018 we selectively
grew our Core Bank loans $110 million, or 3%, primarily by
growing our commercial-sector portfolios $154 million, or
9%. During the same time our on-balance-sheet 1-4 fam-
ily residential real estate portfolio remained level at $1.2
billion, as we focused this production toward our second-
ary-market products.
While period-end Core Bank deposit balances only grew
$20 million, or 1%, during 2018, there is much more to
the story. Our higher-cost deposits, such as reciprocal,
brokered, and time deposits of $250,000-and-greater
decreased $187 million, or 38%, in total. Over the same
period, our lower-cost, more stable accounts, such as non-
interest-bearing and interest-bearing transactional ac-
counts, and time deposits of less-than-$250,000, in total,
grew $207 million, or 7%.
TOTAL COMPANY – PRE-TAX NET INCOME ($)
$94.3
$78.4
20%
$69.0
14%
2016
2017
2018
CORE BANK - NET INTEREST MARGIN (%)
3.70%
3.55%
3.30%
S
N
O
I
L
L
I
M
$100.0
$90.0
$80.0
$70.0
$60.0
$50.0
$40.0
$30.0
$20.0
$10.0
$ -
3.80%
3.70%
3.60%
3.50%
3.40%
3.30%
3.20%
3.10%
3.00%
2016
2017
2018
It’s just easier here.®
CORE BANK - LOAN BALANCES AND MIX ($)
$1.9
$1.7
$1.5
$1.3
$1.2
$1.2
$0.6
$0.5
$0.5
$0.5
$0.5
$0.4
S
N
O
I
L
L
I
B
$2.0
$1.8
$1.6
$1.4
$1.2
$1.0
$0.8
$0.6
$0.4
$0.2
$ -
DEC 2016
DEC 2017
DEC 2018
DEC 2016
DEC 2017
DEC 2018
DEC 2016
DEC 2017
DEC 2018
DEC 2016
DEC 2017
DEC 2018
RESIDENTIAL REAL ESTATE
COMMERCIAL PORTFOLIOS*
WAREHOUSE LINES OF CREDIT
HELOC** AND OTHER CONSUMER
* Includes Commercial Real Estate, Commercial and Industrial, Construction and Development, and Lease Financing Receivables. ** HELOC = Home Equity Line of Credit
We continued to maintain strong credit quality, the foundation of everything we do at Republic. We finished 2018 with fa-
vorably-low delinquent Core Bank loans to total Core Bank-loans of 0.22% and nonperforming Core Bank loans to total Core
Bank loans of 0.40%, both of which compare well to our peers.
CORE BANK - DELINQUENT LOANS/TOTAL LOANS (%)
CORE BANK - DEPOSIT BALANCES AND MIX ($)
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
0.18%
0.21%
0.22%
DEC 2016
DEC 2017
DEC 2018
$2.7
$2.9
$3.1
S
N
O
I
L
L
I
B
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$ -
$0.4
$0.5
$0.3
DEC 2016 DEC 2017 DEC 2018
DEC 2016 DEC 2017 DEC 2018
NIB*, IB**, AND TIME < $250
RECIPROCAL AND
BROKERED DEPOSITS
* NIB - Noninterest Bearing Deposits ** IB - Interest Bearing Deposits
Strategic Achievements
We continued to upgrade our Mortgage Banking operations with additional talent and new technology in 2018. The additional
talent came in the form of 17 new mortgage originators across our footprint, with a focus in our Florida and Tennessee markets.
The new technology came in the form of an upgraded mortgage origination platform and offerings throughout our mortgage
segment. It is one of our strategic goals, within the next five years, to originate a minimum of $1 billion of mortgages per year.
While the current environment will not make this easy, $1 billion of originations is an inflection point that would substantially
raise the profile of this business segment.
For the past few years we have made a concerted effort to diversify our loan mix. We continued that strategic course in 2018,
with our commercial-sector concentration growing from 44% to 46% of total Core Bank loans and our 1-4 family residential
real estate concentration declining from 32% to 31% of that same amount. Additionally, we further diversified our loan portfolio
through growth in aircraft lending and dealer-floorplan lending. We will continue to cautiously underwrite the credit and pru-
dently manage the interest rate risk of these loans while selectively increasing their balances for further portfolio diversification.
As a company, we continued to leverage technology to
better serve our clients. In 2018, we expanded our network
of Interactive Teller Machines (“ITMs”), which allowed us
to efficiently expand our face-to-face client contact, as
locations with ITMs can offer our clients a minimum of
30% more customer service hours than locations without
an ITM. After a successful pilot phase in 2017, we added
18 ITMs and implemented three ITM-only teller service lo-
cations during 2018. In addition to the expansion of ITM
technology for our consumers, we also implemented an in-
dustry-leading online business banking platform during the
fourth quarter of 2018, to ensure our commercial clients
have the best technology at their fingertips.
Cultural Milestones
In early 2018, we launched our first employee engagement survey giving associates a forum in which to share comments
and rate us across numerous measures. Over 90% of our associates completed the survey – an extremely high rate for a
first-time survey – and we were above the peer benchmark on almost all the measures. Associates were candid, providing
us valuable feedback for improvement. While there are always opportunities to grow, the survey demonstrated the many
things we are doing well.
YEARS
ANNIVERSARY
CELEBRATING 20 YEARS AS A
LISTED COMPANY
On July 23rd, we celebrated our 20-year anniversary as a
publicly traded company on the NASDAQ Exchange. To
commemorate our two successful decades as a publicly trad-
ed company, members of our Executive Management and
Board of Directors rang the closing bell at the NASDAQ
Exchange in Times Square. During our 20 years as a publicly
traded company, we entered or expanded markets in north-
ern Kentucky (Cincinnati), southern Indiana (Louisville),
Tennessee (Nashville) and Florida (Tampa). Additionally,
we introduced and grew our Internet banking platform and
expanded Tax Refund Solutions into the Republic Process-
ing Group. Most importantly, for those shareholders that
purchased our shares at a split-adjusted price of $10.69 per
share in 1998, we have provided a total return of 361% as of
December 31, 2018.
In December, to thank our associates for making an IMPACT in 2018, we offered a $750 forgivable loan to help them meet
the everyday challenges of life. The loan is 100% forgivable in two years, provided the associate is still employed at Republic
Bank. We are thrilled with the 87% enrollment rate in this program. Our associates were extremely appreciative, some shar-
ing that they were using the funds for such things as holiday presents, student loans, and donations to charity.
It’s just easier here.®
Final Thoughts
Our capital levels remain strong and continue to position us for
future acquisitions. While we have not announced a deal in the
past two years, we continue to evaluate potential targets that
fit within our long-term strategy. As always, we remain stead-
fast and prudent in our assumptions, pricing, and due diligence.
With a flattening yield curve and uncertain economy ahead,
banking is becoming more and more challenging, and we
must rise to meet these challenges. Our core strategy has
always been and remains long-term sustainability and, as al-
ways, we continue to emphasize the importance of prudent
underwriting and interest-rate-risk management.
Fellow shareholders, I remain as optimistic as
ever that our 1,000+ dedicated associates will
continue to make the IMPACT that allows all of
us to Thrive Together. For 30+ years we have run
a company that benefits our shareholders and
the stakeholders in our communities. We never
take for granted the trust you have given us with
your investment, and we will continue to work
hard to maintain that trust each and every day.
STEVE TRAGER
Chairman and Chief Executive Officer
Innovate for
the Future
Make it
Easier
Provide
Exceptional Service
Acknowledge &
Celebrate Success
Commit to
Caring
Thrive
Together
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, 2018
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. Yes 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. Yes 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. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes 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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Emerging growth company
Accelerated filer
Non-accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
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, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $445,663,266 (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 15, 2019 was 18,680,709 and 2,212,487.
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held April 24, 2019 are incorporated by reference into Part III of this
Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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37
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182
182
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183
184
184
185
185
185
185
186
194
TABLE OF CONTENTS
Business.
PART I
Item 1.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 9.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
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.
PART IV
Item 15.
Item 16. Form 10-K Summary.
Exhibits, Financial Statement Schedules.
Index to Exhibits
Signatures
2
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The acronyms and abbreviations identified in alphabetical order below are used throughout this Form 10-K. You may find it helpful to
refer to this page as you read this report.
Acronym or
Abbreviation
Definition
Acronym or
Abbreviation
Definition
Acronym or
Abbreviation
Definition
Brokered Price Opinion
FRB
Federal Reserve Bank
ACH
AFS
Allowance
AML
AOCI
Automated Clearing House
Available for Sale
Allowance for Loan and Lease Losses
Anti-Money Laundering
Accumulated Other Comprehensive Income
ARM
ASC
ASU
ATM
ATR
Adjustable Rate Mortgage
Accounting Standards Codification
Accounting Standards Update
Automated Teller Machine
Ability to Repay
Basic EPS
Basic earnings per Class A Common Share
Bank Holding Company
Bank Holding Company Act
Bank Owned Life Insurance
BHC
BHCA
BOLI
BPO
BSA
C&D
C&I
CARD Act
CCAD
CDI
CEO
CFO
CFPB
CFTC
CMO
Bank Secrecy Act
Construction and Development
Commercial and Industrial
Credit Card Accountability Responsibility and Disclosure
Act of 2009
Commercial Credit Administration Department
Core Deposit Intangible
Chief Executive Officer
Chief Financial Officer
Consumer Financial Protection Bureau
Commodity Futures Trading Commission
Collateralized Mortgage Obligation
Core Bank
CRA
CRE
DIF
The Traditional Banking, Warehouse Lending, and
Mortgage Banking reportable segments
Community Reinvestment Act
Commercial Real Estate
Deposit Insurance Fund
Diluted EPS
Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer
Diluted earnings per Class A Common Share
DTA
DTL
EA
EBITDA
EFTA
ESPP
Protection Act
Deferred Tax Assets
Deferred Tax Liabilities
Easy Advance
Earnings Before Interest, Taxes, Depreciation and
Amortization
Electronic Fund Transfers Act
Employee Stock Purchase Plan
EVP
FCRA
FASB
FDIA
FDICIA
FFTR
FHA
FHC
FHLB
FHLMC
FICO
FNMA
FOMC
FRA
FTE
FTP
GAAP
GLBA
HEAL
HELOC
HMDA
HTM
IRS
ITM
KDFI
LIBOR
LPO
LTV
MBS
MPP
MSRs
RB&T / the Bank Republic Bank & Trust
Executive Vice President
Fair Credit Reporting Act
Financial Accounting Standards Board
Federal Deposit Insurance Act
Federal Deposit Insurance Corporation
Improvement Act
Federal Funds Target Rate
OREO
Patriot Act
PCI
PCI-1
PCI-Sub
Prime
Federal Housing Administration
Provision
Financial Holding Company
Federal Home Loan Bank
Federal Home Loan Mortgage
Corporation
Fair Isaac Corporation
PSU
QM
R&D
Federal National Mortgage Association RBCT
Federal Open Market Committee
Federal Reserve Act
RCS
Republic / the
Company
RESPA
Full Time Equivalent
Funds Transfer Pricing
Generally Accepted Accounting
Principles in the United States
Gramm-Leach-Bliley Act
Home Equity Amortizing Loan
Home Equity Line of Credit
Home Mortgage Disclosure Act
Held to Maturity
Internal Revenue Service
Interactive Teller Machine
Kentucky Department of Financial
Institutions
London Interbank Offered Rate
ROA
ROE
RPG
RPS
RT
S&P
SAC
SBA
SEC
SERP
SSUAR
SVP
Loan Production Office
Loan to Value
Mortgage Backed Securities
TCJA
TDR
The Captive
Other Real Estate Owned
U.S. Patriot Act
Purchased Credit Impaired
PCI - Group 1
PCI - Substandard
The Wall Street Journal Prime
Interest Rate
Provision for Loan and Lease
Losses
Performance Stock Unit
Qualified Mortgage
Research and Development
Company
Republic Bancorp Capital Trust
Republic Credit Solutions
Republic Bancorp, Inc.
Real Estate Settlement
Procedures Act
Return on Average Assets
Return on Average Equity
Republic Processing Group
Republic Payment Solutions
Refund Transfer
Standard and Poor's
Special Asset Committee
Small Business Administration
Securities and Exchange
Commission
Supplemental Executive
Retirement Plan
Securities Sold Under
Agreements to Repurchase
Senior Vice President
2017 Tax Cuts and Jobs Act
Troubled Debt Restructuring
Republic Insurance Services,
Inc.
Truth in Lending Act
Trust Preferred Securities
Tax Refund Solutions
TPS Investment
U.S. Department of Agriculture
U.S. Department of Veterans
Affairs
Warehouse Lending
Mortgage Purchase Program
Mortgage Servicing Rights
NASDAQ
NA
NM
OCI
NASDAQ Global Select Market®
Not Applicable
Not Meaningful
Other Comprehensive Income
TILA
TPS
TRS
TRUP
USDA
VA
OFAC
Office of Foreign Assets Control
Warehouse
3
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. The term the “Bank” refers to the Company’s subsidiary bank: Republic
Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc.
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;
new information concerning the impact of the TCJA;
the magnitude and frequency of changes to the FFTR implemented by the FOMC of the 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 five reportable segments;
equity and fixed income market fluctuations;
client bankruptcies and loan defaults;
inflation;
recession;
natural disasters impacting Company operations;
future acquisitions;
integrations of acquired businesses;
changes in technology;
changes in applicable laws and regulations or the interpretation and enforcement thereof;
changes in fiscal, monetary, regulatory and tax policies;
changes in accounting standards;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
• monetary fluctuations;
•
•
•
changes to the Company’s overall internal control environment;
success in gaining regulatory approvals when required;
the Company’s ability to qualify for future R&D federal tax credits;
4
•
•
information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party
service providers; and
other risks and uncertainties reported from time to time in the Company’s filings with the SEC, including Part 1 Item 1A
“Risk Factors.”
PART I
Item 1. Business.
Republic is a financial holding company headquartered in Louisville, Kentucky. Republic is the parent company of the Bank and the
Captive. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-
traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates
primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across 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 a group of third-party insurance captives for which insurance may not be
available or economically feasible.
RBCT is a Delaware statutory business trust that is a 100%-owned unconsolidated finance subsidiary of Republic.
As of December 31, 2018, Republic had 45 full-service banking centers and one LPO with locations as follows:
• Kentucky — 32
• Metropolitan Louisville — 18
• Central Kentucky — 9
•
Elizabethtown — 1
•
Frankfort — 1
• Georgetown — 1
•
Lexington — 5
•
Shelbyville — 1
• Western Kentucky — 2
• Owensboro — 2
• Northern Kentucky — 3
• Covington — 1
• Crestview Hills — 1
•
Florence — 1
•
Southern Indiana — 3
•
Floyds Knobs — 1
•
Jeffersonville — 1
• New Albany — 1
• Metropolitan Tampa, Florida — 7
• Metropolitan Cincinnati, Ohio — 1
• Metropolitan Nashville, Tennessee — 3*
*Includes one LPO
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
5
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, 2018,
Republic had total assets of $5.2 billion, total deposits of $3.5 billion, and total stockholders’ equity of $690 million. Based on total
assets as of December 31, 2018, 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.
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. The SEC maintains an
internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC.
General Business Overview
As of December 31, 2018, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage
Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking”
operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the
Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.
(I) Traditional Banking segment
As of December 31, 2018 and through the date of this filing, generally all Traditional Banking products and services, except for a
selection of deposit products offered through the Bank’s separately branded national branchless banking platform, MemoryBank, were
offered through the Company’s traditional RB&T brand.
Lending Activities
The Bank’s principal lending activities consist 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 HEALs and HELOCs
through its retail banking centers. Such loans are generally collateralized by owner occupied property. During 2018, the Bank
changed the marketing of its HELOCs, still utilizing a promotional rate product, but charging a nominal level of closing costs.
Under the terms of the promotional product during 2018, clients received a fixed interest rate for 12 months at the prevailing
Prime Rate minus 0.25% (at time of application). At the expiration of the promotional rate period, rates are adjusted to an index
based on Prime. In the fourth quarter of 2018, the Bank reverted to a no closing costs promotion as a result of decreased volume
throughout the first half of the year, coupled with an increased interest rate environment.
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 and Internet Banking channels 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, ARMs 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
6
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 an 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.
Effective January 10, 2014, with the implementation of the ATR Rule, the Bank eliminated early termination penalties 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. MSRs attached to the sold portfolio are either sold along with the loan or retained. 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.
The Bank does, on occasion, purchase single family, first lien residential real estate loans made to low-to-moderate income
borrowers and/or secured by property located in low-to-moderate income areas in order to meet its obligations under the CRA.
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 Corporate Banking, Commercial
Lending, Business Banking, and Retail Banking channels.
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s CCAD.
Clients are generally located within the Bank’s market footprint, or in an adjacent area to the market footprint.
Credit opportunities are generally driven by the following: companies expanding their businesses; companies acquiring new
businesses; and/or companies refinancing existing debt from other institutions. The Bank has a focus on C&I lending and CRE
lending, specifically owner occupied. The targeted C&I credit size for client relationships is typically between $2 million to $10
million, with higher targets, $10 million to $25 million for large Corporate Banking borrowers of higher credit quality.
C&I loans typically include those secured by general business assets, 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 five years and may also involve financial covenant requirements. These
requirements are monitored by the Bank’s CCAD. Underwriting for C&I loans is based on the borrower’s capacity to repay
these loans from operating cash flows, typically measured by EBITDA, with capital strength, collateral and management
experience also important underwriting considerations.
Corporate Banking focuses on larger C&I and CRE opportunities. For CRE loans, Corporate Banking focuses on stabilized CRE
with low leverage and strong cash flows. Borrowers are generally single-asset entities and loan sizes typically range from $10
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
LIBOR; however, this is expected to change in the coming years when LIBOR is discontinued. Fixed rate terms of up to 10
years are available 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.
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Commercial Lending focuses on medium size C&I and CRE opportunities. Borrowers are generally single-asset entities and loan
sizes typically range from $5 million to $10 million. As with Corporate Banking, the primary underwriting considerations are
property cash flow (current and historical), quality of leases, financial capacity of sponsors, and collateral value of property
financed. Interest rates offered are based on both fixed and variable interest rate formulas.
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.
The Business Banking Department, and to some extent the Bank’s Retail Banking group, focuses on locally based small-to-
medium sized businesses in the Bank’s market footprint with annual revenues between $1 million and $20 million, and
borrowings between $2 million and $5 million. The needs of these clients range from expansion or acquisition financing,
equipment financing, owner-occupied real estate financing, and operating lines of credit. The Bank’s lenders utilize all
appropriate programs of the SBA to reduce credit risk exposure. In 2018, the Bank became an SBA Preferred Lending Partner,
which allows the Bank to underwrite and approve its own SBA loans in an expedited manner. Additionally, the Bank looks to
make loans to real estate investors for various types of investment properties, including rental homes and apartments, shopping
centers, office buildings, and loans to various not-for-profit agencies located within the Bank’s market footprint. The targeted
credit size for a relationship in this area is between $500,000 and $5 million.
Construction and Land Development Lending — To a lesser extent, the Bank originates business loans for the construction of
both single-family residential properties and commercial properties (apartment complexes, shopping centers, office buildings).
While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial
land into buildable lots.
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.
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 owners occupied and non-
owner occupied CRE properties.
Consumer Direct Lending — Through its Consumer Direct Lending channel, formerly named its Internet Lending channel, the
Bank accepts online loan applications for its RB&T branded products through its website at www.republicbank.com.
Historically, the majority of loans originated through its Consumer Direct Lending channel have been within the Bank’s
traditional markets of Kentucky, Florida and Indiana. Other states where loans are marketed include Alabama, Arizona,
California, Colorado, Georgia, Illinois, Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, South
Carolina, Tennessee, Utah, Washington, Wisconsin, and Virginia, as well as, the District of Columbia.
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Correspondent Lending — Primarily from its Warehouse clients, the Bank may occasionally acquire for investment single
family, first lien mortgage loans that meet the Bank’s specifications through its Correspondent Lending channel. Substantially all
loans purchased through the Correspondent Lending channel are purchased at a premium. The volume of loans purchased
through the Correspondent Lending channel may fluctuate from time to time based on several factors, including, but not limited
to, borrower demand, other investment options and the Bank’s current and forecasted liquidity position.
Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity
loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed
in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not
including products offered through Republic Processing Group), while available, are not and have not been actively promoted in
the Bank’s markets.
Dealer Services — The Bank offers dealer-floor-plan loans and consumer-indirect automobile loans through its Dealer Services
Department. Dealer-floor-plan loans are commercial lines of credit to automobile dealers secured by the dealer’s current
inventory of vehicles, typically in or around the Bank’s market footprint. The Indirect Automobile program involves establishing
relationships with automobile dealers and obtaining consumer automobile loans in a low-cost delivery method.
Aircraft Lending — Also included in the Bank’s Dealer Services Department is the Aircraft Lending Division. First offered by
the Bank in October 2017, aircraft loans typically range in amounts from $55,000 to $1,000,000, with terms up to 20 years, to
purchase or refinance a piston aircraft (non-jet aircraft), along with engine overhauls and avionic upgrades. The aircraft loan
program is open to all states, except for Alaska and Hawaii.
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 4 “Loans and Allowance for Loan and Lease
Losses.”
The Bank’s other Traditional Banking activities generally consist of the following:
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
clients that prefer to carry larger balances in highly liquid interest-bearing bank accounts.
Private Banking — The Bank provides financial products and services to high net worth individuals through its Private Banking
department. The Bank’s Private Banking officers have extensive banking experience and are trained to meet the unique financial
needs of this clientele.
Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located
throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and
ACH processing are additional services offered to commercial businesses through the Bank’s Treasury Management department.
Internet Banking — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet
Banking services and products through its website, www.republicbank.com.
Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking
application.
Other Banking Services — The Bank also provides title insurance and other financial institution-related products and services.
Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic
growth strategies.
9
See additional discussion regarding the Traditional Banking segment under Footnote 24 “Segment Information” of Part II Item 8
“Financial Statements and Supplementary Data.”
(II) Warehouse Lending segment
Through its Warehouse Lending segment, 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. 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.
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 FHLMC and the FNMA. 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 would be expected to increase, as prepayment speeds on the underlying
loans would be expected 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.”
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(IV) Tax Refund Solutions segment
Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of
federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the United States,
as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the
TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year,
during which time the segment incurs costs preparing for the upcoming year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or
state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the
taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of
revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. First offered
by TRS in 2016, the EA had the following features during its 2018, 2017, and 2016 offering periods:
Offered only during the first two months of each year;
• No EA fee was charged to the taxpayer customer;
• All fees for the EA 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 pays for another bank product, such as an RT;
• Multiple funds disbursement methods, including direct deposit, prepaid card, check, or Walmart Direct2Cash®, based on the
taxpayer-customer’s election;
• Repayment of the EA to the Bank 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.
The Company reports fees paid by the Tax Providers for the EA product as interest income on loans. EAs are generally repaid within
three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due
date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer customer’s tax return is
submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with provisions
for all probable EA losses made in the first quarter of each year. Unpaid EAs are charged-off within 111 days after the taxpayer
customer’s tax return is submitted to the applicable taxing authority, with the majority of charge-offs typically recorded during the
second quarter of the year.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the
taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is
based primarily on the prior-year’s tax refund funding patterns. 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.
In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EA’s
product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material
negative impact on the performance of the EA and therefore on the Company’s financial condition and results of operations. For the
first quarter 2019 tax season, the Company modified the EA product offering to increase the maximum advance amount and to also
charge a direct fee to the taxpayer-customer. The annual percentage rate to the taxpayer for his or her portion of the EA fee is less than
36% for all EA offering amounts.
11
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 4 “Loans and Allowance for Loan and Lease
Losses”
Republic Payment Solutions division
Through the RPS division of the TRS segment, the Bank is an issuing bank offering general-purpose-reloadable prepaid cards through
third-party service providers.
For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be
immaterial to the Company’s overall results of operations and, as the majority of the cards issued are through TRS relationships, will
be reported as part of the TRS segment. The RPS division will not be classified a separate reportable segment until such time, if any,
that it meets reporting thresholds.
See additional discussion regarding the TRS segment 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”
(V) Republic Credit Solutions segment
Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar
consumer loans and are dependent on various factors including the consumer’s ability to repay. RCS loans typically earn a higher
yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion
of RCS clients considered subprime or near-prime borrowers. Additional information regarding consumer loan products offered
through RCS follows:
• RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United
States through Elevate Credit, Inc., its third-party servicer provider. RCS sells 90% of the balances generated within two
business days of loan origination to a special purpose entity related to Elevate Credit, Inc. and retains the remaining 10%
interest. The line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale are carried
at the lower of cost or fair value.
• RCS credit-card product – From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted a credit-card
product to generally subprime borrowers across the United States through one third-party marketer/servicer. For outstanding
cards, RCS sold 90% of the balances generated within two business days of each transaction occurrence to a special purpose
entity related to its third-party marketer/servicer and retained the remaining 10% interest. During the fourth quarter of 2018,
the Bank and its third-party marketer/servicer finalized an agreement to sell 100% of the existing portfolio to an unrelated
third party. The sale of the RCS credit-card portfolio receivables was settled in January 2019.
• RCS healthcare receivables product – The Bank originates a healthcare-receivables product across the United States through
two different third-party service providers. For one third-party service provider, the Bank retains 100% of the receivables
originated. For the other third-party service provider, the Bank retains 100% of the receivables originated in some instances,
and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale are carried
at the lower of cost or fair value.
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• RCS installment loan product – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer
installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold
100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after
origination. The Bank carried all unsold loans under the program as “held for sale” on its balance sheet. At the initiation of
this program in 2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter
marked to market monthly.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any
new loans, and the subsequent sale of all recently originated loans under this program, while the two parties evaluated the
future offering of this product due to changes in the applicable state law impacting the product. Concurrent with the
suspension of this program, the Bank reclassified approximately $2.2 million of these loans from held for sale on the balance
sheet into the held-for-investment category and revalued these loans accordingly.
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains
or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
See additional discussion regarding the RCS segment 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, 2018, Republic had 1,051 FTE employees. Altogether, Republic had 1,038 full-time and 26 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 it has had and continues to have good employee relations.
Executive Officers
See Part III, Item 10. “Directors, Executive Officers and Corporate Governance.” for information about the Company’s executive
officers.
13
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 national branchless banking platform, MemoryBank, the Bank competes for digital and
mobile clients in select pilot markets under the MemoryBank brand. Through its Correspondent Lending channel, the Bank also
competes to acquire newly originated mortgage loans from select mortgage companies on a national basis. 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 and in other states where the Bank offers its products. 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 or ITMs, 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, ITMs, 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 Consumer Direct lending.
Tax Refund Solutions
The TRS segment encounters direct competition for RT and EA market share from a limited number of banks in the industry. The
Bank promotes these products to Tax Providers using various revenue-share and pricing incentives, as well as product features and
overall service levels.
Republic Payment Solutions
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 general-purpose-reloadable, 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.
14
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.
Republic Credit Solutions
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.
Supervision and Regulation
The Company and the Bank are separate and distinct entities and 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 limited under the BHCA to banking, managing or controlling banks, and other activities that the FRB has determined
to be closely related to banking. The Company, a BHC, elected to become an FHC under the GLBA, allowing it to engage in a broader
range of activities that are (i) financial in nature or incidental to financial activities or (ii) complementary to a financial activity and do
not pose a substantial risk to the safety and soundness of depository institutions or the financial system in general. The FRB conducts
periodic examinations to review the Company’s safety and soundness, and compliance with various legal and safety and soundness
requirements. As an umbrella supervisor under the GLBA's system of functional regulation, the FRB requires that FHCs operate in a
safe and sound manner so that their financial condition does not threaten the viability of affiliated depository institutions.
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 KDFI. The Bank also operates physical locations in Florida, Indiana, Ohio, and Tennessee; originates and purchases
loans on a national basis; 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’s regulation of the Company with monetary policies
and operational rules directly impact the Bank. The Bank is a member of the FHLB System. As a member of the FHLB system, the
Bank must also comply with applicable regulations of the Federal Housing Finance Agency. Regulation by each of these agencies is
intended primarily for the protection of the Bank’s depositors and the DIF and not for the benefit of the Company’s stockholders. The
Bank’s activities are also regulated under federal and state consumer protection laws applicable to the Bank’s lending, deposit, and
other activities. An adverse ruling or finding against the Company or the Bank under these laws could have a material adverse effect
on results of operations.
The Company and the Bank are also subject to the regulations of the CFPB, which was established under the Dodd-Frank Act. The
CFPB has consolidated rules and orders with respect to consumer financial products and services and has substantial power to define
the rights of consumers and responsibilities of lending institutions, such as the Bank. The CFPB does not, however, examine or
supervise the Bank for compliance with such regulations; rather, based on the Bank’s size (less than $10 billion in assets),
enforcement authority remains with the FDIC although the Bank may be required to submit reports or other materials to the CFPB
upon its request. Notwithstanding jurisdictional limitations set forth in the Dodd-Frank Act, the CFPB and federal banking regulators
may endeavor to work jointly in investigating and resolving cases as they arise.
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.
15
Regulators also 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.
The Dodd-Frank Act
The Dodd-Frank Act, among other things, implemented changes that affected the oversight and supervision of financial institutions,
provided for a new resolution procedure for large financial companies, created the CFPB, introduced more stringent regulatory capital
requirements and significant changes in the regulation of OTC derivatives, reformed the regulation of credit rating agencies, increased
controls and transparency in corporate governance and executive compensation practices, incorporated the Volcker Rule, required
registration of advisers to certain private funds, and influenced significant changes in the securitization market.
The Dodd-Frank Act included provisions which restrict interchange fees to those which are “reasonable and proportionate” for certain
debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing (known as the “Durbin
Amendment”). The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. Notably, the
interchange fee restrictions in the Durbin Amendment do not apply to the Bank because debit card issuers with total worldwide assets
of less than $10 billion are exempt.
Incentive Compensation — In 2010, the FRB and other regulators jointly published final guidance for structuring incentive
compensation arrangements at financial organizations. The guidance does not set forth any formulas or pay caps but contains certain
principles that companies are required to follow with respect to employees and groups of employees that may expose the company to
material amounts of risk. The three primary principles are (i) balanced risk-taking incentives, (ii) compatibility with effective controls
and risk management, and (iii) strong corporate governance. The FRB monitors compliance with this guidance as part of its safety and
soundness oversight.
In 2016, the FRB, SEC, and other regulators jointly published proposed rules on incentive compensation under Section 956 of the
Dodd-Frank Act. The proposed rules are intended to (i) prohibit incentive-based payment arrangements that the banking regulators
determine could encourage certain financial institutions to take inappropriate risks by providing excessive compensation or that could
lead to material financial loss, (ii) require the board of directors of those financial institutions to take certain oversight actions related
to incentive-based compensation, and (iii) require those financial institutions to disclose information concerning incentive-based
compensation arrangements to the appropriate federal regulator. The Company and the Bank would be Level 3 covered institutions
under the proposed rules because both have average total consolidated assets between $1 billion and $50 billion. As a Level 3 covered
institution, the Company and the Bank would only be subject to the most basic set of prohibitions and requirements, which prohibit
“excessive compensation, fees, or benefits” or any compensation agreement that “could lead to material financial loss.”
The proposed rules would also require that the Company’s board of directors, or a committee thereof, conduct oversight of its
incentive-based compensation program and approve incentive-based compensation arrangements for senior executive officers.
Additionally, the Company and the Bank would be required to create and maintain records that document the structure of all the
incentive-based compensation arrangements, demonstrate compliance with the final rules, and disclose those records to the
appropriate Federal regulator upon request. In July 2017, the SEC released its rulemaking agenda and did not include the rules under
Section 956 of the Dodd-Frank Act. As a result, it is not certain when the final rules may be issued.
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 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
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that do not hedge a specific identified risk. Affected institutions were required to fully conform to the Volcker Rule by July 21, 2015.
As of the date of this filing, the Bank has been and is in compliance with the Volcker Rule.
I.
The Company
Source of Strength Doctrine — Under FRB policy, a BHC 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 BHC 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 BHC’s bankruptcy, any commitment by the BHC 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 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. FRB policies and regulations also prohibit bank holding companies from engaging in unsafe and unsound banking
practices. The FDIC and the KDFI have similar restrictions with respect to the Bank.
Acquisitions — The Company is required to obtain the prior approval of the FRB under the 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 BHC, its subsidiaries and related banks, and the target
bank involved, the convenience and needs of the communities to be served and 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 (as defined below). 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 BHC 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 BHC 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 before any person or
company acquiring control of a state bank or BHC. 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 of 1934; 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 — As an FHC, the Company is permitted to engage directly or indirectly in a broader range of activities than
those permitted for a BHC under the BHCA. Permitted activities for an FHC include securities underwriting and dealing, insurance
underwriting and brokerage, merchant banking and other activities that are declared by the FRB, in cooperation with the Treasury
Department, to be “financial in nature or incidental thereto” or are declared by the FRB unilaterally to be “complementary” to
financial activities. In addition, an FHC is allowed to conduct permissible new financial activities or acquire permissible non-bank
financial companies with after-the-fact notice to the FRB. A BHC may elect to become an FHC if each of its banking subsidiaries is
well capitalized, is well managed and has at least a “Satisfactory” rating under the CRA. The Dodd-Frank Act also extended the well
capitalized and well managed requirement to the BHC. To maintain FHC status, the Company must continue to meet certain
17
requirements. The failure to meet such requirements could result in material restrictions on the activities of the Company and may also
adversely affect the Company’s ability to enter into certain transactions (including mergers and acquisitions) or obtain necessary
approvals in connection therewith, as well as loss of FHC status. If restrictions are imposed on the activities of an FHC, such
information may not necessarily be available to the public.
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.
Code of Conduct and Ethics — The Company has adopted a code of conduct and ethics that applies to all employees, including the
Company’s principal executive, financial and accounting officers. The Company’s code of conduct and ethics is posted on the Bank’s
website. The Company intends to disclose information about any amendments to, or waivers from, the code of conduct and 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 conduct and 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 association operating
in any other state, a federal savings bank or a federal thrift meeting the qualified thrift lender test engages, provided it first obtains a
legal opinion from counsel specifying the statutory or regulatory provisions that permit the activity.
Safety and Soundness – The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository
institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and
benefits. The guidelines set forth safety and soundness standards that the federal banking regulatory agencies use to identify and
address problems at FDIC member institutions before capital becomes impaired. If the FDIC determines that the Bank fails to meet
any standard prescribed by the guidelines, the FDIC may require the Bank to submit to it an acceptable plan to achieve compliance
with the standard. FDIC regulations establish deadlines for the submission and review of such safety and soundness compliance plans
in response to any such determination. We are not aware of any conditions relating to these safety and soundness standards that would
require us to submit a plan of compliance to the FDIC.
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 several legislative acts including 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
18
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 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.
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 Financial Corporation, a mixed-ownership government corporation
established to recapitalize the predecessor to the DIF. These assessments will continue until the last Financial Corporation bonds
mature in 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 two 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.
Effective July 1, 2016, the FDIC revised the deposit insurance premium assessment method for banks with less than $10 billion in
assets that have been insured by the FDIC for at least five years. This revision changed the assessment method to the financial ratios
method, which is based on a statistical model estimating the probability of failure of a bank over three years. The FDIC also updated
the financial measures used in the financial ratios method consistent with the statistical model, eliminated risk categories for
established small banks, and used the financial ratios method to determine assessment rates for all such banks (subject to minimum or
maximum initial assessment rates based upon a bank’s composite examination rating). The initial base assessment rates for all insured
institutions were reduced from 5 to 35 basis points to 3 to 30 basis points. Total base assessment rates after possible adjustments were
reduced from 2.5 to 45 basis points to 1.5 to 40 basis points. Management cannot predict what insurance assessment rates will be in
the future.
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.
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Anti-Money Laundering, Patriot ACT; OFAC Sanctions – AML measures and economic sanctions have long been a matter of
regulatory focus in the U.S. The Currency and Foreign Transactions Reporting Act of 1970, commonly referred to as the "Bank
Secrecy Act" or "BSA," requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering
by imposing various reporting and recordkeeping requirements on financial institutions. Passage of the Patriot Act renewed and
expanded this focus, extending greatly the breadth and depth of AML measures required under the BSA. The Patriot Act requires all
financial institutions to establish certain anti-money laundering compliance and due diligence programs, including enhanced due
diligence policies, procedures, and controls for certain types of relationships deemed to pose heightened risks. In cooperation with
federal banking regulatory agencies, the Financial Crimes Enforcement Network is responsible for implementing, administering, and
enforcing BSA compliance.
Failure to comply with these laws or maintain an adequate compliance program can lead to significant monetary penalties and
reputational damage. Federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining
whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary activity. There have been a number of
significant enforcement actions by regulators, as well as state attorneys general and the Department of Justice, against banks, broker-
dealers and non-bank financial institutions with respect to these laws and some have resulted in substantial penalties, including
criminal pleas.
Consumer Laws and Regulations — The Dodd-Frank Act established the CFPB in order to regulate any person who offers or provides
personal, family or household financial products or services. The CFPB is an independent “watchdog” within the Federal Reserve
System to enforce and create “Federal consumer financial laws.” Banks as well as nonbanks are subject to any rule, regulation or
guideline created by the CFPB. Congress established the CFPB to create one agency in charge of protecting consumers by overseeing
the application and implementation of “Federal consumer financial laws,” which includes (i) rules, orders and guidelines of the CFPB,
(ii) all consumer financial protection functions, powers and duties transferred from other federal agencies, such as the Federal
Reserve, the OCC, the FDIC, the Federal Trade Commission, and the Department of Housing and Urban Development, and (iii) a long
list of consumer financial protection laws enumerated in the Dodd-Frank Act. The Bank is subject to a number of federal and state
consumer protection laws, including, but not limited to, the Controlling the Assault of Non-Solicited Pornography and Marketing Act,
the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited
Funds Availability Act, the Home Mortgage Disclosure Act, the Military Lending Act, the Real Estate Settlement Procedures Act, the
Servicemembers Civil Relief Act, the Telephone Consumer Protection Act, and these laws’ respective state-law counterparts, among
many others. Moreover, as discussed in more detail below, we further comply with fair lending and privacy laws.
The CFPB is authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or
practices that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or
service, or the offering of a consumer financial product or service. The authority to prohibit “abusive” acts or practices was newly
added to federal law with the passage of the Dodd-Frank Act. The CFPB has engaged in rulemaking and taken enforcement actions
that directly impact the business operations of financial institutions offering consumer financial products or services including the
Bank and its divisions, and is expected to adopt a regulation related to the definition of “abusive” acts or practices in the near future.
Depository institutions with $10 billion or less in assets, such as the Bank, will continue to be examined for compliance with the
consumer protection laws and regulations by their primary bank regulators (the FDIC for the Bank), rather than the CFPB. The FDIC
also regulates what it considers unfair and deceptive practices under Section 5 of the Federal Trade Commission Act.
Such laws and regulations and the other consumer protection laws and regulations to which the Bank has been subject have
historically mandated certain disclosure requirements and regulated the manner in which financial institutions must deal with
customers when taking deposits from, making loans to, or engaging in other types of transactions with, such customers. The continued
effect of the CFPB on the development and promulgation of consumer protection rules and guidelines and the enforcement of federal
“consumer financial laws” on the Bank, if any, cannot be determined with certainty at this time.
Community Reinvestment Act and the Fair Lending Laws – Banks have a responsibility under the CRA and related regulations of the
FDIC to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal
Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution’s failure to comply with the provisions of the CRA could, at a minimum,
result in regulatory restrictions on its activities and the denial of applications. In addition, an institution’s failure to comply with the
Equal Credit Opportunity Act and the Fair Housing Act could result in the FDIC, other federal regulatory agencies or the Department
of Justice, taking enforcement actions against the institution. Failure by the Bank to fully comply with these laws could result in
20
material penalties being assessed against the Bank. In May 2018, 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.
Privacy and Data Security – The FRB, FDIC, and other bank regulatory agencies have adopted guidelines (the “Guidelines) for
safeguarding confidential, personal customer information. The Guidelines require each financial institution, under the supervision and
ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive
written information security program designed to ensure the security and confidentiality of customer information, protect against any
anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any customer. If the Bank fails to properly safeguard customer
information or is the subject of a successful cyber-attack, it could result in material fines and/or liabilities that would materially affect
the Company’s results of operations.
In addition, various U.S. regulators, including the Federal Reserve and the SEC, have increased their focus on cyber-security through
guidance, examinations and regulations. The Company has adopted a customer information security program that has been approved
by the Company’s Board of Directors.
The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal
information about consumers to non-affiliated third parties. In general, the statute requires explanations to consumers on policies and
procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits
disclosing such information except as provided in the banking subsidiary’s policies and procedures. In addition to the GLBA, the
Company and the Bank are also subject to state and international privacy laws.
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.
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 BHC, 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 BHC, or for any assistance provided by the FDIC to another FDIC-insured depository institution controlled by the same BHC
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 eleven federally chartered regional
FHLBs that are regulated by the Federal Housing Finance Agency. 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 MPP. The Bank has never sold loans to the MPP.
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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 depository 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.
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.
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: (a) 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 (b) 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 — The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by
banking regulators. Regulatory 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 used 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).
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.
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Banking regulators have categorized the Bank as well-capitalized. For purposes of prompt corrective action, “well capitalized” banks
must have a minimum 6.5% Common Equity Tier 1 Risk-Based Capital ratio, 8.0% Tier 1 Risk-Based Capital ratio, 10.0% Total
Risk-Based Capital ratio and 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 phased in from 2016 through 2019 on the following schedule: a capital conservation buffer of 0.625%
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.
As of December 31, 2018 and 2017, the Company’s capital ratios were as follows:
December 31, (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
2018
2017
Amount
Ratio
Amount
Ratio
$
$
$
$
757,726
654,258
16.80 % $
14.52
694,369
591,592
16.04 %
13.69
673,051
609,583
14.92 % $
13.53
612,315
548,823
14.15 %
12.70
713,051
609,583
15.81 % $
13.53
651,600
548,823
15.06 %
12.70
713,051
609,583
14.11 % $
12.06
651,600
548,823
13.21 %
11.15
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.
In addition, a BHC 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
23
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 an FHC, such as the Company, 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 an 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 an 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
BHCA without prior FRB approval. Unless the period for compliance is extended by the FRB, if an 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 BHC that has not elected to be treated as an FHC. The Company is currently classified as
an FHC.
Under 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 Regulation and Legislative Initiatives
Any change in the regulations affecting the Bank’s operations is not predictable and could affect the Bank’s operations and
profitability. The U.S. Congress and state legislative bodies also 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.”
Item 1A. Risk Factors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in Republic’s 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
24
“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 2018 as of September 30, 2018. 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 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 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 “Accounting Standards Updates.”
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, assurance 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.
TRADITIONAL BANK LENDING AND THE 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. If the Bank relies on incomplete and/or
inaccurate information, the Bank may incur additional charge-offs that adversely affect its 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
25
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.
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 FHLMC and the FNMA. 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, 2018, the Bank’s Correspondent Lending channel maintained
loans with collateral in 25 different states, with the largest concentration of 74% 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 Consumer Direct 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 Consumer
Direct 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,
26
failure to appropriately identify the end-borrower could result in regulatory sanctions resulting from failure to comply with various
customer identification regulations.
BANK OWNED LIFE INSURANCE
The Bank holds a significant amount of BOLI, which creates credit risk relative to the insurers and liquidity risk relative to the
product. At December 31, 2018, the Bank held 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.
WAREHOUSE LENDING
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.
27
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 number of clients may materially impact the Company’s results of
operations.
REPUBLIC PROCESSING GROUP
The Company’s lines of business and products not typically associated with traditional banking expose earnings to additional risks and
uncertainties. The RPG operations are comprised of two reportable segments: TRS and 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.
TAX REFUND SOLUTIONS
The TRS segment 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 segment. Any failure, sustained
interruption or breach in security, including the cyber 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 revenue without a
corresponding decrease in expenses.
The Bank’s EA and RT products represent a significant third-party management risk, and if RB&T’s third-party service providers fail
to comply with all the statutory and regulatory requirements for these products or if RB&T fails to properly monitor its third-party
service providers offering these products, it could have a material negative impact on earnings. TRS and its third-party service
providers 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 service providers or failure of RB&T to properly monitor the compliance of its third-
party service providers 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 taxpayer customer prior to RB&T
receiving the taxpayer customer’s refund as claimed on the return. Because there is no recourse to the taxpayer customer if the EA is
not paid off by the taxpayer 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 IRS revenue
protection strategies, including audits of returns, errors in the tax return, tax return fraud and tax debts not previously disclosed to
28
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, if refund payment
patterns for a given tax season meaningfully change, if the federal government fails to timely deliver refunds, or if 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 determining factor of the RPG operations’ overall net earnings.
Changes to the EA’s product parameters by management could have a material negative impact on the performance of the EA. In
response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EA’s product
parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative
impact on the performance of the EA and therefore on the Company’s financial condition and results of operations.
Due diligence measures implemented by the federal and state governments, which delay the timing of individual tax refund payments
or possibly deny those individual payments outright, could present an increased credit risk to the Company. 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
has generally driven longer periods between the filing of a tax return and the receipt of the corresponding refund. The federal
government, specifically as a result of the Protecting Americans from Tax Hikes Act of 2015, announced that taxpayers filing tax
returns with certain characteristics will not receive their corresponding refunds before February 15. 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. 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 EA product
parameters, 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.
REPUBLIC CREDIT SOLUTIONS
Consumer loans originated through the RCS segment represent a higher credit risk than Traditional Bank loans. RCS originates a
short-term line-of-credit product, sells 90% of the balances maintained through this product within two days of balance origination
and retains a 10% interest. This product is unsecured and made to borrowers with below prime credit scores, therefore representing an
elevated credit risk. The loss rates for this product has consistently been higher than Traditional Bank loss rates for unsecured
consumer loans. A material increase in RCS loan charge-offs would have a material adverse effect on the Bank’s financial condition
and results of operations.
RCS revenues and earnings are highly concentrated in its line-of-credit product. For the year ended December 31, 2018, RCS’s
revenues and earnings were concentrated in one line-of-credit product. Through the Bank, RCS works with Elevate Credit, Inc. to
market, originate and service this line-of-credit product. The discontinuation of this line-of-credit product would have a material
adverse effect on the Bank’s financial condition and results of operations.
RCS loans represent a significant compliance and regulatory risk, and if the Company fails to comply with all statutory and
regulatory requirements it could have a material negative impact on the Company’s earnings. Federal and state laws and regulations
govern numerous matters relating to the offering of RCS loans. Failure to comply with laws relating to the permissibility of interest
rates and fees charged could have a material negative impact on the Company’s earnings.
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.
29
A pause in the FOMC’s increases to short-term interest rates may lead to reduced profitability. The FOMC of the FRB has
periodically increased short-term interest rates since 2015. These increases have been generally positive for the Bank’s net interest
margin and overall profitability, as the Bank has been able to reprice its interest-earning assets higher and at a faster pace than it has
repriced its interest-bearing deposits. This lag effect occurs because many banks have deposit accounts whose rates are decision-based
and not tied to a specific market-based index, while most interest earning assets are tied to a specific market-based index. If the FOMC
does not continue to increase short-term interest rates in the future, but leaves them unchanged, the Bank’s net interest margin and
profitability may be negatively impacted because the yield on the Bank’s interest-earning assets may remain stagnant, while the cost
of its interest-bearing deposits continues to rise as competition for deposits forces many banks to decide to raise deposit rates higher
for liquidity and/or growth purposes. A rise in the Bank’s cost of interest-bearing deposits without a corresponding increase in the
yield on its interest-earning assets would have an adverse effect on the Bank’s net interest margin and overall results of operations.
A flattening or inversion of the 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 interest-bearing liabilities tend to be
shorter in duration than its interest-earning assets, when the yield curve flattens or even inverts, the Bank’s net interest margin could
decrease as its cost of funds rises higher and at a faster pace than the yield on its interest-earning assets. A rise in the Bank’s cost of
interest-bearing liabilities without a corresponding increase in the yield on its interest-earning assets, would have an adverse effect on
the Bank’s net interest margin and overall results of operations.
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 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;
30
• 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;
• 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 Vice Chairman 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
31
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 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.
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. Federal and state taxing
authorities have continued to be 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.
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
32
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.
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 directly against the Company, or against the Company’s clients or vendors 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, the Bank’s clients, 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
riskier 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 product offerings, 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.
The Company’s ability to successfully complete acquisitions will affect its ability to grow and compete effectively in its market
footprint. The Company has announced plans to pursue a policy of growth through acquisitions 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
33
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 and failed 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, 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 a group of 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
34
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, 2018, Republic had 32 banking centers located in Kentucky, seven banking centers located in Florida,
three banking centers in Indiana, two banking centers and a loan production office in Tennessee, and one banking center in Ohio.
The location of Republic’s facilities, their respective approximate square footage, and their form of occupancy are as follows:
Approximate
Square
Footage
Owned (O)/
Leased (L)
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
5,000 O/L(2)
4,000 O/L(2)
6,000 O
3,000 O
4,000 L
4,000 L
3,000 L
4,000 L
5,000 O
2,000 L
Bank Offices
Kentucky Banking Centers:
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
Lexington
3098 Helmsdale Place
3608 Walden Drive
2401 Harrodsburg Road
641 East Euclid Avenue
333 West Vine Street
Northern Kentucky
535 Madison Avenue, Covington
25 Town Center Blvd., Suite 104, Crestview Hills
8513 U.S. Highway 42, Florence
Owensboro
3500 Frederica Street
3332 Villa Point Drive, Suite 101
(continued)
35
Bank Offices
(continued)
Elizabethtown, 1690 Ring Road
Frankfort, 100 Highway 676
Georgetown, 430 Connector Road
Shelbyville, 1614 Midland Trail
Florida Banking Centers:
12933 Walsingham Road, Largo
9037 U.S. Highway 19, Port Richey
6300 4th Street N, St. Petersburg
6600 Central Avenue, St. Petersburg
7800 Seminole Blvd., Seminole
11502 North 56th Street, Temple Terrace
6906 E. Fowler Avenue, Temple Terrace, FL 33617
1300 North West Shore Blvd. Suite 150, Tampa
Southern Indiana Banking Centers:
4571 Duffy Road, Floyds Knobs
3141 Highway 62, Jeffersonville
3001 Charlestown Crossing Way, New Albany
Tennessee Banking Centers:
113 Seaboard Lane, Franklin
2034 Richard Jones Road, Nashville
Tennessee Loan Production Office:
8 Cadillac Drive, Brentwood
Ohio Banking Center:
4030 Smith Road, Norwood
Support and Operations:
200 South Seventh Street, Louisville, KY
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
Approximate
Square
Footage
Owned (O)/
Leased (L)
4,000 L
3,000 O/L(2)
5,000 O/L(2)
6,000 L(2)
4,000 O
3,000 L
10,000 O
9,000 O
3,000 O
3,000 L
2,088 L
3,000 L
4,000 O/L(2)
4,000 O
2,000 L
2,000 L
3,000 L
4,000 L
5,000 L
64,000 L(1)
4,000 O
3,000 O
3,000 O
(1) Locations are leased from partnerships in which the Company’s Chairman and Chief Executive Officer, Steven E. Trager, its Vice Chairman and President, A.
Scott Trager, or family members of Steven E. Trager and A. Scott Trager, have a financial interest. 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 20 “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.
36
Item 3. Legal Proceedings.
In the ordinary course of operations, Republic and 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.
37
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market and Dividend Information
At February 15, 2019, the Company’s Class A Common Stock was held by 605 shareholders of record and the Class B Common
Stock was held by 103 shareholders of record. Republic’s Class A Common Stock is traded on the NASDAQ under the symbol
“RBCAA.” 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 13 “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
independent trustee administering the plan from time to time in the open market in the form of broker’s transactions. As of December
31, 2018, the trustee held 222,850 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 2018 are included in the following table:
Period
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
Total Number of Maximum Number
Shares Purchased of Shares that May
as Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Shares Purchased Paid Per Share
or Programs
or Programs
— $
5,695
14,100
19,795 $
—
44.82
40.54
41.77
—
5,695
14,100
19,795
203,901
During 2018, the Company repurchased 19,795 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, 2018, the Company had 203,901 shares which could be repurchased under its current share repurchase programs.
During 2018, there were approximately 30,137 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.
38
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 S&P 500 Index. The graph covers the
period beginning December 31, 2013 and ending December 31, 2018. 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, 2013.
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,
2013
2014
2015
2016
2017
2018
Republic Class A
Common Stock (RBCAA)
NASDAQ Bank Index
S&P 500 Index
$
100.00 $
100.00
100.00
103.85 $
104.92
114.27
114.39 $
114.20
113.02
176.44 $
157.56
130.04
173.58 $
166.16
157.22
180.66
138.50
144.79
Republic Bancorp Class A Common Stock
NASDAQ Bank Index
S&P 500 Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$-
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2015
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2018
39
Item 6. Selected Financial Data.
The following table sets forth Republic Bancorp Inc.’s selected financial data from 2014 through 2018. 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:
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
2018
$
351,474
543,771
21,809
4,148,227
(44,675)
16,300
64,883
5,240,404
1,003,969
2,452,176
3,456,145
Securities sold under agreements to repurchase and other short-term
borrowings
Federal Home Loan Bank advances
Subordinated note
Total liabilities
Total stockholders’ equity
182,990
810,000
41,240
4,550,470
689,934
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
Total assets
Noninterest-bearing deposits
Interest-bearing deposits
Total interest-bearing liabilities
Total stockholders’ equity
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 expense
Income before income tax expense
Income tax expense
Net income
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 expense
Income before income tax expense
Income tax expense
Net income
(continued)
$
255,708
542,258
4,094,918
(47,774)
5,130,628
1,147,432
2,445,385
3,268,860
666,979
$
$
256,181
30,123
226,058
31,368
63,425
163,852
94,263
16,411
77,852
203,764
27,238
176,526
3,568
35,380
144,162
64,176
9,986
54,190
40
As of and for the Years Ended December 31,
2015
2016
2017
$
$
$
$
299,351
591,458
16,989
4,014,034
(42,769)
16,300
63,356
5,085,362
1,022,042
2,411,116
3,433,158
204,021
737,500
41,240
4,452,938
632,424
188,427
574,027
3,831,406
(39,202)
4,826,208
1,073,181
2,267,663
3,091,970
628,329
218,778
20,258
198,520
27,704
58,414
150,844
78,386
32,754
45,632
179,986
19,284
160,702
3,773
32,410
132,794
56,545
23,097
33,448
$
$
$
$
289,309
534,139
15,170
3,810,778
(32,920)
16,300
61,794
4,816,309
971,952
2,188,740
3,160,692
173,473
802,500
41,240
4,211,903
604,406
130,889
572,599
3,568,383
(29,880)
4,485,829
894,049
2,058,592
2,964,981
597,463
173,992
17,938
156,054
14,493
57,509
130,107
68,963
23,060
45,903
156,252
17,831
138,421
3,945
33,350
116,190
51,636
16,777
34,859
$
$
$
$
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
$
$
$
$
2014
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
Item 6. Selected Financial Data. (continued)
(in thousands, except per share data, FTEs and # of banking centers)
2018
2017
2016
2015
2014
As of and for the Years Ended December 31,
Per Share Data:
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Period-end 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
Cash dividends declared per share:
Class A Common Stock
Class B Common Stock
Market value per share at December 31,
Book value per share at December 31,(2)
Tangible book value per share at December 31,(2)
Performance Ratios:
Return on average assets
Return on average equity
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
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:
Period-end FTEs(5) - Total Company
Period-end FTEs - Core Bank
Number of banking centers
(continued)
20,960
21,065
18,675
2,213
3.76
3.41
3.74
3.40
0.968
0.880
38.72
33.03
31.98
$
$
$
$
$
$
$
$
20,921
21,007
18,607
2,243
2.21
2.01
2.20
2.00
0.869
0.790
38.02
30.33
29.27
$
$
$
$
20,942
20,954
18,615
2,245
2.22
2.02
2.22
2.01
0.825
0.750
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
1.52 %
11.67
57
5.24
0.92
0.47
4.32
4.62
3.70
13.00 %
16.80
14.92
15.81
14.11
26
2.50
0.95 %
7.26
59
4.76
0.66
0.29
4.10
4.32
3.55
13.02 %
16.04
14.15
15.06
13.21
39
2.29
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
1,051
968
45
997
915
45
938
869
44
785
726
40
723
672
41
41
Item 6. Selected Financial Data. (continued)
(dollars in thousands)
2018
As of and for the Years Ended December 31,
2016
2015
2017
2014
Credit Quality Data and Ratios:
Credit Quality Asset Balances:
Nonperforming Assets - Total Company:
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
Nonperforming Assets - Core Bank(1):
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
Delinquent loans:
Delinquent loans - Core Bank
Delinquent loans - RPG(6)
Total delinquent loans - Total Company
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans
Nonperforming assets to total loans
(including OREO)
Nonperforming assets to total assets
Allowance to total loans
Allowance to nonperforming loans
Delinquent loans to total loans(7)
Net loan charge-offs to average loans
Credit Quality Ratios - Core Bank:
Nonperforming loans to total loans
Nonperforming assets to total loans
(including OREO)
Nonperforming assets to total assets
Allowance to total loans
Allowance to nonperforming loans
Delinquent loans to total loans
Net charge-offs to average loans
$
15,993
$
14,118
$
15,892
$
21,712
$
23,337
145
16,138
160
16,298
15,993
13
16,006
160
16,166
8,875
7,087
15,962
$
$
$
$
$
$
$
$
$
$
956
15,074
115
15,189
14,118
19
14,137
115
14,252
8,460
5,641
14,101
$
$
$
$
$
167
16,059
1,391
17,450
15,892
85
15,977
1,391
17,368
6,821
2,137
8,958
$
$
$
$
$
224
21,936
1,220
23,156
21,712
224
21,936
1,220
23,156
11,485
246
11,731
$
$
$
$
$
322
23,659
11,243
34,902
23,337
322
23,659
11,243
34,902
15,710
141
15,851
0.39 %
0.38 %
0.42 %
0.66 %
0.78 %
0.39
0.31
1.08
277
0.38
0.72
0.38
0.30
1.07
284
0.35
0.47
0.46
0.36
0.86
205
0.24
0.25
0.70
0.55
0.83
125
0.35
0.07
1.14
0.93
0.80
103
0.52
0.05
0.40 %
0.36 %
0.42 %
0.66 %
0.78 %
0.40
0.32
0.78
197
0.22
0.06
0.36
0.28
0.77
213
0.21
0.04
0.46
0.36
0.74
175
0.18
0.05
0.70
0.55
0.78
118
0.35
0.05
1.15
0.93
0.80
103
0.52
0.08
42
Item 6. Selected Financial Data. (continued)
(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 GAAP to tangible stockholders’ equity in accordance with
applicable regulatory requirements, a non-GAAP measure. The Company provides the tangible book value per share, another 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 - GAAP (a)
Less: Goodwill
Less: Mortgage servicing rights
Less: Core deposit intangible
Tangible stockholders' equity - Non-GAAP (c)
Total assets - GAAP (b)
Less: Goodwill
Less: Mortgage servicing rights
Less: Core deposit intangible
Tangible assets - Non-GAAP (d)
2018
689,934
16,300
4,919
654
668,061
$
$
$ 5,240,404
16,300
4,919
654
$ 5,218,531
2017
632,424
16,300
5,044
858
610,222
$
$
$ 5,085,362
16,300
5,044
858
$ 5,063,160
2016
604,406
16,300
5,180
1,070
581,856
$
$
$ 4,816,309
16,300
5,180
1,070
$ 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
Total stockholders' equity to total assets - GAAP (a/b)
Tangible stockholders' equity to tangible assets - Non-GAAP (c/d)
13.17 %
12.80 %
12.44 %
12.05 %
12.55 %
12.14 %
13.63 %
13.32 %
14.91 %
14.57 %
Number of shares outstanding (e)
20,888
20,850
20,860
20,897
20,848
Book value per share - GAAP (a/e)
Tangible book value per share - Non-GAAP (c/e)
$
33.03
31.98
$
30.33
29.27
$
28.97
27.89
$
27.59
26.87
$
26.80
26.08
(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 gains (losses) on sales, calls and impairment of investment securities, if applicable.
(4) The cost of average 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) RPG operations consist of the TRS and RCS segments.
(7) The delinquent loans to total loans ratio equals loans 30-days-or-more past due divided by total loans. Depending on loan class, loan delinquency is determined
by the number of days or the number of payments past due.
43
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial statements include the accounts of Republic (the “Parent Company”) and its wholly-owned subsidiaries,
the Bank and the Captive. 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. The term the “Bank” refers to the
Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary:
Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
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.”
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-
member financial institution that provides both traditional and non-traditional banking products through five reportable segments
using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery
channels allow it to reach clients across 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 a group of third-
party insurance captives for which insurance may not be available or economically feasible.
RBCT is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
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;
new information concerning the impact of the TCJA;
the magnitude and frequency of changes to the FFTR implemented by the FOMC of the 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 five reportable segments;
equity and fixed income market fluctuations;
client bankruptcies and loan defaults;
inflation;
recession;
natural disasters impacting Company operations;
future acquisitions;
integrations of acquired businesses;
changes in technology;
44
changes in applicable laws and regulations or the interpretation and enforcement thereof;
changes in fiscal, monetary, regulatory and tax policies;
changes in accounting standards;
•
•
•
• monetary fluctuations;
•
•
•
•
changes to the Company’s overall internal control environment;
success in gaining regulatory approvals when required;
the Company’s ability to qualify for future R&D federal tax credits;
information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party
service providers; and
other risks and uncertainties reported from time to time in the Company’s filings with the SEC, including Part 1 Item 1A
“Risk Factors.”
•
Issued but Not Yet Effective Accounting Standards Updates
For disclosure regarding the impact to the Company’s financial statements of issued-but-not-yet-effective ASUs, see Footnote 1
“Summary of Significant Accounting Policies” of Part II Item 8 “Financial Statements and Supplementary Data.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reported periods.
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 and Provision
• Goodwill and Other Intangible Assets
• Mortgage Servicing Rights
•
Income Tax Accounting
•
Investment Securities
Allowance and Provision — 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.
45
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 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 estimated
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 estimated 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 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.
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 TDR, 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:
• Current year to date historical loss factor average
• Rolling four quarter average
46
• 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
• Rolling thirty-six quarter average
• Rolling forty quarter 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 consider other significant factors that may be necessary or prudent in order to reflect probable incurred losses
in the total loan portfolio.
Management’s Evaluation of the Allowance
Management evaluates the Allowance for its more traditional Core Banking operations differently than its non-traditional RPG
operations. Core Banking operations consist of the Company’s Traditional Banking, Warehouse Lending and Mortgage Banking
segments. RPG operations consist of the Company’s TRS and RCS segments.
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 December 31, 2018 compared to 6% at December 31, 2017.
The Core Bank’s five-year annual average for this ratio was 7% as of December 31, 2018. Management believes the Core Bank’s net
charge-off ratio to beginning Allowance was within a reasonable range at December 31, 2018 and 2017.
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 five to twelve years. The Core Bank’s Allowance exhaustion
rates at December 31, 2018 and 2017 were 8.4 years and 10.0 years compared to the five-year annual average of 7.2 years as of
47
December 31, 2018. Management believes the Core Bank’s Allowance exhaustion rates were within a reasonable range at
December 31, 2018 and 2017.
Based on management’s calculation, a Core Bank Allowance of $32 million, or 0.78% of total loans and leases, was an adequate
estimate of probable incurred losses within the loan portfolio as of December 31, 2018 compared to $30 million, or 0.77%, at
December 31, 2017. This estimate resulted in Core Banking Provision of $3.6 million during 2018 compared to $3.8 million in 2017.
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, 2018 and 2017 primarily related to loans originated and held for investment through the RCS
segment. RCS generally originates small-dollar, consumer 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. RCS loans typically earn a higher yield but also
have higher credit risk compared to loans originated through Core Banking operations, with a significant portion of RCS clients
considered subprime or near-prime borrowers.
RCS’s short-term line-of-credit product represented 36% and 42% of the RCS held-for-investment loan portfolio at December 31,
2018 and 2017. For this product, management conducted an analysis of historical losses and delinquencies by month of loan
origination when determining the Allowance through September 30, 2018. Subsequent to September 30, 2018, management conducted
an analysis of its line-of-credit product using a method similar to that employed for pooled loans collectively evaluated, as described
above. This change in method of analysis did not a have a material impact on the Allowance calculated for RCS’s line-of-credit
product as of December 31, 2018, September 30, 2018 or December 31, 2017. For RCS’s other products, the Allowance is and has
been traditionally estimated using a method similar to that employed for pooled loans collectively evaluated, as described above.
RPG maintained an Allowance for two loan products offered through its RCS segment at December 31, 2018, including its line-of-
credit product and its healthcare-receivables product. At December 31, 2018, the Allowance to total loans estimated for each RCS
product ranged from as low as 0.25% for its healthcare-receivables portfolio to as high as 40% for its line-of-credit portfolio. A lower
reserve percentage was provided for RCS’s healthcare receivables at December 31, 2018, as such receivables have recourse back to
the Company’s third-party service providers in the transactions. Based on management’s calculation, an Allowance of $13 million, or
13%, of total RPG loans was an adequate estimate of probable incurred losses within the RPG portfolio as of December 31, 2018
compared to an Allowance of $13 million, or 16%, at December 31, 2017.
RPG’s TRS segment first offered its EA tax-credit product during the first two months of 2016 and again during the first two months
of 2017 and 2018. An Allowance for losses on EAs is estimated during the limited, short-term period the product is offered. EAs are
generally repaid within three weeks of origination. Provisions for loan losses on EAs are estimated when advances are made, with all
provisions made in the first quarter of each year. No Allowance for EAs existed as of December 31, 2018 and 2017, as all EAs
originated during the first two months of each year had either been paid off or charged-off within 111 days of origination. The
majority of EA charge-offs are recorded during the second quarter of each year.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the
taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is
based primarily on the prior-year’s tax refund funding patterns. 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.
In response to changes in the legal, regulatory and competitive environment, management annually reviews and revises the EA’s
product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material
negative impact on the performance of the EA and therefore on the Company’s financial condition and results of operations. For the
first quarter 2019 tax season, the Company modified the EA product offering to increase the maximum advance amount and to also
charge a direct fee to the taxpayer-customer. The annual percentage rate to the taxpayer for his or her portion of the EA fee is less than
36% for all EA offering amounts.
See additional discussion regarding the EA product under the sections titled:
• Part I Item 1A “Risk Factors”
48
• Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 4 “Loans and Allowance for Loan and Lease
Losses”
RPG recorded a net charge of $27.8 million, $23.9 million, and $10.5 million to the Provision during 2018, 2017 and 2016, with the
Provision for each year primarily due to net losses on EAs and growth in short-term, consumer loans originated through the RCS
segment. If the number 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.
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 at both December 31, 2018 and 2017 was not impaired and
is properly recorded in the consolidated financial.
Other intangible assets consist of 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 Cornerstone acquisition, the Company maintained $654,000 and $858,000 of CDI assets as
of December 31, 2018 and 2017. The Cornerstone related CDI is scheduled to amortize through 2022.
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, 2018 and 2017, management determined there was no impairment within
the MSR portfolio.
The Bank’s carrying value of its MSR portfolio was $5 million at both December 31, 2018 and 2017.
49
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 DTL or DTA 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 income
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.
The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018.
The Company incurred a charge of $6.3 million to income tax expense during 2017 representing the decrease in value of its net DTA
upon enactment of the TCJA. At December 31, 2017, except for a planned cost-segregation study, based on facts and circumstances
known at that time, the Company believed it had substantially completed its accounting for the tax effects of the TCJA.
During 2018, the Company began and completed a cost-segregation study. The Company’s cost-segregation study assigned revised
tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets
allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income
tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. The Company also
made the decision to adopt an automatic tax-accounting-method change related to deferred loan costs during the third quarter of 2018,
as it was preparing its 2017 federal tax return. The Company’s tax-accounting-method change related to the immediate recognition of
loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The cost-
segregation study and the change in tax-accounting-method did result in a further impact from the TCJA, as they affected the
Company’s 2017 federal tax return due October 15, 2018.
In addition to the completed cost-segregation study and the change in the tax-accounting-method related to loan origination costs, the
Company also completed an R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits
dating back to 2014. In total, these three tax-related items provided $3.4 million in federal income tax benefits for 2018, of which $3.2
million was the cumulative benefit related to years prior to 2018.
There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, or additional
information concerning the TCJA’s impact on the Company’s net DTAs, 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, 2018 and 2017.
Investment Securities — 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.
50
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 with a total carrying value of $4 million at both December 31, 2018 and 2017 for which it recorded OTTI
charges in previous years.
OVERVIEW
Total Company pre-tax net income for 2018 was $94.3 million, a 20% increase over 2017. As discussed in more detail below, net
interest margin expansion, loan and deposit growth, and continued strong credit quality within the Company’s Core Banking
operations all contributed to growth in the Company’s pre-tax net income during 2018.
Total Company net income was $77.9 million and Diluted EPS was $3.74 for 2018, representing increases of 71% and 70% over
similar metrics for 2017. As illustrated in Table 1 below, the TCJA, which among other things, lowered the federal corporate tax rate
from 35% to 21%, effective January 1, 2018, drove a meaningful discrepancy in growth between the Company’s net-income-based
metrics and pre-tax net income when comparing 2018 to 2017 and 2017 to 2016. Net-income-based metrics for 2018 included the
benefit of a 14% lower federal income tax rate, as well as the cumulative benefits of a cost segregation and R&D tax credit studies
completed by the Company during 2018. Additionally, as previously reported, the Company’s 2017 net-income-based metrics
included the negative impact of a $6.3 million charge representing the devaluation of the Company’s net DTA upon enactment of the
TCJA.
See additional detail regarding the TCJA’s impact on the Company’s income tax expense under Footnote 18 “Income Taxes” of
Part II Item 8 “Financial Statements and Supplementary Data.”
51
The following table presents Republic’s financial performance for the years ended December 31, 2018, 2017 and 2016:
Table 1 — Summary
Years Ended December 31, (dollars in thousands, except per share data)
2018
2017
2016
Income before income tax expense
Net income
Diluted EPS of Class A Common Stock
ROA
ROE
$ 94,263
77,852
3.74
1.52 %
11.67
$ 78,386
45,632
2.20
0.95 %
7.26
$ 68,963
45,903
2.22
1.02 %
7.68
Percent Increase/(Decrease)
2017/2016
2018/2017
20 %
71
70
60
61
14 %
(1)
(1)
(7)
(5)
Additional discussion follows in this section of the filing under “Results of Operations.”
General highlights by reportable segment for the year ended December 31, 2018 consisted of the following:
Traditional Banking segment
• Traditional Banking pre-tax net income increased $8.5 million, or 20%, while net income increased $19.9 million, or 85%,
for 2018 compared to 2017. Net income growth benefitted from a TCJA-driven $11.4 million decrease in income tax
expense.
• Net interest income increased $17.6 million, or 12%, to $160.4 million during 2018. Traditional Banking net interest margin
increased 21 basis points to 3.76%.
• The Traditional Banking Provision was $3.7 million for 2018 compared to $3.9 million for 2017.
• Noninterest income increased $2.5 million, or 9% during 2018.
• Noninterest expense increased $11.8 million, or 9% during 2018.
• Gross Traditional Bank loans increased by $167 million, or 5% from December 31, 2017 to December 31, 2018.
• Traditional Bank deposits grew $64 million, or 2%, from December 31, 2017 to December 31, 2018.
• Total nonperforming Traditional Bank loans to total Traditional Bank loans was 0.45% at December 31, 2018 compared to
0.41% at December 31, 2017.
• Delinquent Traditional Bank loans to total Traditional Bank loans was 0.25% at December 31, 2018 compared to 0.25% at
December 31, 2017.
Warehouse Lending segment
• Warehouse pre-tax net income decreased $1.8 million, or 12%, while net income increased $765,000, or 9% during 2018.
The TCJA drove a $2.6 million positive swing in income tax expense.
• Warehouse net interest income decreased $1.8 million, or 10%, during 2018. Warehouse net interest margin decreased 36
basis points from 2017 to 3.17% for 2018.
• The Warehouse Provision was a credit of $142,000 for 2018 compared to a credit of $150,000 for 2017.
• Total committed Warehouse lines remained at $1.1 billion from December 31, 2017 to December 31, 2018.
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• Average line usage was 48% during both 2018 and 2017.
Mortgage Banking segment
• Within the Mortgage Banking segment, mortgage banking income increased $183,000, or 4%, during 2018.
• Overall, Republic’s originations of secondary market loans totaled $177 million during 2018 compared to $160 million
during the same period in 2017, with the Company’s gain recognized as a percent of total originations decreasing to 2.17%
during 2018 from 2.48% in 2017.
Tax Refund Solutions segment
• TRS pre-tax net income increased $2.1 million, or 16%, while net income increased $3.8 million, or 46%, during 2018. The
TCJA drove a $1.7 million decrease in income tax expense.
• TRS net interest income increased $4.0 million, or 26%, during 2018.
• The TRS Provision was $10.9 million during 2018, compared to $6.5 million for 2017.
• Noninterest income was $21.6 million for 2018 compared to $18.8 million for 2017.
• Net RT revenue increased $1.5 million, or 8%, during 2018.
• Noninterest expense was $14.7 million for 2018 compared to $14.5 million for 2017.
Republic Credit Solution segment
• RCS pre-tax net income increased $6.1 million, or 69%, while net income increased $7.7 million, or 196%, during 2018. The
TCJA drove a $1.5 million decrease in income tax expense.
• RCS net interest income increased $7.7 million, or 34%, during 2018.
• The RCS Provision was $16.9 million during 2018 compared to $17.4 million for 2017.
• Noninterest income decreased $672,000, or 9%, during 2018.
• Noninterest expense increased $1.4 million, or 41%, during 2018.
• Total nonperforming RCS loans to total RCS loans was 0.14% at December 31, 2018 compared to 1.40% at
December 31, 2017.
• Delinquent RCS loans to total RCS loans was 7.97% at December 31, 2018 compared to 8.43% at December 31, 2017.
General highlights by reportable segment for the year ended December 31, 2017 consisted of the following:
Traditional Banking segment
• Pre-tax net income increased $5.7 million, or 16%, while net income decreased $1.4 million, or 6%, for 2017 compared to
2016. Approximately $5.1 million of the Company’s previously mentioned 2017 TCJA-related charge to income tax expense
was tied to the Traditional Banking segment.
• Traditional Banking net interest income increased $21.1 million, or 17%, for 2017 to $142.8 million. Traditional Banking net
interest margin increased 29 basis points for the year ended December 31, 2017 to 3.55%.
53
• The Traditional Banking Provision was $3.9 million for 2017 compared to $3.4 million for 2016.
• Noninterest income increased $1.4 million, or 5%, for 2017 compared to 2016.
• Noninterest expense increased $16.3 million, or 15%, during 2017 compared to 2016.
• Gross Traditional Bank loans increased by $224 million, or 7%, from December 31, 2016 to December 31, 2017.
• Traditional Bank deposits grew $243 million, or 8%, from December 31, 2016 to December 31, 2017.
• Total nonperforming Traditional Bank loans to total Traditional Bank loans was 0.41% at December 31, 2017 compared to
0.50% at December 31, 2016.
• Delinquent Traditional Bank loans to total Traditional Bank loans was 0.25% at December 31, 2017 compared to 0.21% at
December 31, 2016.
Warehouse Lending segment
• Warehouse pre-tax net income increased $1.4 million, or 11%, while net income increased $797,000, or 10%, for 2017
compared to 2016. Approximately $181,000 of the Company’s previously mentioned 2017 TCJA-related charge to income
tax expense was tied to the Warehouse segment.
• Warehouse net interest income increased $1.0 million, or 6%, for 2017 compared to 2016. Warehouse net interest margin
decreased six basis points from 2016 to 3.53% for 2017.
• The Warehouse Provision was a credit of $150,000 for 2017 compared to a charge of $497,000 for 2016.
• Total committed Warehouse lines increased from $1.0 billion at December 31, 2016 to $1.1 billion at December 31, 2017.
• Average line usage was 48% during 2017 compared to 57% during 2016.
Mortgage Banking segment
• Within the Mortgage Banking segment, mortgage banking income decreased $2.2 million, or 33%, during 2017 compared to
2016, with $1.1 million of the decrease 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 originations of secondary market loans totaled $160 million
during 2017 compared to $217 million during the same period in 2016.
Tax Refund Solutions segment
• TRS pre-tax net income increased $1.2 million, or 11%, while net income increased $787,000, or 10%, for 2017 compared to
2016. TRS segment did not incur a 2017 TCJA-related charge to income tax expense.
• TRS net interest income increased $8.6 million for 2017 compared to 2016.
• The TRS Provision was $6.5 million during 2017, compared to $2.8 million for 2016.
• Noninterest income was $18.8 million for 2017 compared to $19.6 million for 2016.
• Net RT revenue decreased $740,000, or 4%, during 2017 compared to 2016.
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• Noninterest expense was $14.5 million for 2017 compared to $11.7 million for 2016.
Republic Credit Solution segment
• RCS pre-tax net income increased $3.3 million, or 59%, while net income increased $353,000, or 10%, for 2017 compared to
2016. Approximately $1.7 million of the Company’s previously mentioned 2017 TCJA-related charge to income tax expense
was tied to the RCS segment.
• RCS net interest income increased $11.6 million, or 105%, for 2017 compared to 2016.
• RCS recorded a Provision of $17.4 million during 2017 compared to $7.8 million for 2016.
• Noninterest income increased $2.6 million, or 58%, for 2017 compared to 2016.
• Noninterest expense increased $1.3 million, or 61%, for 2017 compared to 2016.
• Total nonperforming RCS loans to total RCS loans was 1.40% at December 31, 2017 compared to 0.25% at
December 31, 2016.
• Delinquent RCS loans to total RCS loans was 8.43% at December 31, 2017 compared to 6.63% at December 31, 2016.
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 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 2018 vs. 2017
A large amount of the Company’s financial instruments track closely with or are primarily indexed to either the FFTR, Prime, or
LIBOR. These market rates have trended higher since December 2015, and the FOMC of the FRB has provided guidance that near-
term increases in the FFTR are possible. Additional increases in short-term interest rates and overall market rates are generally
believed by management to be favorable to the Bank’s net interest income and net interest margin in the near term. Increases in short-
term interest rates, however, could have a negative impact on net interest income and net interest margin if the Bank is unable to
maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening
or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could
negatively impact the Company’s net interest income and net interest margin. Unknown variables, which may impact the Company’s
net interest income and net interest margin in the future, include, but are not limited to, the actual steepness of the yield curve, future
demand for the Bank’s financial products and the Bank’s overall future liquidity needs.
Total Company net interest income increased $27.5 million, or 14%, during 2018 compared to the same period in 2017. Net interest
margin expansion was the primary driver of the increase in net interest income, with loan growth providing a complement to the net
interest margin expansion. Total Company net interest margin increased to 4.62% during 2018 compared to 4.32% in 2017.
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The most significant components affecting the total Company’s net interest income and net interest margin by reportable segment
follow:
Traditional Banking segment
The Traditional Banking segment’s net interest income increased $17.6 million, or 12%, during 2018 compared to 2017. The
Traditional Banking net interest margin was 3.76% for 2018, an increase of 21 basis points from 2017.
The following factors primarily drove the increases in the Traditional Bank’s net interest income and net interest margin during 2018:
•
In general, with market interest rates rising, the Traditional Bank’s interest-earning assets repriced at a faster pace than its
interest-bearing liabilities during 2018, leading to a higher spread for this operating segment. Altogether the Traditional
Bank’s net interest spread increased 17 basis points from 2017 to 2018. Contributing significantly to this overall expansion in
net interest spread was the ability of the Traditional Bank to constrain its overall funding costs related to its non-maturity
deposits, whose costs increased 17 basis points from 2017 to 2018, compared to a 60-basis-point increase in the investment
portfolio yield and a 20-basis-point increase in the Traditional Bank loan yield during these same periods.
• The difference between the Traditional Bank’s net interest margin and net interest spread was 14 basis points during 2018
compared to 10 basis points during 2017. The differential between the net interest margin and net interest spread represents
the value of the Traditional Bank’s noninterest-bearing deposits and stockholders’ equity to its net interest margin. Because
of rising short-term interest rates from December 31, 2017 to December 31, 2018, as measured by the increase of 100 basis
points in the FFTR during this period, the contribution of the Traditional Bank’s noninterest-bearing deposits and
stockholders’ equity to the net interest margin increased significantly.
• Average Traditional Bank loans outstanding, excluding loans from the Company’s 2012 FDIC-assisted transactions, grew to
$3.5 billion during 2018 from $3.2 billion during 2017, an increase of 7%. This growth was largely concentrated in the
commercial loan sector, with average CRE balances growing $121 million, or 11%, and average C&I balances growing $66
million, or 25%.
• The Traditional Bank’s 2012 FDIC-assisted transactions contributed $3.8 million less in net interest income during 2018
compared to the same period in 2017, as two large pay-offs during 2017 contributed approximately $3.5 million of accretion
to net interest income. Substantially all of the accretable discount on the acquired loans had been recognized by December
31, 2017.
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, 2018 and 2017” under “Financial Condition.”
Warehouse Lending segment
Warehouse’s net interest income decreased $1.8 million, or 10%, for 2018 compared to the same period in 2017. An internal change in
the way the Company assigns cost of funds to its Warehouse segment through its FTP methodology resulted in the Warehouse
segment’s fluctuation in net interest income. Effective January 1, 2018, the Company changed its Warehouse FTP methodology to be
more consistent with that used for other Core Bank loan products with similar pricing and duration characteristics. This change had a
$1.3 million negative comparable impact on the Warehouse net interest income for 2018 and a corresponding positive comparable
impact of $1.3 million to the Traditional Bank’s net interest income.
Total Warehouse line commitments remained at $1.1 billion from December 31, 2017 to December 31, 2018. Average line usage on
Warehouse commitments was 48% during both 2018 and 2017.
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 January 2019 projected mortgage originations to decrease 2% across
the United States from 2018 to 2019, which leads management to believe that usage rates among the Bank’s Warehouse Lending
clients may also decrease. This predicted decrease in mortgage volume, along with the competitive environment, may negatively
56
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.
Tax Refund Solutions segment
Net interest income within the TRS segment increased $4.0 million during 2018 compared to 2017. TRS’s EA product earned $17.8
million in interest income during 2018, a $3.6 million, or 25%, increase from the same period in 2017. The higher EA income was
driven by an increase in EA origination volume, as the Company originated $430 million in EAs during 2018 compared to $329
million during the 2017. The increase in EA origination volume during 2018 resulted primarily from an increase in the maximum EA
advance amount.
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 4 “Loans and Allowance for Loan and Lease
Losses”
Republic Credit Solutions segment
RCS’s net interest income increased $7.7 million, or 34%, from 2017 to 2018. The increase was driven primarily by an increase in fee
income from RCS’s line-of-credit product. Loan fees on RCS’s line-of-credit product recorded as interest income increased to $26.3
million during 2018 compared to $20.2 million during 2017 and accounted for 82% and 88% of all RCS interest income on loans
during the periods.
Future long-term growth in interest income from RCS’s line-of-credit product is restricted by a current on-balance-sheet Board-
approved risk limit of $40 million for the Company. As of December 31, 2018, the total outstanding on-balance-sheet amount,
including loans held for sale, related to this product was $34 million.
Discussion of 2017 vs. 2016
Total Company net interest income increased $42.5 million, or 27%, during 2017 compared to the same period in 2016. A 67-basis
point expansion in the Company’s net interest margin, complemented by growth in average loans throughout each of the Company’s
reportable segments, drove the increase in net interest income. Growth in fee-driven loans for TRS’s EA product and RCS’s small-
dollar consumer loans were the primary 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 reportable segment
follow:
Traditional Banking segment
Net interest income within the Traditional Banking segment increased $21.1 million, or 17%, during 2017 compared to 2016. The
Traditional Banking net interest margin was 3.55% for 2017, an increase of 29 basis points from 2016.
The increases in the Traditional Bank’s net interest income and net interest margin during 2017 were primarily attributable to the
following:
• Average Traditional Bank loans outstanding, excluding loans from the Company’s 2012 FDIC-assisted transactions, were
$3.2 billion with a weighted average yield of 4.35% during 2017 compared to $3.1 billion with a weighted average yield of
4.11% during 2016. The overall effect of these changes in rate and volume was an increase of $15.5 million in interest
income. This increase in average loans for 2017 over 2016 was driven primarily by growth in the Bank’s CRE, C&I and
C&D portfolios.
• Net interest income related to loans from the Company’s 2012 FDIC-assisted transactions was higher during 2017 compared
to 2016 primarily due to the payoff of two relatively large loans. When loans from these transactions are paid off, all
57
unearned discount on such loans is immediately accreted into income. Accretion income during 2017 from this portfolio was
$3.5 million compared to $1.1 million in 2016. Overall, the average balance of the portfolio was $12 million with a yield of
37.11% during 2017 compared to $20 million with a yield of 13.30% in 2016.
• The weighted average cost of interest-bearing deposits during 2017 compared to 2016 increased to 0.43% from 0.29%, while
the average outstanding interest-bearing deposits increased $209 million when comparing the two periods. The net effect of
these changes in rate and volume was a decrease in net interest income of $3.7 million.
• The weighted average cost of FHLB advances during 2017 compared to 2016 declined to 1.57% from 1.87%. The average
outstanding FHLB advances decreased $20 million during the same period, with the Traditional Bank continuing to employ a
higher mix of lower cost overnight borrowings during 2017. The net effect of these changes in rate and volume was an
increase in net interest income of $2.0 million.
Warehouse Lending segment
Net interest income within the Warehouse Lending segment increased $1.0 million, or 6%, during 2017 compared to 2016. The
increase in net interest income was primarily attributable to higher average outstanding balances. Overall, average outstanding
Warehouse balances during 2017 increased $36 million, or 8%, compared to the same period in 2016.
Total Warehouse line commitments increased to $1.1 billion at December 31, 2017 from $1.0 billion at December 31, 2016, as the
Company continued to grow its Warehouse client base. Average line usage on Warehouse commitments was 48% during 2017
compared to 57% in 2016.
Tax Refund Solutions segment
Net interest income within the TRS segment increased $8.6 million during 2017 compared to 2016 primarily due to the following:
• The TRS segment’s EA product earned $14.2 million in interest income during 2017, a $9.0 million increase from 2016. The
higher EA income was driven by an increase in EA origination volume as the Company originated $329 million in EAs
during 2017 compared to $123 million during 2016. Additional demand for EAs during 2017 was partially driven by the
previously disclosed delays in certain taxpayer refunds from the U.S. Treasury due to additional fraud prevention measures
taken by the Federal government. In addition, the Company’s increase in EA dollar volume during 2017 was driven by a
higher weighted average advance amount as compared to 2016.
• Partially offsetting growth in EA-related interest income, the TRS segment did not renew a short-term commercial loan from
which it earned $1.1 million in loan fees during 2016. However, TRS did earn $635,000 in loan fees during 2017 from other
commercial loan relationships.
Republic Credit Solutions segment
Net interest income within the RCS segment increased $11.6 million during 2017 compared to 2016. The increase was driven by
product expansion at RCS over the previous 12 months, particularly within the segment’s line-of-credit product. Average RCS loans
increased to $46 million during 2017 from $17 million during 2016. Loan fees on RCS’s line-of-credit product recorded as interest
income increased to $20.2 million during 2017 compared to $10.1 million during 2016 and accounted for 88% and 92% of all RCS
interest income on loans during the periods.
58
Table 2 — Total Company Average Balance Sheets and Interest Rates
(dollars in thousands)
ASSETS
Interest-earning assets:
Federal funds sold and other interest-earning deposits
Investment securities, including FHLB stock(1)
TRS Easy Advance loans (2)
Other RPG loans(3)(6)
Outstanding Warehouse lines of credit(4)(6)
All other Traditional Bank loans(5)(6)
2018
Years Ended December 31,
2017
2016
Average
Balance
Interest
Average Average
Balance
Rate
Interest
Average Average
Balance
Rate
Interest
Average
Rate
$
255,708 $
542,258
31,112
91,923
496,380
3,475,503
4,752
13,808
17,832
32,247
25,526
162,016
1.86 % $
2.55
57.32
35.08
5.14
4.66
188,427 $
574,027
19,596
49,475
496,665
3,265,670
2,126
11,070
14,220
23,452
22,144
145,766
1.13 % $
1.93
72.57
47.40
4.46
4.46
130,889 $
572,599
5,268
23,090
460,285
3,079,740
828
8,932
5,210
12,081
18,357
128,584
0.63 %
1.56
98.90
52.32
3.99
4.18
Total interest-earning assets
4,892,884
256,181
5.24
4,593,860
218,778
4.76
4,271,871
173,992
4.07
Allowance for loan and lease losses
(47,774)
(39,202)
(29,880)
Noninterest-earning assets:
Noninterest-earning cash and cash equivalents
Premises and equipment, net
Bank owned life insurance
Other assets(1)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts
Money market accounts
Time deposits
Reciprocal money market and time deposits
Brokered deposits
109,798
46,300
64,132
65,288
$ 5,130,628
99,888
44,519
62,572
64,571
$ 4,826,208
88,190
38,591
58,242
58,815
$ 4,485,829
$ 1,120,633 $
639,560
348,670
301,291
35,231
4,341
4,026
5,699
2,289
662
0.39 % $ 1,095,276 $
0.63
1.63
0.76
1.88
554,336
266,332
235,127
116,592
2,448
1,586
3,166
1,072
1,530
0.22 % $
0.29
1.19
0.46
1.31
962,473 $
546,360
221,634
188,267
139,858
953
1,094
2,218
616
1,177
0.10 %
0.20
1.00
0.33
0.84
Total interest-bearing deposits
2,445,385
17,017
0.70
2,267,663
9,802
0.43
2,058,592
6,058
0.29
Securities sold under agreements to repurchase and other short-
term borrowings
Federal Home Loan Bank advances
Subordinated note
225,145
557,090
41,240
1,125
10,473
1,508
0.50
1.88
3.66
219,515
563,552
41,240
502
8,860
1,094
0.23
1.57
2.65
280,296
583,591
42,502
65
10,900
915
0.02
1.87
2.15
Total interest-bearing liabilities
3,268,860
30,123
0.92
3,091,970
20,258
0.66
2,964,981
17,938
0.60
Noninterest-bearing liabilities and Stockholders’ equity:
Noninterest-bearing deposits
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
1,147,432
47,357
666,979
$ 5,130,628
1,073,181
32,728
628,329
$ 4,826,208
894,049
29,336
597,463
$ 4,485,829
Net interest income
Net interest spread
Net interest margin
$ 226,058
$ 198,520
$ 156,054
4.32 %
4.62 %
4.10 %
4.32 %
3.47 %
3.65 %
(1) For the purpose of this calculation, the fair 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) Interest income for Easy Advances is composed entirely of loan fees.
(3) Interest income includes loan fees of $27.2 million, $20.8 million and $11.1 million for 2018, 2017 and 2016.
(4) Interest income includes loan fees of $3.0 million, $3.2 million and $3.2 million for 2018, 2017 and 2016.
(5) Interest income includes loan fees of $5.7 million, $7.9 million and $4.6 million for 2018, 2017 and 2016.
(6) Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all
loan premiums, discounts, fees and costs.
59
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
Year Ended December 31, 2018
Compared to
Year Ended December 31, 2017
Year Ended December 31, 2017
Compared to
Year Ended December 31, 2016
(in thousands)
Interest income:
Federal funds sold and other interest-earning deposits
Investment securities, including FHLB stock
TRS Easy Advance loans
Other RPG loans
Outstanding Warehouse lines of credit
All other Traditional Bank loans
Net change in interest income
Interest expense:
Total Net
Change
Increase / (Decrease) Due to Total Net
Change
Volume
Rate
Increase / (Decrease) Due to
Volume
Rate
$
2,626 $
2,738
3,612
8,795
3,382
16,250
934 $
(642)
7,063
16,107
(13)
9,612
1,692 $
3,380
(3,451)
(7,312)
3,395
6,638
1,298 $
2,138
9,010
11,371
3,787
17,182
466 $
22
10,733
12,606
1,520
8,013
37,403
33,061
4,342
44,786
33,360
832
2,116
(1,723)
(1,235)
2,267
9,169
11,426
Transaction accounts
Money market accounts
Time deposits
Reciprocal money market and time deposits
Brokered deposits
Securities sold under agreements to repurchase and other short-
term borrowings
Federal Home Loan Bank advances
Subordinated note
Net change in interest expense
1,893
2,440
2,533
1,217
(868)
623
1,613
414
9,865
58
277
1,145
362
(1,353)
13
(103)
—
399
1,835
2,163
1,388
855
485
610
1,716
414
9,466
1,495
492
948
456
353
437
(2,040)
179
2,320
147
16
490
176
(221)
(17)
(363)
(28)
200
Net change in net interest income
$
27,538 $
32,662 $
(5,124) $
42,466 $
33,160 $
1,348
476
458
280
574
454
(1,677)
207
2,120
9,306
Provision for Loan and Lease Losses
Discussion of 2018 vs. 2017
The Company recorded a Provision of $31.4 million during 2018, compared to $27.7 million in 2017. The most significant
components comprising the Company’s Provision by reportable segment follow:
Traditional Banking segment
The Traditional Banking Provision during 2018 was $3.7 million, compared to $3.9 million in 2017. An analysis of the Provision for
2018 compared to 2017 follows:
• Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $3.1 million and $3.7 million to the
Provision for 2018 and 2017. Loan growth primarily drove the net charge to the Provision in both periods.
60
• The Bank recorded net charges to the Provision of $643,000 and $65,000 for 2018 and 2017 for activity related to loans rated
Substandard and Special Mention. Charges of $631,000 related to three residential real estate relationships drove the 2018
Provision.
As a percentage of total loans, the Traditional Banking Allowance remained at 0.85% from December 31, 2017 to December 31, 2018.
The Company believes, based on information presently available, that it has adequately provided for Traditional Bank loan losses at
December 31, 2018.
See the sections titled “Allowance 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 a net credit of $142,000 for 2018 compared to a net credit of $150,000 for 2017. Provision expense for
both 2018 and 2017 reflects general reserves for changes in outstanding balances during the periods. Outstanding Warehouse balances
decreased $57 million during 2018 and $60 million during 2017.
As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at December 31, 2018 and 2017. The
Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses at
December 31, 2018.
Tax Refund Solutions segment
TRS recorded a net charge to the Provision of $10.9 million during 2018 compared to a net charge of $6.5 million in 2017. An
increase in net loss on EA loans resulting from both a higher volume of EA originations and a higher EA loss rate drove the increased
TRS Provision. TRS originated $430 million of EAs during 2018 compared to $329 million in 2017. The Company’s net loss on EAs
to total EA originations for 2018 increased 43 basis points from 2017 to 2.50%. Each 0.10% in estimated loan loss reserves for EAs
during 2018 equates to approximately $430,000 in Provision expense, while each 0.10% during 2017 equated to approximately
$329,000.
As of December 31, 2018 and 2017, all unpaid EAs originated during each year had been charged-off. The Company believes, based
on information presently available, that it has adequately provided for TRS loan losses at December 31, 2018.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Loan and Lease Losses” of Part II Item 8
“Financial Statements and Supplemental Data.”
Republic Credit Solutions segment
RCS recorded a Provision of $16.9 million during 2018, a decrease of $515,000 compared to same period in 2017. A $1.0 million
reduction in Provision related to RCS’s line-of-credit product was partially offset by a $495,000 increase in Provision related to RCS’s
credit-card product. The lower Provision for RCS’s line-of-credit product resulted from a seasoning of the portfolio. An increase in net
charge-offs from 2017 to 2018 primarily drove the increase in Provision related to the credit-card product.
During the second quarter of 2018, the Bank and its third-party marketer/servicer discontinued the marketing of RCS’s credit-card
product to potential new clients as the two parties deliberated the future direction of the program. During the third quarter of 2018, the
Bank and its third-party marketer/servicer reached an agreement in concept to sell 100% of the existing portfolio to an unrelated third
party. As a result, the Bank reclassified its 10% interest into a held-for-sale category and charged the entire RCS credit-card portfolio
down to its estimated net realizable value. Concurrent with this reclassification, the Company relieved all Allowance connected to this
product against the RCS Provision. During the fourth quarter of 2018, the Bank and its third-party marketer/servicer finalized the
agreement to sell 100% of its existing portfolio, with the final settlement occurring in January 2019.
The following table presents RCS Provision by product:
61
Table 4 — RCS Provision by Product
Years Ended December 31, (in thousands)
2018
2017
2016
Percent Increase/(Decrease)
2018/2017
2017/2016
Product:
Line of credit
Credit card
Hospital receivables
Total
$
$
14,100 $
2,728
53
16,881 $
15,112 $
2,233
51
17,396 $
7,413
331
32
7,776
(6.7)%
22.2
3.9
(3.0)
104 %
575
59
124
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a
percentage of total RCS loans, the RCS Allowance was 14.70% and 18.85% at December 31, 2018 and 2017. The Company believes,
based on information presently available, that it has adequately provided for RCS loan losses at December 31, 2018.
Discussion of 2017 vs. 2016
The Company recorded a Provision of $27.7 million during 2017, compared to $14.5 million in 2016. The most significant
components comprising the Company’s Provision by reportable segment follow:
Traditional Banking segment
The Traditional Banking Provision during 2017 was $3.9 million, compared to $3.4 million in 2016. An analysis of the Provision for
2017 compared to 2016 follows:
• Related to the Bank’s pass-rated and non-rated credits, the Bank recorded net charges of $3.7 million and $3.1 million to the
Provision during 2017 and 2016. Loan growth primarily drove the net charges to the Provision in both periods, as gross loans
increased $224 million during 2017 compared to $254 million during the same period in 2016. Growth during 2016 was
primarily driven by the Company’s May 2016 Cornerstone acquisition, while growth during 2017 was primarily organic in
nature. Since business-acquisition loans are purchased at fair value and the credit risk is a component of the valuation when
determining the fair value, only a minimal Provision was recorded during 2016 for loan growth attributable to the
Cornerstone acquisition.
• Related to the Bank’s loans rated Substandard and Special Mention, the Bank recorded net charges of $65,000 and $756,000
to the Provision during 2017 and 2016. Charges of $472,000 related to one CRE relationship and $234,000 related to one
C&I relationship drove the 2016 Provision.
• Related to PCI loans, the Bank recorded a net charge of $176,000 to the Provision during 2017 compared to a net credit of
$410,000 during 2016. 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 increased to 0.85% at December 31, 2017 compared to 0.83% at
December 31, 2016.
Warehouse Lending segment
The Warehouse Provision was a net credit of $150,000 for 2017 compared to a net charge of $497,000 for 2016. Provision expense for
both 2017 and 2016 reflects general reserves for changes in outstanding balances during the periods. Outstanding Warehouse balances
decreased $60 million during 2017 compared to growth of $199 million during 2016.
As a percentage of total Warehouse outstanding balances, the Warehouse Allowance was 0.25% at December 31, 2017 and 2016.
Tax Refund Solutions segment
TRS recorded a Provision of $6.5 million during 2017 compared to $2.8 million during 2016.
62
The increase in Provision at TRS was attributable to an increase in estimated losses for EA loans, as EA volume increased $206
million, or 167%, during 2017 compared to 2016. The Company recorded Provisions of 2.07% and 2.47% of total EAs originated
during 2017 and 2016. Of the $329 million in EAs originated during 2017, all were either collected or charged off at December 31,
2017.
Republic Credit Solutions segment
RCS recorded a Provision of $17.4 million during 2017, an increase of $9.6 million compared to same period in 2016. Loan growth
and an increase in the historical loss factors for general reserves resulting from a rise in charge-offs from the prior year drove the
increased 2017 Provision.
As a percentage of total RCS loans, the RCS Allowance was 18.85% and 15.40% at December 31, 2017 and 2016.
Noninterest Income
Table 5 — Analysis of Noninterest Income
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Percent Increase/(Decrease)
2017/2016
2018/2017
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
Net losses on debt securities
Net gains on other real estate owned
Other
Total noninterest income
$ 14,273 $ 13,357 $ 13,176
19,240
18,500
6,882
4,642
9,009
9,881
3,044
5,824
1,516
1,562
—
(136)
244
676
4,398
4,108
$ 63,425 $ 58,414 $ 57,509
20,029
4,825
11,159
6,225
1,527
—
729
4,658
7 %
8
4
13
7
(2)
NM
8
13
9
1 %
(4)
(33)
10
91
3
NM
177
(7)
2
NM - Not meaningful
Discussion of 2018 vs. 2017
Total Company noninterest income increased $5.0 million, or 9%, for 2018 compared to 2017. The following were the most
significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking segment
Traditional Banking noninterest income increased $2.5 million, or 9%, for 2018 compared to 2017. The most significant categories
affecting the change in noninterest income for 2018 follow:
• Service charges on deposit accounts increased $874,000, or 7%, to $14.2 million during 2018 compared to $13.4 million
during 2017 driven by an 8% growth in the Company’s transactional account base during 2018. 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 2018 and 2017 were $8.7 million and $8.1 million. The total daily overdraft charges, net of
refunds, included in interest income during 2018 and 2017 were $2.1 million and $1.8 million. A $2 per day increase in daily
overdraft charges initiated in July 2018 primarily drove the Bank’s increase in daily overdraft charges.
•
Interchange income increased $1.3 million, or 13%, due to a 9% increase in the number of active debit cards along with an
increase in usage on the Company’s existing debit cards.
63
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income increased $183,000, or 4%, during 2018 compared to 2017.
Overall, Republic’s originations of secondary market loans totaled $177 million during 2018 compared to $160 million during 2017.
The ratio of net gain on sale of mortgage loans originated for sale was 2.17% and 2.48% during 2018 and 2017.
Tax Refund Solutions segment
Within the TRS segment, noninterest income increased $2.7 million, or 14%, during 2018 compared to 2017. Net RT revenue
increased $1.5 million, or 8%, compared to 2017, consistent with a 7% increase in the number of RTs funded when comparing the two
periods. Additionally, TRS received and recorded a $1.0 million nonrefundable capital commitment fee during 2018. The fee was paid
by a third party upon the Company’s completion of its contractual obligations to build the infrastructure and disburse funds for a new
collaborative credit product offered through the Bank to the third party’s customers.
Republic Credit Solutions segment
Within the RCS segment, noninterest income decreased $672,000, or 9%, during 2018 compared to 2017. The following primarily
drove the decrease:
• Within other income, RCS recorded a $486,000 mark-to-market charge to its held-for-sale subprime credit card portfolio
during 2018.
• Within other income, RCS recorded a $425,000 first-year-guarantee payment during 2017.
• Offsetting the decreases above, program fees increased $282,000 during 2018. As illustrated in Table 6 below, the increase in
program fees resulted from an increase in fees associated with RCS’s line-of-credit and credit-card products partially offset
by a decrease in fees associated with RCS’s installment loan product. Program fees are the largest component of RCS’s
noninterest income and primarily represent net gains from the sale of consumer loans. RCS sold $782 million of consumer
loans in 2018 compared to $661 million in 2017.
The decrease in program fees associated with RCS’s installment loan product resulted from the suspension of loan originations and
sales through this program during the second quarter of 2018. Concurrent with the suspension of this program, the Bank reclassified
approximately $2.2 million of these loans from “held for sale” on the balance sheet to “held for investment” and recorded a $427,000
charge to its mark-to-market fair value adjustment for these loans. Mark-to-market adjustments for this product are recorded as a
component of program fees.
The following table presents RCS program fees by product:
Table 6 — RCS Program Fees by Product
Years Ended December 31, (in thousands)
2018
2017
2016
Percent Increase/(Decrease)
2018/2017
2017/2016
Product:
Line of credit
Credit card
Hospital receivables
Installment loans*
Total
$
$
4,486 $
1,703
144
(403)
5,930 $
3,854 $
1,376
26
392
5,648 $
2,378
122
—
334
2,834
16 %
24
454
(203)
5
62 %
1,028
—
17
99
*The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of
program fees.
64
Discussion of 2017 vs. 2016
Noninterest income increased $905,000, or 2%, for 2017 compared to 2016. The most significant components comprising the total
Company’s change in noninterest income by reportable segment follow:
Traditional Banking segment
Traditional Banking noninterest income increased $1.4 million, or 5%, for 2017 compared to 2016. The most significant categories
affecting the change in noninterest income for 2017 follow:
• Service charges on deposit accounts increased $201,000, or 2%, to $13.4 million during 2017 compared to $13.2 million
during 2016 driven by a 7% growth in the Company’s transactional account base during 2017. The total per item fees, net of
refunds, included in service charges on deposits during 2017 and 2016 were $8.1 million and $7.8 million. The total daily
overdraft charges, net of refunds, included in interest income during 2017 and 2016 were $1.8 million and $1.7 million.
•
Interchange income increased $683,000, or 8%, due to an 11% increase in the number of active debit cards and an 8%
increase in the number of transactions experienced by the Company for such cards.
• The Traditional Bank recorded an increase of $353,000 on net gains on OREO from 2017 compared to 2016.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased $2.2 million during 2017 compared to 2016.
Approximately $1.1 million of the decrease in mortgage banking income was attributable to a nonrecurring gain recorded during the
third quarter of 2016 from the bulk sale of $71 million in mortgage loans, which represented a portion of the Company’s
correspondent loan portfolio. The remainder of the decrease in mortgage banking income was consistent with a decrease in consumer
refinance activity during 2017.
Overall, excluding the aforementioned bulk loan sale, Republic’s originations of secondary market loans totaled $160 million during
2017 compared to $217 million during 2016. Excluding the bulk sale, the ratio of net gain on sale of mortgage loans originated for
sale was 2.48% and 3.07% during 2017 and 2016.
Tax Refund Solutions segment
Within the TRS segment, noninterest income decreased $799,000, or 4%, during 2017 compared to 2016. The overall decrease was
primarily attributable to a $740,000, or 4%, decrease in net RT revenue from 2016 to 2017, consistent with the 10% decrease in RT
product volume during 2017.
Republic Credit Solutions segment
Within the RCS segment, noninterest income increased $2.6 million, or 57%, during 2017 compared to 2016. The overall increase was
primarily attributable to an increase of $2.8 million in RCS program fees, which represents net gains from the sale of consumer loans.
The increase in program fees resulted from an increase in volume from RCS’s consumer loan programs. During 2017, loans sold
through the RCS programs increased $281 million, or 74%, to $661 million compared to $380 million during 2016.
65
Noninterest Expense
Table 7 — Analysis of Noninterest Expense
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Percent Increase/(Decrease)
2017/2016
2018/2017
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
Impairment of premises held for sale
Other
Total noninterest expense
Discussion of 2018 vs. 2017
$ 91,189 $ 82,233 $ 69,882
21,586
4,256
3,778
1,780
4,757
6,121
4,140
1,406
503
2,556
846
191
8,305
$ 163,852 $ 150,844 $ 130,107
24,019
4,711
5,188
1,378
4,626
7,748
3,988
1,594
388
2,410
—
1,175
11,386
24,883
4,785
4,432
1,494
4,951
9,613
4,480
1,444
94
3,459
—
482
12,546
11 %
4
2
(15)
8
7
24
12
(9)
(76)
44
—
(59)
10
9
18 %
11
11
37
(23)
(3)
27
(4)
13
(23)
(6)
(100)
515
37
16
Total Company noninterest expense increased $13.0 million, or 9%, during 2018 compared to 2017. The most significant components
comprising the change in noninterest expense by reportable segment follow:
Traditional Banking segment
For 2018 compared to 2017, Traditional Banking noninterest expense increased $11.8 million, or 9%. The following were the most
significant categories affecting the change in noninterest expense:
• Salaries and benefits expense increased $9.2 million, or 14%, driven by the following:
o Annual merit increases.
o An increase of approximately 53 Traditional Bank FTE employees over the previous 12 months to support growth.
o An $814,000 increase in healthcare benefits.
o A $1.4 million increase in incentive compensation, as the Company achieved some of its more aggressive budgeted
targets for the year, resulting in higher incentive payouts.
• New and upgraded technology implemented in the previous 12 months to support several Traditional Bank key strategic
initiatives caused data processing expenses to increase $1.1 million, or 17%. Such initiatives include improving the
Company’s client relationship management system, its online banking functionality, and the overall security of client
information and assets.
• A 12% increase in depreciation expense associated with banking center renovations over the previous year drove a $1.2
million, or 5%, increase in occupancy expense.
• Additional consulting concerning the Company’s cost segregation and R&D studies primarily drove a $648,000 increase in
legal and professional fees.
• Offsetting the increases above was a decrease of $693,000 in impairment of premises held for sale. During 2017, the
Traditional Bank recorded a $907,000 nonrecurring impairment charge for a property the Company sold in December 2018.
66
•
A reduction in marketing spend for the Traditional Bank’s separately branded digital banking products drove a $686,000
decrease in marketing expense.
Republic Credit Solutions segment
For 2018 compared to 2017, RCS noninterest expense increased $1.4 million, or 41%, during 2018 compared to 2017. The increase
was primarily driven by higher legal and professional fees resulting from corporate income-tax consultation matters and contingent
legal reserves.
Discussion of 2017 vs. 2016
Total Company noninterest expense increased $20.7 million, or 16%, during 2017 compared to 2016. The most significant
components comprising the change in noninterest expense by reportable segment follow:
Traditional Banking segment
For 2017 compared to 2016, Traditional Banking noninterest expense increased $16.3 million, or 15%. The following factors drove
the increase:
• Salaries and benefits expense increased $9.5 million, or 17%, primarily due to an increase of 48 FTE employees during 2017.
The increase in FTE employees was driven by additional staffing needed to implement the Company’s strategic initiatives.
• Occupancy expense increased $2.4 million, or 12%, driven by increases in rent, depreciation, and equipment service expense
resulting from new locations, existing banking center renovations and the cost of technology to support the Bank’s strategic
initiatives.
• Marketing and development expense increased $1.1 million, or 32%, with $430,000 of the increase attributable to the
Company’s national branchless banking platform, MemoryBank. The remainder of the increase was focused on driving loan
and deposit growth in markets outside of the Company’s Louisville, Kentucky footprint. In addition, the Company also
instituted a marketing awareness campaign in its Louisville, Kentucky market as part of a mortgage lending initiative.
• Data processing expense increased $1.1 million, primarily driven by estimated conversion-related expenses resulting from a
change in the Company’s digital-banking vendor for its commercial clients.
•
Impairment of premises held for sale increased $984,000 resulting primarily from a mark-to-market charge during the third
quarter of 2017 for a bank property that the Company sold during the fourth quarter of 2018.
Warehouse Lending segment
For 2017 compared to 2016, Warehouse noninterest expense increased $250,000, or 8%. 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.
Tax Refund Solutions segment
For 2017 compared to 2016, TRS segment, noninterest expense increased $2.8 million, or 24%, during 2017 compared to 2016. The
increase was primarily due to a $2.0 million increase in salaries and benefits expense, driven by additional staff added during 2017 to
support growth and new initiatives. The remaining increase was primarily in the other expense category and was related to an accrual
for future Tax Provider payments triggered by the attainment of certain agreed upon incentive metrics for the applicable program.
67
Republic Credit Solutions segment
For 2017 compared to 2016, RCS noninterest expense increased $1.3 million, or 61%, during 2017 compared to 2016. The increase
was primarily due to increases of $716,000 in data processing expenses and $208,000 in marketing expenses, with both increases
consistent with RCS product growth during 2017.
Income Tax Expense
Discussion of 2018 vs. 2017
On December 22, 2017, the TCJA lowered the federal corporate tax rate from 35% to 21%, effective January 1, 2018. While the
Company benefitted during 2018 from a 14% lower federal corporate tax rate, the TCJA negatively impacted 2017 because the
Company recorded a $6.3 million charge to income tax expense representing the decrease in value of its net DTA upon enactment of
the TCJA.
In addition to the income tax benefit received during 2018 from the TCJA, Republic also recognized additional federal income tax
benefits of approximately $3.4 million as part of preparing its fiscal-year 2017 federal tax return due October 15, 2018.
Approximately $3.2 million of the $3.4 million in federal income tax benefits represented cumulative benefits for years prior to 2018.
The $3.4 million of additional tax benefits recognized during 2018 was primarily driven by three distinct items, which were comprised
of (1) a cost-segregation study, (2) an automatic change in tax-accounting method, and (3) R&D federal tax credits.
During 2018, the Company began and completed a cost-segregation study. The Company’s cost-segregation study assigned revised
tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets
allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income
tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. The Company also
made the decision to adopt an automatic tax-accounting-method change related to loan origination costs during 2018, as it was
preparing its 2017 federal tax return. The Company’s tax-accounting-method change related to the immediate recognition of loan
origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The cost-segregation
study and the change in tax-accounting method did result in a further impact from the TCJA, as they affected the Company’s 2017
federal tax return due October 15, 2018.
In addition to the completed cost-segregation study and the change in the tax-accounting method related to loan origination costs, the
Company also completed an R&D tax-credit study during 2018, which resulted in the recognition of R&D credits dating back to 2014.
Driven by the lower federal corporate tax rate during 2018 and the above mentioned three distinct items, the Company’s effective tax
rate was 17% during 2018. Driven primarily by the $6.3 million TCJA-driven charge, the Company’s effective tax rate was 42% in
2017.
The most significant components comprising the change in income tax expense by reportable segment follow:
Traditional Banking segment
The Traditional Bank’s effective tax rate was 14% in 2018 and 44% in 2017. During 2018, the Traditional Bank’s effective tax rate
benefitted from the lower federal corporate tax rate, the Company’s cost segregation study, and the Company’s automatic change in
tax-accounting method. During 2017, the TCJA-driven charge tied to the Traditional Banking segment primarily represents the
decrease in value of a DTA associated with the Traditional Banking segment’s Allowance.
Tax Refund Solutions segment
TRS’s effective tax rate was 20% in 2018 and 36% in 2017. During 2018, TRS’s effective tax rate benefitted from the lower federal
corporate tax rate and the Company’s R&D federal tax credits.
68
Republic Credit Services segment
RCS’s effective tax rate was 23% in 2018 and 56% in 2017. During 2018, RCS’s effective tax rate benefitted from the lower federal
corporate tax rate and the Company’s R&D federal tax credits. During 2017, the TCJA-driven charge tied to RCS represents the
decrease in value of a DTA associated with the RCS segment’s Allowance.
Discussion of 2017 vs. 2016
As previously mentioned, the Company incurred a charge of $6.3 million to income tax expense during 2017 representing the decrease
in value of its net DTA upon enactment of the TCJA. Driven primarily by the $6.3 million TCJA-driven charge, the Company’s
effective tax rate was 42% in 2017 compared to 33% in 2016.
The most significant components comprising the change in income tax expense by reportable segment follow:
Traditional Banking segment
Driven by its portion of the TCJA-driven charge, the Traditional Banking segment’s effective tax rate was 44% in 2017 compared to
31% in 2016. The TCJA-driven charge tied to the Traditional Banking segment primarily represents the decrease in value of a DTA
associated with the Traditional Banking segment’s Allowance.
Republic Credit Services segment
Driven primarily by its portion of the TCJA-driven charge, RCS’s effective tax rate was 56% in 2017 compared to 36% in 2016. The
TCJA-driven charge tied to RCS represents the decrease in value of a DTA associated with the RCS segment’s Allowance.
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 $351 million in cash and cash equivalents at December 31, 2018 compared to $299 million at December 31,
2017. During 2018 and 2017, the Bank maintained a relatively high cash balance on its balance sheet for liquidity purposes.
For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This yield increased from 1.25% at January
1, 2017 to 2.40% at December 31, 2018. For 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 $3 million and
$3 million at December 31, 2018 and 2017.
69
Investment Securities
Table 8 — Investment Securities Portfolio
December 31, (in thousands)
2018
2017
2016
2015
2014
Available-for-sale debt securities (fair value):
U.S. Treasury securities and U.S. Government agencies
Private label mortgage backed security
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Trust preferred security
Total available-for-sale debt securities
Held-to-maturity debt securities (carrying value):
U.S. Treasury securities and U.S. Government agencies
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Obligations of state and political subdivisions
Total held-to-maturity debt securities
$ 216,873 $ 307,592 $ 294,544 $ 286,479 $ 146,922
5,250
124,256
143,171
15,063
—
434,662
5,132
92,268
113,668
14,922
3,405
515,874
4,449
106,374
87,163
15,125
3,600
524,303
4,777
73,004
87,654
15,158
3,200
478,337
3,712
169,209
72,811
9,058
4,075
475,738
—
132
19,544
45,088
463
65,227
—
151
23,437
40,175
464
64,227
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
Equity securities with a readily determinable fair value (fair
value):
Freddie Mac preferred stock
Community Reinvestment Act mutual fund
Total equity securities with a readily determinable fair value
410
2,396
2,806
473
2,455
2,928
483
2,455
2,938
173
1,011
1,184
231
1,018
1,249
Total investment securities
$ 543,771 $ 591,458 $ 534,139 $ 555,785 $ 481,348
AFS debt securities primarily consists of U.S. Treasury securities and U.S. Government agency obligations, including agency MBS
and agency CMOs. The agency MBSs primarily consist of hybrid mortgage investment securities, as well as other adjustable rate
mortgage investment securities, underwritten and guaranteed by the GNMA, the FHLMC and the FNMA. 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 SSUARs. 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.
During 2018, the Bank purchased $174 million in long-term investment debt securities, allocated among $90 million in mortgage-
backed securities, $79 million in US government agencies, and a $5 million corporate bond. The mortgage-backed securities have an
expected weighted-average yield of approximately 3.24% and a weighted average expected life of 3.53 years. The U.S. Government
agencies have an expected weighted average yield of approximately 2.83% and a weighted average life of 3.06 years. The corporate
bond has a floating rate and matures in 2026.
From 2013 to 2018, the Bank purchased various floating-rate corporate bonds. These 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 10%
and 9% of the Bank’s investment portfolio as of December 31, 2018 and 2017. During 2018, one of these bonds was downgraded to
BBB+ (S&P/Fitch), driving a significant decrease in the bond’s market value. As of December 31, 2018, this bond reflected an
unrealized loss of $942,000. The Bank does not intend to sell this bond, and it is likely that it will not be required to sell this bond
before the bond’s anticipated recovery, therefore, management does not consider this bond to have OTTI.
Strategies for the investment securities portfolio are influenced by economic and market conditions, loan demand, deposit mix, and
liquidity needs. For the past several years, the Bank has continued to utilize a general strategy within the investment portfolio of
purchasing securities with shorter-term durations. The Bank has used this general strategy for liquidity purposes and as an interest rate
70
risk management tool in what has been a long period of historically low interest rates. Management believes the Bank will likely
continue with this general strategy into the foreseeable future as market interest rates are expected to continue to rise in 2018.
Table 9 — Mortgage Backed Investment Securities
December 31, (in thousands)
2018
2017
2016
2015
2014
$
4,449 $
3,712 $
5,250
4,777 $
124,423
73,174
182,133
114,922
$ 265,548 $ 221,803 $ 192,873 $ 244,750 $ 311,806
5,132 $
92,327
147,291
169,349
92,487
106,535
110,819
Amortized
Cost
Fair
Value
Weighted
Weighted
Average
Yield
Average
Maturity in
Years
$
74,692 $
143,810
218,502
74,083
142,790
216,873
1.31 %
2.40
2.03
10,000
10,000
3,533
2,348
168,992
73,740
9,058
9,058
4,075
3,712
169,209
72,811
$ 477,115 $ 475,738
3.44
3.44
6.72
7.06
2.97
2.59
2.51
0.63
2.33
1.75
4.29
4.29
18.43
14.59
18.05
21.75
10.84
Carrying
Value
Fair
Value
Weighted
Weighted
Average
Yield
Average
Maturity in
Years
$
75 $
40,073
4,940
45,088
75
39,814
4,701
44,590
463
463
132
19,544
452
452
140
19,676
$ 65,227 $ 64,858
2.60 %
3.57
3.54
3.56
1.76 %
1.76
4.94
2.81
3.33
0.75
4.04
7.10
4.38
3.16
3.16
16.00
20.58
9.25
Private label mortgage backed security
Mortgage backed securities - residential
Collateralized mortgage obligations
Total fair value of mortgage backed securities
Table 10 — Available-for-Sale Debt Securities
December 31, 2018 (dollars in thousands)
U.S. Treasury securities and U.S. Government agencies:
Due in one year or less
Due from one year to five years
Total U.S. Treasury securities and U.S. Government agencies
Corporate bonds:
Due from one year to five 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
Total available-for-sale debt securities
Table 11 — Held-to-Maturity Debt Securities
December 31, 2018 (dollars in thousands)
Corporate bonds:
Due from one year or less
Due from one year to five years
Due from five years to ten years
Total corporate bonds
Obligations of state and political subdivisions:
Due from one year to five years
Total obligations of state and political subdivisions
Total mortgage backed securities - residential
Total collateralized mortgage obligations
Total held-to-maturity debt securities
71
Loan Portfolio
Table 12 — Loan Portfolio Composition
December 31, (in thousands)
2018
2017
2016
2015
2014
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent*
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit*
Total Core Banking
Republic Processing Group*:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
$
907,005 $
94,827
242,846
1,248,940
175,178
430,355
15,031
332,548
921,565 $ 1,000,148 $ 1,081,934 $ 1,118,341
226,628
116,792
96,492
205,081
807,207
1,207,293
38,480
150,065
157,067
341,692
2,530
16,580
245,679
347,655
149,028
156,605
1,060,496
119,650
259,026
13,614
341,285
249,344
116,294
860,561
66,500
229,307
8,905
289,194
19,095
1,102
63,475
46,642
3,577,044
468,695
4,045,739
16,078
974
65,650
20,501
3,409,926
525,572
3,935,498
13,414
803
52,579
19,744
3,186,392
585,439
3,771,831
11,068
685
6,473
11,998
2,932,263
386,729
3,318,992
9,573
1,180
3,231
10,289
2,716,697
319,431
3,036,128
—
13,744
88,744
102,488
—
11,648
66,888
78,536
—
6,695
32,252
38,947
—
414
7,204
7,618
—
272
4,095
4,367
Total loans**
Allowance for loan and lease losses
4,148,227
(44,675)
4,014,034
(42,769)
3,810,778
(32,920)
3,326,610
(27,491)
3,040,495
(24,410)
Total loans, net
$ 4,103,552 $ 3,971,265 $ 3,777,858 $ 3,299,119 $ 3,016,085
* 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 $134 million, or 3%, during 2018 to $4.1 billion at December 31, 2018. The most significant components
comprising the change in loans by reportable segment follow:
Traditional Banking segment
Traditional Banking loans increased $167 million, or 5%, during 2018. Growth was primarily concentrated in commercial purpose
loans, which is the Company’s primary sales focus for on-balance sheet loan growth. C&I, CRE, nonowner-occupied residential real
estate, and C&D portfolios experienced growth of $89 million, $42 million, $38 million, and $25 million, respectively, during 2018.
Additionally, a $26 million increase in loans collateralized by consumer aircraft drove a $26 million increase in other consumer loans
during 2018.
The Bank’s owner occupied residential real estate loans, including correspondent loans, declined $37 million in total. These category
fluctuations were generally in-line with the Company’s overall long-term loan growth strategy, which is to reduce the Bank’s reliance
on residential real estate loans for balance sheet growth and to rely more on commercial purpose loans for future growth. While the
Company does currently intend to reduce its reliance on owner occupied residential real estate loans for future balance sheet growth, it
72
also continues to make plans to expand its agency-eligible volume of first mortgage residential real estate loans, which it intends to
sell into the secondary market in order to generate fee income.
Warehouse Lending segment
Outstanding Warehouse loans decreased $57 million from December 31, 2017 to December 31, 2018. Due to the volatility and
seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of
the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since
its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall
demand for mortgage products. Weighted average quarterly usage rates on 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 third 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.
Republic Credit Solutions segment
RCS loans increased $22 million from December 31, 2017 to December 31, 2018 driven primarily by the addition of $21 million in
hospital receivables during 2018.
During 2018, the Company agreed to sell its entire 10% interest in RCS’s credit-card product. The sale settled in January 2019.
The table below illustrates the Bank’s fixed and variable rate loan maturities:
Table 13 — Selected Loan Distribution
December 31, 2018 (in thousands)
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
Total
One Year
Or Less
Over One
Through
Five Years
Over
Five Years
$
$
$
$
$
$
454,659
461,801
39,274
192,369
13,203
—
—
199,153
1,360,459
790,019
787,139
135,904
251,730
1,828
468,695
332,548
19,905
2,787,768
1,244,678
1,248,940
175,178
444,099
15,031
468,695
332,548
219,058
4,148,227
$
$
$
$
$
$
53,435
64,517
9,636
51,933
5,976
—
—
116,892
302,389
21,504
60,057
37,698
105,809
1,828
468,695
78,491
19,112
793,194
74,939
124,574
47,334
157,742
7,804
468,695
78,491
136,004
1,095,583
$
$
$
$
$
$
103,676
151,365
17,053
100,957
7,227
—
—
53,513
433,791
82,739
144,507
53,275
106,936
—
—
151,499
748
539,704
186,415
295,872
70,328
207,893
7,227
—
151,499
54,261
973,495
$
$
$
$
$
$
297,548
245,919
12,585
39,479
—
—
—
28,748
624,279
685,776
582,575
44,931
38,985
—
—
102,558
45
1,454,870
983,324
828,494
57,516
78,464
—
—
102,558
28,793
2,079,149
Loans at maturity interval to overall total loans
100 %
26 %
23 %
50 %
73
Allowance 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 monthly and presents and discusses the analysis with the
Audit Committee and the Board of Directors quarterly.
The Bank’s Allowance increased $2 million, or 4%, during 2018 to $45 million at December 31, 2018, primarily driven by reserves
for general growth in Traditional Bank portfolios. As a percent of total loans, the total Bank’s Allowance increased to 1.08% at
December 31, 2018 compared to 1.07% at December 31, 2017. An analysis of the Allowance by reportable segment follows:
Traditional Banking segment
The Allowance at the Traditional Banking segment, increased to $30 million at December 31, 2018 from $29 million at December 31,
2017. The Allowance to total Traditional Bank loans remained at 0.85% from December 31, 2017 to December 31, 2018. The growth
in the Allowance for the Traditional Banking segment was generally related to the growth in the overall loan portfolio, with changes to
the historical loss percentages and qualitative factors of the calculation providing minimal impact.
Warehouse Lending segment
The Allowance on loans originated through the Company’s Warehouse segment decreased to $1.2 million at December 31, 2018 from
$1.3 million at December 31, 2017, with the Allowance to total outstanding Warehouse balances remaining at 0.25% at both period
ends. The decrease in the Allowance for the Warehouse Lending segment was entirely related to the decline in the overall loan
portfolio.
Republic Credit Solutions segment
The Allowance on loans originated through the Company’s RCS segment remained at $13 million from December 31, 2017 to
December 31, 2018. Additional reserves for growth in RCS’s line-of-credit and hospital receivables products were offset by reserves
released upon the reclassification of RCS’s credit-card product into the held-for-sale category. The Allowance to total RCS loans
decreased to 14.70% at December 31, 2018 from 18.85% at December 31, 2017 due to a higher concentration of lower-risk healthcare
receivables within the RCS loan portfolio at December 31, 2018.
RCS maintained an Allowance for two loan products offered at December 31, 2018, including its line-of-credit product and its
healthcare-receivables product. At December 31, 2018, the Allowance to total loans estimated for each RCS product ranged from as
low as 0.25% for its healthcare-receivables portfolio to as high as 40% for its line-of-credit portfolio. The lower reserve percentage of
0.25% was provided for RCS’s healthcare receivables at December 31, 2018, as such receivables have recourse back to a third-party
provider.
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.”
74
Table 14 — Summary of Loan and Lease Loss Experience
Years Ended December 31, (dollars in thousands)
2018
2017
2016
2015
2014
Allowance at beginning of period
$
42,769
$
32,920
$
27,491
$
24,410
$
23,026
Charge-offs:
Traditional Banking:
Residential real estate
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Total charge-offs
Recoveries:
Traditional Banking:
Residential real estate
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Total recoveries
Net loan charge-offs
Provision - Core Banking
Provision - RPG
Total Provision
Allowance at end of period
Credit Quality Ratios - Total Company:
Allowance to total loans
Allowance to nonperforming loans
Net loan charge-offs to average loans
Credit Quality Ratios - Core Banking:
Allowance to total loans
Allowance to nonperforming loans
Net loan charge-offs to average loans
(1,187)
(7)
—
(200)
—
(115)
(2,099)
(3,608)
—
(3,608)
(12,478)
(74)
(17,692)
(30,244)
(33,852)
285
131
30
51
—
311
604
1,412
—
1,412
1,718
10
1,250
2,978
4,390
(330)
—
—
(189)
—
(222)
(2,042)
(2,783)
—
(2,783)
(8,121)
—
(10,659)
(18,780)
(21,563)
272
139
6
34
—
182
596
1,229
—
1,229
1,332
—
906
2,479
3,708
(29,462)
(17,855)
3,568
27,800
31,368
44,675
3,773
23,931
27,704
42,769
$
$
$
(416)
(514)
(44)
(330)
—
(351)
(1,727)
(3,382)
—
(3,382)
(3,474)
—
(5,000)
(8,474)
(11,856)
429
152
78
127
—
151
636
1,573
—
1,573
426
—
492
1,219
2,792
(9,064)
3,945
10,548
14,493
32,920
$
(748)
(546)
—
(56)
—
(466)
(1,185)
(3,001)
—
(3,001)
—
—
(971)
(971)
(3,972)
318
98
—
62
—
148
736
1,362
—
1,362
—
—
17
295
1,657
(2,315)
3,065
2,331
5,396
27,491
$
(1,021)
(868)
(18)
(20)
—
(548)
(1,083)
(3,558)
—
(3,558)
—
—
(5)
(5)
(3,563)
164
155
89
114
—
183
801
1,506
—
1,506
—
—
—
582
2,088
(1,475)
3,392
(533)
2,859
24,410
1.08 %
277
0.72
0.78 %
197
0.06
1.07 %
284
0.47
0.77 %
213
0.04
0.86 %
205
0.25
0.74 %
175
0.05
0.83 %
125
0.07
0.78 %
118
0.05
0.80 %
103
0.05
0.80 %
103
0.08
75
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 15 — Management’s Allocation of the Allowance for Loan and Lease Losses
December 31, (in thousands)
Allowance
Loans*
2018
Percent of
Loans to
Total
2017
2016
2015
2014
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
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Commercial & industrial
Republic Credit Solutions
Total Republic Processing Group
Total
$
5,798
237
1,662
10,030
2,555
2,873
158
3,477
1,140
1,102
724
591
30,347
1,172
31,519
24 % $
2
6
30
4
10
—
8
—
—
2
1
87
11
98
6,182
292
1,396
9,043
2,364
2,198
174
3,754
607
974
687
1,162
28,833
1,314
30,147
22 % $
3
5
30
4
9
—
9
—
—
2
1
85
13
98
7,158
373
1,139
8,078
1,850
1,511
136
3,757
490
675
526
771
26,464
1,464
27,928
27 % $
4
4
28
3
7
—
9
—
—
—
1
1
84
15
99
8,301
623
1,052
7,672
1,303
1,455
89
2,996
448
351
56
479
24,825
967
25,792
34 % $
7
3
26
2
7
—
9
—
—
—
—
—
88
12
100
8,565
567
837
7,774
926
1,167
25
2,730
285
382
32
277
23,567
799
24,366
38 %
7
3
27
1
5
—
8
—
—
—
—
—
89
11
100
—
107
13,049
13,156
$ 44,675
—
—
2
2
100
—
12
12,610
12,622
$ 42,769
—
—
2
2
100
—
25
4,967
4,992
$ 32,920
—
—
1
1
100
—
—
1,699
1,699
$ 27,491
—
—
—
—
100
—
—
44
44
$ 24,410
—
—
—
—
100
*See Table 12 in this section of the filing for loan portfolio balances. 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, 2018.
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.
76
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-Sub are considered “Classified.” Loans
rated “Special Mention” or PCI-1 are considered Special Mention. The Bank’s Classified and Special Mention loans decreased $5
million during 2018, primarily due to the payoffs and paydowns of Special Mention loans during the period.
See Footnote 4 “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 16 — Classified and Special Mention Loans
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
Loss
Doubtful
Substandard
Purchased Credit Impaired - Substandard
Total Classified Loans
Special Mention
Purchased Credit Impaired - Group 1
Total Special Mention Loans
$
—
—
19,860
1,559
21,419
21,205
1,121
22,326
$
—
—
21,202
1,771
22,973
23,813
1,833
25,646
$
—
—
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
Total Classified and Special Mention Loans
$
43,745
$
48,619
$
62,388
$
71,688
$
93,757
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 $8 million and $6 million at December 31, 2018 and 2017. Generally, all nonperforming loans are considered impaired.
Nonperforming loans to total loans increased to 0.39% at December 31, 2018 from 0.38% at December 31, 2017, as the total balance
of nonperforming loans increased by $1 million, or 7%, while total loans increased $134 million, or 3% during 2018.
77
Table 17 — Nonperforming Loans and Nonperforming Assets Summary
(in thousands)
2018
2017
2016
2015
2014
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
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
$
$
15,993
145
16,138
160
16,298
$
$
14,118
956
15,074
115
15,189
$
$
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
0.39 %
0.39
0.31
0.40 %
0.40
0.32
0.38 %
0.38
0.30
0.36 %
0.36
0.28
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
*Loans on nonaccrual status include impaired loans. See Footnote 4 “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 and smaller-balance consumer loans.
Approximately $13 million, or 80%, of the Bank’s total nonperforming loans at December 31, 2018, compared to $11 million, or 71%,
as of December 31, 2017, were concentrated in the residential real estate and HELOC categories, with the underlying collateral
predominantly located in the Bank’s primary market area of Kentucky.
Approximately $2 million, or 14%, of the Bank’s total nonperforming loans at December 31, 2018, compared to $3 million, or 22%, at
December 31, 2017 were concentrated in the CRE and C&D portfolios. While CRE is the primary collateral for such loans, the Bank
also obtains in many cases, at the time of origination, personal guarantees from the principal borrowers and/or secured liens on the
guarantors’ primary residences.
Table 18 — Nonperforming Loan Composition
2018
2017
2016
2015
2014
Years Ended December 31, (in thousands)
Balance
Percent of
Percent of
Total
Total
Loan Class Balance Loan Class Balance Loan Class Balance Loan Class Balance Loan Class
Percent of
Total
Percent of
Total
Percent of
Total
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
$ 10,800 1.19 % $ 9,230 1.00 % $ 10,955 1.10 % $ 13,197 1.22 % $ 11,225 1.00 %
382 0.40
669 0.28
2,318 0.19
—
—
630 0.15
—
—
1,095 0.33
—
—
—
—
75 0.12
37 0.08
16,006 0.45
—
—
16,006 0.40
—
—
257 0.13
3,247 0.27
67 0.04
—
—
—
—
1,217 0.35
—
—
—
—
68 0.10
51 0.25
14,137 0.41
—
14,137 0.36
—
—
—
852 0.54
2,725 0.26
77 0.06
154 0.06
—
—
1,069 0.31
—
—
—
—
—
—
145 0.73
15,977 0.50
—
15,977 0.42
—
—
—
935 0.80
4,165 0.50
1,589 2.39
194 0.08
—
—
1,793 0.62
—
—
—
—
—
—
63 0.53
21,936 0.75
—
21,936 0.66
—
—
—
2,352 2.44
6,151 0.80
1,990 5.17
169 0.11
—
1,678 0.68
—
—
—
—
—
—
—
94 0.91
23,659 0.87
—
—
23,659 0.78
—
—
4 0.03
128 0.14
132 0.13
—
—
—
—
937 1.40
937 1.19
—
—
—
—
82 0.25
82 0.21
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total nonperforming loans
$ 16,138 0.39
$ 15,074 0.38
$ 16,059 0.42
$ 21,936 0.66
$ 23,659 0.78
78
Table 19 — Stratification of Nonperforming Loans
December 31, 2018
(dollars in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Number of Nonperforming Loans and Recorded Investment
No.
Balance
<= $100
Balance
> $100 &
<= $500
No.
No.
Balance
> $500
No.
Total
Balance
$
108
—
4
5
—
2
—
19
—
—
5
14
157
—
157
—
6
960
966
4,859
—
169
201
—
59
—
417
—
—
75
37
5,817
—
5,817
—
4
128
132
$
11
1
—
1
—
2
—
4
—
—
—
—
19
—
19
—
—
—
—
2,401
382
—
397
—
571
—
678
—
—
—
—
4,429
—
4,429
—
—
—
—
$
3
—
1
2
—
—
—
—
—
—
—
—
6
—
6
—
—
—
—
3,540
—
500
1,720
—
—
—
—
—
—
—
—
5,760
—
5,760
—
—
—
—
$
122
1
5
8
—
4
—
23
—
—
5
14
182
—
182
—
6
960
966
10,800
382
669
2,318
—
630
—
1,095
—
—
75
37
16,006
—
16,006
—
4
128
132
Total
1,123
$
5,949
19
$
4,429
6
$
5,760
1,148
$
16,138
December 31, 2017
(dollars in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Number of Nonperforming Loans and Recorded Investment
No.
Balance
<= $100
Balance
> $100 &
<= $500
No.
No.
Balance
> $500
No.
Total
Balance
$
102
—
5
2
1
—
—
26
—
—
3
12
151
—
151
—
—
13,536
13,536
4,903
—
156
112
67
—
—
615
—
—
68
51
5,972
—
5,972
—
—
937
937
$
14
—
1
3
—
—
—
4
—
—
—
—
22
—
22
—
—
—
—
2,760
—
101
767
—
—
—
602
—
—
—
—
4,230
—
4,230
—
—
—
—
1
—
—
2
—
—
—
—
—
—
—
—
3
—
3
—
—
—
—
$
1,567
—
—
2,368
—
—
—
—
—
—
—
—
3,935
—
3,935
$
117
—
6
7
1
—
—
30
—
—
3
12
176
—
176
—
—
—
—
—
—
13,536
13,536
9,230
—
257
3,247
67
—
—
1,217
—
—
68
51
14,137
—
14,137
—
—
937
937
Total
13,687
$
6,909
22
$
4,230
3
$
3,935
13,712
$
15,074
Interest income that would have been recorded if nonaccrual loans were on a current basis in accordance with their original terms was
$852,000, $734,000 and $888,000 in 2018, 2017 and 2016.
79
Based on the Bank’s review as of December 31, 2018, management believes that its reserves are adequate to absorb probable losses on
all nonperforming credits.
Table 20 — Rollforward of Nonperforming Loan
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
Nonperforming loans at the beginning of the period
Loans added to nonperforming status during the period that remained nonperforming at the end of the period
Loans removed from nonperforming status during the period that were nonperforming at the beginning of
$
15,074
8,129
$
16,059
7,204
$
21,936
3,784
$
23,659
7,861
$
21,078
15,657
the period (see table below)
Principal balance paydowns of loans nonperforming at both period ends
Net change in principal balance of other loans nonperforming at both period ends*
(5,079)
(1,175)
(811)
(8,196)
(782)
789
(8,086)
(1,742)
167
(8,505)
(1,079)
—
(12,060)
(1,016)
—
Nonperforming loans at the end of the period
$
16,138
$
15,074
$
16,059
$
21,936
$
23,659
*Includes relatively small consumer portfolios, e.g., RCS loans.
Table 21 — Detail of Loans Removed from Nonperforming Status
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
Loans charged-off
Loans transferred to OREO
Loans refinanced at other institutions
Loans returned to accrual status
Total loans removed from nonperforming status during the period that were nonperforming at the
beginning of the period
Delinquent Loans
$
$
(46)
(569)
(4,043)
(421)
(287)
(574)
(3,841)
(3,494)
$
$
(329)
(2,986)
(4,771)
—
(210)
(2,034)
(4,026)
(2,235)
$
(119)
(4,365)
(5,034)
(2,542)
$
(5,079)
$
(8,196)
$
(8,086)
$
(8,505)
$
(12,060)
Delinquent loans to total loans increased to 0.38% at December 31, 2018, from 0.35% at December 31, 2017, as the total balance of
delinquent loans increased by $2 million, or 13%. With the exception of smaller-balance consumer loans, all loans past due 90-days-
or-more as of December 31, 2018 and 2017 were on nonaccrual status.
Core Banking delinquent loans to total loans increased one basis point to 0.22% during 2018, while RPG delinquent loans to total
loans remained at approximately 7% during 2018.
80
Table 22 — Delinquent Loan Composition*
Years Ended December 31, (in thousands)
Balance
Percent of
Total
Loan Class Balance
Percent of
Total
Loan Class Balance Loan Class Balance
Percent of
Total
Percent of
Total
Loan Class Balance
Percent of
Total
Loan Class
2018
2017
2016
2015
2014
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
$ 5,525
—
1,008
1,099
—
25
—
784
0.61 % $ 4,782
—
146
1,727
67
15
—
1,221
—
0.42
0.09
—
0.01
—
0.24
0.52 % $ 4,554
—
46
425
—
342
—
970
—
0.07
0.14
0.04
0.00
—
0.35
0.46 % $ 6,882
—
53
1,111
1,500
299
—
1,393
—
0.03
0.04
—
0.13
—
0.28
0.64 % $ 8,008
—
776
2,972
1,990
211
—
1,362
—
0.05
0.13
2.26
0.13
—
0.48
0.72 %
—
0.80
0.37
5.17
0.13
—
0.55
129
230
28
47
8,875
—
8,875
0.68
20.87
0.04
0.10
0.25
—
0.22
74
233
60
135
8,460
—
8,460
0.46
23.92
0.09
0.66
0.25
—
0.21
18
161
—
305
6,821
—
6,821
0.13
20.05
—
1.54
0.21
—
0.18
12
133
1
101
11,485
—
11,485
0.11
19.42
0.02
0.84
0.39
—
0.35
134
178
19
60
15,710
—
15,710
1.40
15.08
0.59
0.58
0.58
—
0.52
—
10
7,077
7,087
—
0.07
7.97
6.91
—
—
5,641
5,641
—
—
8.43
7.18
—
—
2,137
2,137
—
—
6.63
5.49
—
—
246
246
—
—
3.41
3.23
—
—
141
141
—
—
3.44
3.23
Total delinquent loans
$ 15,962
0.38
$ 14,101
0.35
$ 8,958
0.24
$ 11,731
0.35
$ 15,851
0.52
*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.
81
Table 23 — Rollforward of Delinquent Loans
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
Delinquent loans at the beginning of the period
Loans added to delinquency status during the period and remained in delinquency status at the end of
the period
Loans removed from delinquency status during the period that were in delinquency status at the
beginning of the period (see table below)
Principal balance paydowns of loans delinquent at both period ends
Net change in principal balance of other loans delinquent at both period ends*
Delinquent loans at the end of period
$
14,101
$
8,958
$
11,731
$
15,851
$
16,223
7,092
7,015
5,399
6,942
13,750
(6,332)
(334)
1,435
15,962
$
(5,181)
(170)
3,479
14,101
(10,205)
(94)
2,127
8,958
(10,969)
(207)
114
11,731
$
$
(14,079)
(245)
202
15,851
$
$
*Includes relatively small consumer portfolios, e.g., RCS loans.
Table 24 — Detail of Loans Removed from Delinquent Status
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
Loans charged-off
Loans transferred to OREO
Loans refinanced at other institutions
Loans paid current
$
(50)
(502)
(3,523)
(2,257)
$
(114)
(526)
(2,529)
(2,012)
$
(150)
(2,805)
(3,926)
(3,324)
$
(302)
(2,207)
(4,072)
(4,388)
$
(159)
(4,889)
(5,617)
(3,414)
Total loans removed from delinquency status during the period that were in delinquency status at
the beginning of the period
$
(6,332)
$
(5,181)
$
(10,205)
$
(10,969)
$
(14,079)
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 $41
million at December 31, 2018 compared to $46 million at December 31, 2017.
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 evaluation of the
borrower’s financial condition and ability and willingness to service the modified debt. As of December 31, 2018, the Bank had $33
million in TDRs, of which $8 million were also on nonaccrual status. As of December 31, 2017, the Bank had $35 million in TDRs, of
which $6 million were also on nonaccrual status.
Table 25 — Impaired Loan Composition
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
Troubled debt restructurings
Impaired loans (which are not TDRs)
Total recorded investment in impaired loans
$
$
32,863
8,572
41,435
$
$
34,637
10,979
45,616
$
$
41,586
11,098
52,684
$
$
49,580
16,543
66,123
$
$
65,266
20,914
86,180
See Footnote 4 “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.
82
Other Real Estate Owned
Table 26 — Stratification of Other Real Estate Owned
December 31, 2018
(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
$
160
—
$
—
—
$
—
3
$
160
Total
3
$
160
—
$
—
—
$
—
3
$
160
December 31, 2017
(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
2
$
115
—
$
—
—
$
—
2
$
115
Total
2
$
115
—
$
—
—
$
—
2
$
115
Table 27 — Rollforward of Other Real Estate Owned Activity
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
OREO at beginning of period
Transfer from loans to OREO
Proceeds from sale*
Net gain on sale
Writedowns
OREO at end of period
$
$
115
662
(1,346)
729
—
160
$
$
1,391
841
(2,793)
831
(155)
115
$
$
1,220
4,778
(4,851)
514
(270)
1,391
*Inclusive of non-cash proceeds where the Bank financed the sale of the property.
$
11,243
2,938
(12,660)
956
(1,257)
1,220
$
$
17,102
7,333
(10,974)
883
(3,101)
11,243
$
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 offers tax advantaged noninterest income to help the Bank offset employee benefits expenses. The Company carried $65 million
and $63 million of BOLI on its consolidated balance sheet at December 31, 2018 and 2017. The Company acquired $7 million of
BOLI during 2016 in association with its May 17, 2016 Cornerstone acquisition.
83
Table 28 — Rollforward of Bank Owned Life Insurance
Years ended December 31, (in thousands)
2018
2017
2016
2015
2014
BOLI at beginning of period
BOLI acquired
Increase in cash surrender value
BOLI at end of period
Deposits
Table 29 — Deposit Composition
$
$
63,356
—
1,527
64,883
$
$
61,794
—
1,562
63,356
$
$
52,817
7,461
1,516
61,794
$
$
51,415
—
1,402
52,817
$
25,086
25,000
1,329
51,415
$
Years Ended December 31, (in thousands)
2018
2017
2016
2015
2014
Core Bank:
Demand
Money market accounts
Savings
Individual retirement accounts(1)
Time deposits, $250 and over(1)
Other certificates of deposit(1)
Reciprocal money market and time deposits(1)(2)
Brokered deposits(1)
Total Core Bank interest-bearing deposits
Total Core Bank noninterest-bearing deposits
Total Core Bank deposits
Republic Processing Group:
Money market accounts
Total RPG interest-bearing deposits
Brokered prepaid card deposits
Other noninterest-bearing deposits
Total RPG noninterest-bearing deposits
Total RPG deposits
Total deposits
$
937,402
717,954
187,868
53,524
84,104
239,324
217,153
9,394
2,446,723
971,422
3,418,145
$
944,812
546,998
182,800
47,982
77,891
189,661
346,613
72,718
2,409,475
988,537
3,398,012
$
872,709
541,622
164,410
42,642
37,200
140,894
221,113
168,150
2,188,740
943,329
3,132,069
$
783,054
501,059
117,408
36,016
42,775
127,878
174,653
69,771
1,852,614
606,154
2,458,768
$
691,787
471,339
91,625
28,771
56,556
104,010
62,176
49,349
1,555,613
494,244
2,049,857
5,453
5,453
4,350
28,197
32,547
38,000
1,641
1,641
1,509
31,996
33,505
35,146
—
—
145
28,478
28,623
28,623
—
—
1,540
27,169
28,709
28,709
—
—
—
8,325
8,325
8,325
$
3,456,145
$
3,433,158
$
3,160,692
$
2,487,477
$
2,058,182
(1) Represents a time deposit.
(2) Prior to June 2018, reciprocal deposits were classified as “brokered deposits.” The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted
in May 2018, provides that most reciprocal deposits are no longer classified as brokered deposits if the Bank meets certain regulatory criteria.
Total Company deposits increased $23 million, or 1%, from December 31, 2017 to $3.5 billion at December 31, 2018.
Core Bank deposits increased $20 million during 2018, with generally lower-cost deposits such as noninterest-bearing, savings,
money markets, and time deposits growing $185 million, in total. Largely offsetting this growth were reductions in generally higher-
costing reciprocal and brokered deposits of $129 million and $63 million. A payoff of $50 million in wholesale-brokered money
market deposits in April 2018 drove the decline in brokered deposits, while competitive market conditions generally drove the
decrease in reciprocal deposits, which typically carry larger balances and tend to be more interest rate sensitive.
84
Table 30 — Average Deposits
Years ended December 31, (dollars in thousands)
2018
2017
2016
2015
2014
Average
Balance
Average Average
Balance
Rate
Average Average
Balance
Rate
Average Average
Balance
Rate
Average Average
Balance
Rate
Average
Rate
Transaction accounts
Money market accounts
Time deposits
Brokered and reciprocal money market
Brokered and reciprocal certificates of deposit
Total average interest-bearing deposits
Total average noninterest-bearing deposits
Total average deposits
$ 1,120,633
639,560
348,670
289,441
47,081
2,445,385
1,147,432
$ 3,592,817
0.39 % $ 1,095,276
554,336
0.63
266,332
1.63
314,788
0.78
36,931
1.50
2,267,663
0.70
1,073,181
—
$ 3,340,844
0.47
0.22 % $
0.29
1.19
0.68
1.25
0.43
—
0.29
962,473
546,360
221,634
289,612
38,513
2,058,592
894,049
$ 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
Table 31 — Maturities of Time Deposits Greater than $100,000 at December 31, 2018
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
$
$
13,037
9,728
55,348
124,183
202,296
0.98 %
1.07
1.72
2.28
1.99
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are
recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All
securities underlying the agreements are under the Bank’s control.
SSUARs totaled $183 million and $204 million at December 31, 2018 and 2017. The substantial majority of SSUARs are indexed to
immediately repricing indices such as the FFTR.
Table 32 — Securities Sold Under Agreements to Repurchase
As of and for the Years Ended December 31, (dollars in thousands)
2018
2017
2016
2015
2014
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
$ 182,990
$ 204,021
$ 173,473
$ 395,433
$ 356,108
0.83 %
0.31 %
0.05 %
0.02 %
0.04 %
$ 225,145
$ 219,515
$ 280,296
$ 379,477
$ 296,196
0.50 %
0.23 %
0.02 %
0.02 %
0.04 %
$ 260,147
$ 293,944
$ 367,373
$ 442,981
$ 408,891
Federal Home Loan Bank Advances
FHLB advances increased $73 million, or 10%, from December 31, 2017 to $810 million at December 31, 2018, with the Bank
reducing its term advances by $107 million and increasing its overnight advances by $180 million during 2018. During 2018, the Bank
obtained $20 million in additional term advances with a weighted average rate of 2.96% and a weighted average term of 3.0 years,
while $127 million of term advances with a weighted average rate of 1.61% matured during the period. The Bank held $510 million in
overnight advances at a rate of 2.45% as of December 31, 2018, compared to $330 million in overnight advances at a rate of 1.42% at
December 31, 2017.
The Bank chose to increase its overnight advances and reduce its term advances during 2018 in order to take advantage of the lower
borrowing costs associated with overnight borrowings. The Bank was able to implement this strategy due to its projected favorable
85
risk position in the event of rising interest rates. See the section titled “Asset/Liability Management and Market Risk” in this section of
the filing for additional discussion regarding the Bank’s interest-rate sensitivity.
Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current
earnings, and expectations of future interest rates, among others. If a meaningful amount of the Bank’s loan originations in the future
have repricing terms longer than five years, management will likely elect to borrow additional funds to mitigate its risk of future
increases in market interest rates. Whether the Bank ultimately does so, and how much in advances it extends out, will be dependent
upon circumstances at that time. If the Bank does obtain longer-term FHLB advances for interest rate risk mitigation, it will have a
negative impact on then-current earnings. The amount of the negative impact will be dependent upon the dollar amount, coupon, and
final maturity of the advances obtained.
Table 33 — Federal Home Loan Bank Advances
As of and for the Years Ended December 31, (dollars in thousands)
2018
2017
2016
2015
2014
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
Interest Rate Swaps
Interest Rate Swaps Used as Cash Flow Hedges
$ 810,000
$ 557,090
$
2.26 %
$
1.88 %
737,500
$ 802,500
$ 699,500
$ 707,500
1.61 %
1.35 %
1.77 %
1.60 %
563,552
$ 583,591
$ 599,630
$ 584,516
1.57 %
1.87 %
1.99 %
2.24 %
$ 967,500
$ 1,002,500
$ 987,500
$ 916,500
$ 707,500
The Bank entered into two interest rate swap agreements during 2013 as part of its interest rate risk management strategy. The Bank
designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to
the 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR. The
counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is
not significant.
Non-hedge Interest Rate Swaps
During 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 7 “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 120% at December 31, 2018 and 120% at December 31, 2017.
The December 31, 2017 ratio was recasted for the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May
2018, which provides that most reciprocal deposits are no longer classified as brokered deposits if the Bank meets certain regulatory
criteria. At December 31, 2018 and December 31, 2017, the Company had cash and cash equivalents on-hand of $351 million and
$299 million. In addition, the Bank had available borrowing capacity of $254 million and $347 million from the FHLB at December
31, 2018 and December 31, 2017. In addition to its borrowing capacity with the FHLB, the Bank’s liquidity resources included
unencumbered securities of $300 million and $326 million as of December 31, 2018 and December 31, 2017 and unsecured lines of
credit totaling $125 million available through various other financial institutions as of December 31, 2018 and December 31, 2017.
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
86
AFS debt securities, principal paydowns on loans and mortgage backed securities and proceeds realized from loans held for sale. The
Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities
that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as
required by law. At December 31, 2018 and December 31, 2017, these pledged investment securities had a fair value of $241 million
and $263 million. Republic’s banking centers and its websites, www.republicbank.com and www.mymemorybank.com, provide
access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional
funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of
credit were canceled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit
interest rates to meet its funding and liquidity needs.
At December 31, 2018, the Bank had approximately $979 million in deposits from 151 large non-sweep deposit relationships,
including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships
represented approximately $519 million, or 15%, of the Company’s total deposit balances at December 31, 2018. These accounts do
not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances
were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a
longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-
cost internet-sourced deposits. Based on past experience, utilizing brokered deposits and internet-sourced deposits, the Bank believes
it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be
substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.
Due to the its historical success of growing loans and its overall use of non-core funding sources, the Bank has approached, and
periodically during each quarter, has fallen short of its minimum internal policy limits for liquidity management, as set forth by the
Bank’s Board of Directors. As of December 31, 2018, the Bank was in compliance with all Board-approved liquidity policies,
however, the Bank will likely continue to maintain its liquidity levels near the Bank’s Board-approved minimums for the foreseeable
future. It is also likely the Bank, as it manages its liquidity levels in order to maximize its overall earnings, will continue to fall short
of these minimums on occasion in the future, particularly during the first quarter of each year when short-term Easy Advance loans are
originated.
Capital
Table 34 — Capital
Information pertaining to the Company’s capital balances and ratios follows:
(dollars in thousands, except per share data)
2018
As of and for the Years Ended December 31,
2016
2017
2015
Stockholders’ equity
Book value per share
Tangible book value per share*
Dividends declared per share - Class A Common Stock
Dividends declared per share - Class B Common Stock
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
$ 689,934
33.03
31.98
0.968
0.880
13.00 %
16.80
14.92
15.81
14.11
26
2.50
$ 632,424
30.33
29.27
0.869
0.790
13.02 %
16.04
14.15
15.06
13.21
39
2.29
$ 604,406
28.97
27.89
0.825
0.750
13.32 %
16.37
14.59
15.55
13.54
37
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
*See Footnote 2 of Part II, Item 6 “Selected Financial Data” for additional detail.
NA – Not applicable.
87
2014
$ 558,731
26.80
26.08
0.737
0.670
15.66 %
22.17
NA
21.28
15.92
53
2.98
Total stockholders’ equity increased from $632 million at December 31, 2017 to $690 million at December 31, 2018. The increase in
stockholders’ equity was primarily attributable to net income earned during 2018 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, 2018, the
Bank could, without prior approval, declare dividends of approximately $111 million.
Regulatory Capital Requirements — The Company and the Bank are subject to capital regulations in accordance with Basel III, as
administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital
requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the
Company’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other
factors.
Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with
Basel III define “well capitalized” as a 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 phased in from 2016 to 2019 on the following schedule: a capital conservation
buffer of 0.625% 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.
Republic continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based, 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 the FDIC, in addition to the Capital Conservation Buffer. Republic’s
average stockholders’ equity to average assets ratio was 13.00% at December 31, 2018 compared to 13.02% at December 31, 2017.
Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. The sole asset of RBCT
represents the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. The
RBCT TPS are treated as part of Republic’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
Company chose not to redeem the subordinated note on January 1, 2019, and is currently carrying the note at a cost of 3-LIBOR plus
1.42%, or 4.22%.
88
Off Balance Sheet Items
Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit follows:
Table 35 — Off Balance Sheet Items
December 31, 2018 (in thousands)
Less than
one year
Maturity by Period
Greater
than one
year to
three years
Greater
than three
years to
five years
Greater
than five
years
Total
Unused warehouse lines of credit
Unused home equity lines of credit
Unused loan commitments - other
Standby letters of credit
FHLB letter of credit
$
591,305 $
30,257
546,259
9,760
10,000
Total off balance sheet items
$ 1,187,581 $
— $
30,896
100,556
569
—
132,021 $
— $
64,778
11,399
313
—
76,490 $
— $
251,346
62,431
—
—
313,777 $
591,305
377,277
720,645
10,642
10,000
1,709,869
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 $11 million and $12 million at December 31, 2018
and 2017. 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.
At December 31, 2018, the Bank had a $10 million letter of credit from the FHLB issued on behalf of a Bank client. This letter of
credit was used as credit enhancements for client bond offerings and reduced the Bank’s available borrowing line at the FHLB. The
Bank uses a blanket pledge of eligible real estate loans to secure these letters of credit.
Commitments to extend credit generally consist of unfunded lines of credit. These commitments generally have variable rates of
interest.
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:
89
Table 36 — Aggregate Contractual Obligations
December 31, 2018 (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*
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
$ 2,035,792 $
— $
— $
178,209
620,486
—
182,990
7,293
12,716
144,539
150,000
—
—
13,616
10,592
94,234
40,000
—
—
9,909
4,669
$ 3,037,486 $ 318,747 $ 148,812 $
— $ 2,035,792
416,982
—
810,486
—
41,240
41,240
182,990
—
49,305
18,487
1,473
29,450
61,200 $ 3,566,245
*Includes accrued interest.
**Primarily includes dividends declared on common stock, the Bank’s SERP, and the Bank’s significant long-term vendor contracts.
See Footnote 8 “Deposits” of Part II Item 8 “Financial Statements and Supplementary Data” for further information regarding the
Bank’s deposits.
See Footnote 10 “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 11 “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 17 “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 20 “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.
90
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 on net interest income of instantaneous movements in interest
rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth
expectations and on the historical behavior of the Bank’s deposit and loan rates and their related balances in relation to changes in
interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model
cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net
interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of
interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market
conditions and the application and timing of various management strategies as compared to those projected in the various simulated
models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the
yield curve.
As of December 31, 2018, a dynamic simulation model was run for interest rate changes from “Down 100” basis points to “Up 400”
basis points. Since December 2015, the Federal Open Market Committee has incrementally raised the FFTR, with further guidance
suggesting that increases to the FFTR were possible in 2019.
The following table illustrates the Bank’s projected percent change from its Base net interest income for the next 12 months as of
December 31, 2018 and 2017 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally
across all points on the yield curve. The Bank’s dynamic earnings simulation model excludes Traditional Bank loan fees.
Table 37 — Bank Interest Rate Sensitivity at December 31, 2018 and 2017
(100)
Basis Points
+100
Basis Points
Change in Rates
+200
Basis Points
+300
Basis Points
+400
Basis Points
% Change from base net interest income at December 31, 2018
% Change from base net interest income at December 31, 2017
(2.9)%
(4.6)%
0.9 %
3.8 %
0.3 %
4.8 %
(0.9) %
5.4 %
(1.7)%
5.4 %
The Bank’s dynamic simulation model run for December 2018 projected modest improvement in the Bank’s net interest income over
the next 12 months relative to the Base case for the Up 100 through the Up 200 scenarios, while the prior year’s simulation reflected
greater improvement than December 2018 for the Up 100 through the Up 200 scenarios, as well as improvement in the Up 300 and Up
400 scenarios. A 100-basis point increase in the FFTR from December 31, 2017 to December 31, 2018, and a continued flattening of
the yield curve over the same period were both drivers of the diminished projections reflected in the December 2018 scenarios.
Additionally, conservative revisions to the Bank’s beta assumptions concerning its non-maturing deposits in response to deposit
pricing trends contributed to the diminished 2018 projections. The Bank’s dynamic simulation model run for both December 2018 and
2017 projected a decline in the Bank’s net interest income over the next 12 months relative to the Base case for the Down 100
scenario.
91
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, 2018 and 2017
Consolidated statements of income and comprehensive income — years ended December 31, 2018, 2017 and 2016
Consolidated statements of stockholders’ equity — years ended December 31, 2018, 2017 and 2016
Consolidated statements of cash flows — years ended December 31, 2018, 2017 and 2016
Footnotes to consolidated financial statements
93
94
96
97
99
100
101
92
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, 2018, 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, 2018, the Company’s internal control was effective in
achieving the objectives stated above. Crowe LLP has provided its report on the audited 2018 and 2017 consolidated financial
statements and on the effectiveness of the Company’s internal control in their report dated March 14, 2019.
Steven E. Trager
Chairman and Chief Executive Officer
Kevin Sipes
Chief Financial Officer and Chief Accounting Officer
March 14, 2019
93
Crowe LLP
Independent Member Crowe Global
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors of Republic Bancorp, Inc.
Louisville, Kentucky
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Republic Bancorp, Inc. (the "Company") as of December 31, 2018
and 2017, 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, 2018, and the related notes (collectively referred to as the "financial statements").
We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’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 the Company’s
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud,
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. 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.
94
Definition and Limitations of Internal Control Over Financial Reporting
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.
We have served as the Company’s auditor since 1996.
Louisville, Kentucky
March 14, 2019
95
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, (in thousands, except share data)
ASSETS
Cash and cash equivalents
Available-for-sale debt securities
Held-to-maturity debt securities (fair value of $64,858 in 2018 and $65,133 in 2017)
Equity securities with readily determinable fair value
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 (includes $1,922 of loans carried at fair value in 2018)
Allowance for loan and lease losses
Loans, net
Federal Home Loan Bank stock, at cost
Premises and equipment, net
Premises, held for sale
Goodwill
Other real estate owned
Bank owned life insurance
Other assets and accrued interest receivable
TOTAL ASSETS
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase and other short-term borrowings
Federal Home Loan Bank advances
Subordinated note
Other liabilities and accrued interest payable
Total liabilities
Commitments and contingent liabilities (Footnote 12)
STOCKHOLDERS’ EQUITY
Preferred stock, no par value
Class A Common Stock, no par value, 30,000,000 shares authorized, 18,675,262 shares (2018) and 18,606,338
shares (2017) issued and outstanding; Class B Common Stock, no par value, 5,000,000 shares authorized,
2,212,487 shares (2018) and 2,242,624 shares (2017) issued and outstanding
Additional paid in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders’ equity
2018
2017
$
351,474 $
475,738
65,227
2,806
8,971
—
12,838
4,148,227
(44,675)
4,103,552
32,067
43,126
1,694
16,300
160
64,883
61,568
299,351
524,303
64,227
2,928
5,761
2,677
8,551
4,014,034
(42,769)
3,971,265
32,067
42,588
3,017
16,300
115
63,356
48,856
$
5,240,404 $
5,085,362
$
1,003,969 $
2,452,176
3,456,145
1,022,042
2,411,116
3,433,158
182,990
810,000
41,240
60,095
204,021
737,500
41,240
37,019
4,550,470
4,452,938
—
—
—
—
4,900
141,018
545,013
(997)
4,902
139,406
487,700
416
689,934
632,424
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
5,240,404 $
5,085,362
See accompanying footnotes to consolidated financial statements.
96
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, (in thousands, except per share data)
INTEREST INCOME:
Loans, including fees
Taxable investment securities
Federal Home Loan Bank stock and other
Total interest income
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
Net losses on debt securities
Net gains on other real estate owned
Other
Total noninterest income
NONINTEREST EXPENSE:
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
Impairment of premises held for sale
Other
Total noninterest expense
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
See accompanying footnotes to consolidated financial statements.
97
2018
2017
2016
$
$
237,621
11,830
6,730
256,181
$
205,582
9,404
3,792
218,778
17,017
1,125
10,473
1,508
30,123
226,058
31,368
194,690
14,273
20,029
4,825
11,159
6,225
1,527
—
729
4,658
63,425
91,189
24,883
4,785
4,432
1,494
4,951
9,613
4,480
1,444
94
3,459
—
482
12,546
163,852
94,263
16,411
9,802
502
8,860
1,094
20,258
198,520
27,704
170,816
13,357
18,500
4,642
9,881
5,824
1,562
(136)
676
4,108
58,414
82,233
24,019
4,711
5,188
1,378
4,626
7,748
3,988
1,594
388
2,410
—
1,175
11,386
150,844
78,386
32,754
$
$
$
77,852
$
45,632
$
3.76
3.41
3.74
3.40
$
$
2.21
2.01
2.20
2.00
$
$
164,232
7,876
1,884
173,992
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
21,586
4,256
3,778
1,780
4,757
6,121
4,140
1,406
503
2,556
846
191
8,305
130,107
68,963
23,060
45,903
2.22
2.02
2.22
2.01
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, (in thousands)
Net income
OTHER COMPREHENSIVE INCOME
2018
2017
2016
$
77,852 $
45,632 $
45,903
Change in fair value of derivatives used for cash flow hedges
Reclassification amount for net derivative losses realized in income
Change in unrealized (loss) gain on AFS debt securities (2018), debt and equity securities (2017 and 2016)
Adjustment for adoption of ASU 2016-01
Reclassification adjustment for net (gain) loss on AFS debt securities recognized in earnings
Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
Total other comprehensive (loss) income before income tax
Tax effect
Total other comprehensive (loss) income, net of tax
178
28
(1,548)
(428)
—
(20)
(1,790)
377
(1,413)
83
219
(1,265)
—
136
298
(529)
258
(271)
(125)
332
(2,294)
—
—
(9)
(2,096)
734
(1,362)
COMPREHENSIVE INCOME
$
76,439 $
45,361 $
44,541
See accompanying footnotes to consolidated financial statements.
98
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
(in thousands)
Balance, January 1, 2016
2016 Activity:
Net income
Net change in accumulated other comprehensive income
Dividends declared on Common Stock:
Class A Shares ($0.825 per share)
Class B Shares ($0.75 per share)
Stock options exercised, net of shares redeemed
Repurchase of Class A Common Stock
Conversion of Class B to Class A Common Shares
Net change in notes receivable on Class A Common Stock
Deferred director compensation expense - Class A Common Stock
Stock-based awards - Class A Common Stock:
Performance stock units
Restricted stock
Stock options
Balance, December 31, 2016
2017 Activity:
Net income
Net change in accumulated other comprehensive income
Dividends declared on Common Stock:
Class A Shares ($0.869 per share)
Class B Shares ($0.79 per share)
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 awards - Class A Common Stock:
Performance stock units
Restricted stock
Stock options
Balance, December 31, 2017
2018 Activity:
Adjustment for adoption of ASU 2016-01
Net income
Net change in accumulated other comprehensive income
Dividends declared on Common Stock:
Class A Shares ($0.968 per share)
Class B Shares ($0.88 per share)
Stock options exercised, net of shares redeemed
Conversion of Class B to Class A Common Shares
Repurchase of Class A Common Stock
Net change in notes receivable on Class A Common Stock
Deferred compensation - Class A Common Stock:
Directors
Designated key employees
Employee stock purchase plan - Class A Common Stock
Stock-based awards - Class A Common Stock:
Performance stock units
Restricted stock
Stock options
Common Stock
Class B
Shares
Class A
Shares
Outstanding Outstanding Amount
Additional
Paid In
Capital
Retained
Earnings
Accumulated
Other
Total
Comprehensive Stockholders’
Income
Equity
18,652
2,245 $ 4,915 $ 136,910 $ 432,673 $
2,049 $
576,547
—
—
—
—
4
(43)
—
—
4
—
(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
45,903
—
—
(1,362)
—
—
—
(9)
—
—
—
—
—
—
—
—
80
(287)
—
289
170
524
258
248
(15,359)
(1,685)
—
(911)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
45,903
(1,362)
(15,359)
(1,685)
80
(1,207)
—
289
170
524
258
248
18,615
2,245 $ 4,906 $ 138,192 $ 460,621 $
687 $
604,406
—
—
—
—
4
(26)
2
—
5
—
7
—
—
—
—
—
—
—
(2)
—
—
—
—
—
—
—
—
—
—
(4)
—
—
—
—
—
—
—
—
45,632
—
—
(271)
—
—
68
(422)
—
235
191
491
424
227
(16,158)
(1,773)
—
(622)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
45,632
(271)
(16,158)
(1,773)
68
(1,048)
—
235
191
491
424
227
18,607
2,243 $ 4,902 $ 139,406 $ 487,700 $
416 $
632,424
—
—
—
—
—
3
30
(14)
—
5
—
6
—
38
—
—
—
—
—
—
—
(30)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5)
—
1
—
2
—
—
—
—
—
—
—
—
83
—
(349)
5
214
430
228
106
630
265
(35)
77,852
—
(18,076)
(1,955)
—
—
(473)
—
—
—
—
—
—
—
(338)
—
(1,075)
—
—
—
—
—
—
—
—
—
—
—
—
(373)
77,852
(1,075)
(18,076)
(1,955)
83
—
(827)
5
215
430
230
—
106
630
265
Balance, December 31, 2018
18,675
2,213 $ 4,900 $ 141,018 $ 545,013 $
(997) $
689,934
See accompanying footnotes to consolidated financial statements.
99
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:
Net amortization on investment securities
Net accretion on loans and amortization of core deposit intangible
Unrealized losses on equity securities with readily determinable fair value
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 losses on debt securities
Net gain realized on sale of other real estate owned
Writedowns of other real estate owned
Impairment of premises held for sale
Deferred compensation expense - Class A Common Stock
Stock-based awards expense - Class A Common Stock
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 available-for-sale debt securities
Purchases of held-to-maturity debt securities
Proceeds from calls, maturities and paydowns of available-for-sale debt securities
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities
Proceeds from sales of available-for-sale debt securities
Net change in outstanding warehouse lines of credit
Purchase of non-business-acquisition loans, including premiums paid
Net change in other loans
Proceeds from sale of mortgage loans transferred to held for sale
Proceeds from redemption of Federal Home Loan Bank stock
Purchase of Federal Home Loan Bank stock
Proceeds from sales of other real estate owned
Net purchases of premises and equipment
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 Class A Common Stock
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
Net proceeds from Class A 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 sale to held for investment
Loans provided for sales of other real estate owned
Transfers from loans held for investment to held for sale
Unfunded commitments in low-income-housing investments
See accompanying footnotes to consolidated financial statements.
100
2018
2017
2016
$
77,852
$
45,632
$
45,903
97
(3,540)
122
9,347
1,432
31,368
(3,839)
(176,916)
177,545
(5,930)
(778,476)
781,951
—
(729)
—
482
645
1,001
(1,527)
(1,860)
(16)
2,822
7,368
119,199
—
(173,875)
(4,934)
220,798
3,911
—
56,877
—
(216,600)
—
—
—
1,346
(9,044)
(121,521)
22,987
(21,031)
(457,500)
530,000
—
(827)
230
83
(19,497)
54,445
52,123
299,351
351,474
30,139
11,119
662
2,237
—
1,392
14,029
$
$
$
245
(6,373)
—
8,472
1,504
27,704
(3,977)
(160,091)
169,969
(5,647)
(663,171)
661,098
136
(831)
155
1,175
191
1,142
(1,562)
(1,726)
152
730
2,850
77,777
—
(225,212)
(15,595)
158,056
4,207
20,012
59,867
(6,160)
(268,839)
—
—
(3,859)
2,793
(12,383)
(287,113)
272,466
30,548
(490,000)
425,000
—
(1,048)
—
68
(17,656)
219,378
10,042
289,309
299,351
20,106
28,779
841
—
—
—
9,736
$
$
$
503
(2,573)
—
7,304
1,757
14,493
(6,656)
(216,812)
214,760
(2,835)
(380,066)
379,907
—
(514)
270
191
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)
72,330
224
—
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
—
—
$
$
$
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
(the “Parent Company”) and its wholly-owned subsidiaries, the Bank and the Captive. All significant intercompany balances and
transactions are eliminated in consolidation. All companies are collectively referred to as Republic or the Company. The term the
“Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s
insurance subsidiary: Republic Insurance Services, Inc.
The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional
banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its
market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across 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 a group of third-party insurance captives for which insurance may not be
available or economically feasible.
RBCT is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
As of December 31, 2018, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage
Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking”
operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the
Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.
Core Bank
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in
the Company’s market footprint. As of December 31, 2018, Republic had 45 full-service banking centers and one LPO with locations
as follows:
• Kentucky — 32
• Metropolitan Louisville — 18
• Central Kentucky — 9
• Elizabethtown — 1
• Frankfort — 1
• Georgetown — 1
• Lexington — 5
• Shelbyville — 1
• Western Kentucky — 2
• Owensboro — 2
• Northern Kentucky — 3
• Covington — 1
• Crestview Hills — 1
• Florence — 1
• Southern Indiana — 3
• Floyds Knobs — 1
•
Jeffersonville — 1
• New Albany — 1
• Metropolitan Tampa, Florida — 7
• Metropolitan Cincinnati, Ohio — 1
• Metropolitan Nashville, Tennessee — 3*
*Includes one LPO
101
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
Traditional 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
Traditional 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. FHLB advances have traditionally been a significant borrowing
source for the Bank.
Other sources of Traditional 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, and increases in the cash surrender value of BOLI.
Traditional 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, FDIC
insurance expense, franchise tax expense and various other general and administrative costs. Traditional 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 Traditional Bank has acquired for investment single family, first lien mortgage loans that meet the Traditional Bank’s
specifications through its Correspondent Lending channel. Substantially all loans purchased through the Correspondent Lending
channel are purchased at a premium.
Warehouse Lending segment — Through its Warehouse Lending segment, 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. 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.
Mortgage Banking segment — Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first
lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The
Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank
includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting
payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
Republic Processing Group
Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that
facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers
located throughout the United States, as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially
all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss
during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or
state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the
taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of
revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
102
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. First offered
by TRS in 2016, the EA had the following features during its 2018, 2017, and 2016 offering periods:
• Offered only during the first two months of each year;
• No EA fee was charged to the taxpayer customer;
• All fees for the EA 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 pays for another bank product, such as an RT;
• Multiple funds disbursement methods, including direct deposit, prepaid card, check, or Walmart Direct2Cash®, based on the
taxpayer-customer’s election;
• Repayment of the EA to the Bank 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.
The Company reports fees paid by the Tax Providers for the EA product as interest income on loans. EAs are generally repaid within
three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due
date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer customer’s tax return is
submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with provisions
for all probable EA losses made in the first quarter of each year. Unpaid EAs are charged-off within 111 days after the taxpayer
customer’s tax return is submitted to the applicable taxing authority, with the majority of charge-offs typically recorded during the
second quarter of the year.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the
taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is
based primarily on the prior-year’s tax refund funding patterns. Because much of the EA 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.
Republic Payment Solutions — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering
general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card
program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of
operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment
until such time, if any, that it meets quantitative reporting thresholds.
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.”
Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit
products are unsecured, small dollar consumer loans and are dependent on various factors including the consumer’s ability to repay.
RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking
segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. Additional information regarding
consumer loan products offered through RCS follows:
• RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United
States through Elevate Credit, Inc., its third-party servicer provider. RCS sells 90% of the balances generated within two
business days of loan origination to a special purpose entity related to Elevate Credit, Inc. and retains the remaining 10%
interest. The line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale are carried
at the lower of cost or fair value.
• RCS credit-card product – From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted a credit-card
product to generally subprime borrowers across the United States through one third-party marketer/servicer. For outstanding
103
cards, RCS sold 90% of the balances generated within two business days of each transaction occurrence to a special purpose
entity related to its third-party marketer/servicer and retained the remaining 10% interest. During the fourth quarter of 2018,
the Bank and its third-party marketer/servicer finalized an agreement to sell 100% of the existing portfolio to an unrelated
third party. The sale of the RCS credit-card portfolio receivables was settled in January 2019.
• RCS healthcare receivables product – The Bank originates a healthcare-receivables product across the United States through
two different third-party service providers. For one third-party service provider, the Bank retains 100% of the receivables
originated. For the other third-party service provider, the Bank retains 100% of the receivables originated in some instances,
and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale are carried
at the lower of cost or fair value.
• RCS installment loan product – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer
installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold
100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after
origination. The Bank carried all unsold loans under the program as “held for sale” on its balance sheet. At the initiation of
this program in 2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter
marked to market monthly.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any
new loans, and the subsequent sale of all recently originated loans under this program, while the two parties evaluated the
future offering of this product due to changes in the applicable state law impacting the product. Concurrent with the
suspension of this program, the Bank reclassified approximately $2.2 million of these loans from held for sale on the balance
sheet into the held-for-investment category and revalued these loans accordingly.
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains
or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
Use of Estimates — Financial statements prepared in conformity with 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 74% of such loans secured by collateral located in the state of
California as of December 31, 2018. 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, 2018, 32% of collateral securing
warehouse lines were located in California.
Earnings Concentration — For 2018, 2017 and 2016, approximately 27%, 25% and 19% of total Company net revenues (net interest
income plus noninterest income) were derived from the RPG operations. Within RPG, the TRS segment accounted for 14%, 13% and
12%, while the RCS segment accounting for 13%, 12% and 7% of total Company net revenues.
For 2018, 2017 and 2016, approximately 5%, 7% and 8% 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.
104
Interest-Bearing Deposits in Other Financial Institutions — Interest-bearing deposits in other financial institutions mature within
one year and are carried at cost.
Debt Securities — 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.
Available-for-sale debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive
income, net of tax.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on callable securities are amortized
to the earliest call date. Other 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 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 OCI. 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.
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.
Equity Securities — On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments. Among other things, ASU
2016-01 requires the Company recognize changes in the fair value of equity investments with a readily determinable fair value in net
income unless those investments are accounted for under the equity method of accounting.
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 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.
105
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 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, 2018 and 2017, management determined there was no impairment within the MSR portfolio.
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 $2.4 million, $2.2 million and $2.0 million for the years ended December 31, 2018, 2017 and
2016. Late fees and ancillary fees related to loan servicing are considered nominal.
Loans — The Bank’s financing receivables consist primarily of loans and 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.
106
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 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.
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 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-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.
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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 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 — 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.
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
estimated 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 estimated 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.
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In addition to obtaining appraisals at the time of origination, the Bank typically updates appraisals and/or 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.
In determining the historical loss rates for each respective loan class, management evaluates the following historical loss rate
scenarios:
• Current year to date historical loss factor average
• 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
• Rolling thirty-six quarter average
• Rolling forty quarter 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.
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As this analysis, or any similar analysis, is an imprecise measure of loss, the Allowance is subject to ongoing adjustments. Therefore,
management will often consider 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.
Allowance for Loans Originated Through the Republic Processing Group
The RPG Allowance at December 31, 2018 and 2017 primarily related to loans originated and held for investment through the RCS
segment. RCS generally originates small-dollar, consumer 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. RCS loans typically earn a higher yield but also
have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS
clients considered subprime or near-prime borrowers.
RCS’s short-term line-of-credit product represented 36% and 42% of the RCS held-for-investment loan portfolio at December 31,
2018 and 2017. For this product, management conducted an analysis of historical losses and delinquencies by month of loan
origination when determining the Allowance through September 30, 2018. Subsequent to September 30, 2018, management conducted
an analysis of its line-of-credit product using a method similar to that employed for pooled loans collectively evaluated, as described
above. This change in method of analysis did not a have a material impact on the Allowance calculated for RCS’s line-of-credit
product as of December 31, 2018, September 30, 2018 or December 31, 2017. For RCS’s other products, the Allowance is and has
been traditionally estimated using a method similar to that employed for pooled loans collectively evaluated, as described above.
RPG’s TRS segment first offered its EA tax-credit product during the first two months of 2016 and again during the first two months
of 2017 and 2018. An Allowance for losses on EAs is estimated during the limited, short-term period the product is offered. EAs are
generally repaid within three weeks of origination. Provisions for loan losses on EAs are estimated when advances are made, with all
provisions made in the first quarter of each year. No Allowance for EAs existed as of December 31, 2018 and 2017, as all EAs
originated during the first two months of each year had either been paid off or charged-off within 111 days of origination. The
majority of EA charge-offs are recorded during the second quarter of each year.
See Footnote 4 “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.
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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
broker price opinions. Operating costs after acquisition are expensed.
Appraisals for both collateral-dependent impaired loans and OREO 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 CCAD 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.
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 represents the excess of the fair value of the
consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets
assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase combination and determined to have an
indefinite useful life are not amortized, but tested annually or more frequently if events and circumstances exist that indicate that a
goodwill impairment test should be performed.
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 at December 31, 2018 and 2017 was not impaired and is
properly recorded in the consolidated financial.
Other intangible assets consist of 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.
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
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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.
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. Forfeitures of
stock-based awards are accounted for when incurred in lieu of using forfeiture estimates.
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. DTAs and DTLs 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 DTAs 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.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
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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. All
outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating
securities for this calculation. 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 OCI. OCI includes, net of tax, unrealized gains and
losses on available-for-sale debt securities and unrealized gains and losses on cash flow hedges, which are also recognized as separate
components 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 FRB to maintain average reserve balances. Cash and due
from banks on the consolidated balance sheet included no required reserve balances at December 31, 2018 and 2017.
The Company’s Captive maintains cash reserves to cover insurable claims. Reserves totaled $3 million and $3 million as of December
31, 2018 and 2017.
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 14 “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.
Revenue from contracts with Customers - On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with
Customers and all subsequent amendments to the ASU (collectively, “ASC 606”). While this update modified guidance for
recognizing revenue, it did not have a material impact on the timing or presentation of the Company’s revenue. The majority of
Company’s revenue comes from interest income and other sources, including loans, leases, securities, and derivatives, which are not
subject to ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are
recognized as revenue as the Company satisfies its obligation to its client. The Company did elect a practical expedient permitted
under this guidance which allows it to expense as-incurred incremental costs of obtaining a contract when the amortization period of
those costs would be less than one year.
Segment Information — Reportable segments represent parts of the Company evaluated by management with separate financial
information. Republic’s internal information is primarily reported and evaluated in five reportable segments – Traditional Banking,
Warehouse, Mortgage Banking, TRS and RCS.
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.
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Accounting Standards Updates
The following ASUs were issued prior to December 31, 2018 and are considered relevant to the Company’s financial statements.
Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to the Company has been disclosed in prior
Company financial statements, it will not be included below.
Topic
ASU. No.
2016-02 Leases (Topic
842)
Nature of Update
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.
Date Adoption Required Permitted Adoption Methods
January 1, 2019
Modified-retrospective
approach, which includes a
number of optional practical
expedients.
2016-13 Financial
Instruments –
Credit Losses
(Topic 326)
This ASU amends guidance on reporting
credit losses for assets held at amortized-
cost basis and available-for-sale debt
securities.
January 1, 2020
Modified-retrospective
approach.
Expected Financial Statement Impact
The Company adopted this ASU on January 1, 2019 and
upon adoption recorded $41 million of right-of-use
lease assets and $42 million of operating lease liabilities
on its balance sheet. The Company does not expect the
adoption of this ASU to have a meaningful impact on
the Company's performance metrics, including
regulatory capital ratios and return on average assets.
Additionally, the Company does not believe that the
adoption of this ASU by its clients will have a
significant impact on the Company's ability to
underwrite credit when client financial statements are
presented inclusive of the requirements of this ASU.
As a result of this ASU, the Company expects an as yet
undetermined increase in its allowance for credit losses.
A committee formed by the Company to oversee its
transition to a current expected credit losses (“CECL”)
methodology has analyzed the Company’s loan-level
data and preliminarily concluded that no additional loan
level segmentation beyond its current methodology
segmentation would be warranted under CECL. The
Company is also currently performing iterations of its
allowance calculation under a “beta” CECL model
provided by the same third-party software solution
currently-employed to calculate the Company's
allowance for loan and lease losses.
2018-10 Codification
Improvements
to Topic 842,
Leases
2018-11 Leases (Topic
842): Targeted
Improvements
2018-16 Derivatives
and Hedging
(Topic 815)
2018-18 Collaborative
Arrangements
(Topic 808)
2018-20 Leases (Topic
842)
This ASU affects narrow aspects of the
guidance issued in the amendments in
ASU 2016-02.
January 1, 2019
Adoption should conform to
Immaterial
the adoption of ASU 2016-02
above.
This ASU provides the Company with an
January 1, 2019
Adoption should conform to
The Company elected the optional transition method
additional (and optional) transition
method to adopt ASU 2016-02. This
ASU also provides the Company with a
practical expedient to not separate non-
lease components from the associated
lease component under certain
circumstances.
the adoption of ASU 2016-02
above.
permitted by this ASU, allowing the Company to adopt
ASU 2016-02, effective January 1, 2019 with a
cumulative-effect adjustment to the opening balance of
retained earnings on January 1, 2019.
This ASU permits the use of the
January 1, 2019
Prospectively.
Immaterial
Overnight Index Swap (OIS) rate based
on Secured Overnight Financing Rate
(SOFR) as a U.S. benchmark interest rate
for hedge accounting purposes under
Topic 815.
This ASU makes targeted improvements
January 1, 2020
Retrospectively.
Immaterial
for accounting for collaborative
arrangements in order to better align the
accounting with guidance in Topic 606,
Revenue from Contracts with Customers.
This ASU permits lessors, as an
January 1, 2019
Prospectively.
Immaterial
accounting policy election, to not
evaluate whether certain sales taxes and
other similar taxes are lessor costs or
lessee costs, but instead account for such
costs as lessee costs. This ASU also
requires that lessors allocate rather than
recognize certain variable payments to
the lease and non-lease components
when the changes in facts and
circumstances on which the variable
payment is based occur.
114
The following ASUs were adopted by the Company during the year ended December 31, 2018:
ASU. No.
Topic
2014-09 Revenue from
Contracts with
Customers (Topic
606)
Nature of Update
Requires that revenue from contracts with
clients be 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.
Date Adopted Method of Adoption
January 1, 2018 Modified-
retrospective
approach.
Financial Statement Impact
Because most financial instruments are not subject to this ASU, a
substantial portion of the Company's revenue was not impacted by
this standard. Furthermore, this new standard did not have a
material impact on the timing of revenue recognition for any of
the Company's revenue for 2018 nor is it expected to going
forward. Additionally, the Company took the following actions in
association with the adoption of this ASU: 1) amended its
accounting policies and procedures to ensure proper revenue
recognition in conformity with this ASU; and 2) updated its
revenue-recognition financial statement disclosures (see footnote
23 in this section of the filing).
2016-01 Financial
Among other things: Requires equity
January 1, 2018 Modified-
The Company has updated its policies, procedures, and financial
retrospective
approach.
statement presentation and disclosures for this ASU. As provided
by this ASU, the Company now reports its financial instruments at
exit price (see footnote 14 in this section of the filing) and
recognizes changes in the fair value of applicable equity
investments in net income (see footnote 2 in this section of the
filing).
Instruments –
Overall (Topic 825-
10)
investments (except 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.
2016-15 Statement of Cash
Flows (Topic 230):
Classification of
Certain Cash
Receipts and Cash
Payments
2016-18 Statement of Cash
Flows (Topic 230)
This ASU provides cash flow statement
January 1, 2018 Retrospective
Immaterial.
classification guidance on eight reportable
topics.
transition.
Requires that a statement of cash flows
January 1, 2018 Retrospective
Immaterial.
transition.
explain the change during the period in the
total of cash, cash equivalents, and amounts
generally described as restricted cash or
restricted cash equivalents. As a result,
amounts generally described as restricted cash
and restricted cash equivalents should be
included with cash and cash equivalents when
reconciling the beginning-of-period and end-
of-period total amounts shown on the
statement of cash flows. The amendments do
not provide a definition of restricted cash or
restricted cash equivalents.
2017-09 Compensation -
Stock
Compensation
(Topic 718)
The amendments provide guidance on
January 1, 2018 Prospectively.
Immaterial.
determining which changes to the terms and
conditions of share-based payment awards
require the Company to apply modification
accounting under Topic 718.
2018-05 Income Taxes
This ASU updates the FASB's ASC for
Upon addition
Not Applicable.
For the Company's financial statement disclosures in accordance
(Topic 740):
Amendments to
SEC Paragraphs
Pursuant to SEC
Staff Accounting
Bulletin No. 118
("SAB 118")
guidance issued by the SEC in SAB 118.
Among other things, SAB 118 allows
companies a one-year measurement period to
complete their accounting for the impact of
the 2017 Tax Cuts and Jobs Act.
to the ASC
with SAB 118, see footnote 18 in this section of the filing.
115
2.
INVESTMENT SECURITIES
Available-for-Sale Debt Securities
The gross amortized cost and fair value of AFS debt securities and the related gross unrealized gains and losses recognized in AOCI
were as follows:
December 31, 2018 (in thousands)
U.S. Treasury securities and U.S. Government agencies
Private label mortgage backed security
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Trust preferred security
Total available-for-sale debt securities
December 31, 2017 (in thousands)
U.S. Treasury securities and U.S. Government agencies
Private label mortgage backed security
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Trust preferred security
Total available-for-sale debt securities
Held-to-Maturity Debt Securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
218,502 $
2,348
168,992
73,740
10,000
3,533
477,115 $
25 $
1,364
1,470
222
—
542
3,623 $
(1,654) $
—
(1,253)
(1,151)
(942)
—
(5,000) $
216,873
3,712
169,209
72,811
9,058
4,075
475,738
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
309,042 $
3,065
105,644
87,867
15,001
3,493
524,112 $
1 $
1,384
1,603
371
124
107
3,590 $
(1,451) $
—
(873)
(1,075)
—
—
(3,399) $
307,592
4,449
106,374
87,163
15,125
3,600
524,303
$
$
$
$
The carrying value, gross unrecognized gains and losses, and fair value of HTM debt securities were as follows:
December 31, 2018 (in thousands)
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Obligations of state and political subdivisions
Total held-to-maturity debt securities
December 31, 2017 (in thousands)
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Obligations of state and political subdivisions
Total held-to-maturity debt securities
Gross
Gross
Carrying
Value
Unrecognized
Unrecognized
Gains
Losses
Fair
Value
132 $
19,544
45,088
463
65,227 $
8 $
178
16
—
202 $
— $
(46)
(514)
(11)
(571) $
140
19,676
44,590
452
64,858
Gross
Gross
Carrying
Value
Unrecognized
Unrecognized
Gains
Losses
Fair
Value
151 $
23,437
40,175
464
64,227 $
10 $
236
686
—
932 $
— $
(17)
(3)
(6)
(26) $
161
23,656
40,858
458
65,133
$
$
$
$
At December 31, 2018 and 2017, there were no holdings of debt securities of any one issuer, other than the U.S. Government and its
agencies, in an amount greater than 10% of stockholders’ equity.
116
Sales of Available-for-Sale Debt Securities
During 2017, the Bank recognized a gross loss of $136,000 on the sale of two AFS debt securities. The tax benefit related to the
Bank’s realized losses totaled $48,000 for the year ended December 31, 2017.
During 2018 and 2016, there were no sales of AFS debt securities.
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2018 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, 2018 (in thousands)
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
Total debt securities
Market Loss Analysis
Available-for-Sale
Debt Securities
Held-to-Maturity
Debt Securities
Amortized
Cost
Fair
Value
Carrying
Value
Fair
Value
$
$
74,692
153,810
—
3,533
2,348
168,992
73,740
477,115
$
$
74,083
151,848
—
4,075
3,712
169,209
72,811
475,738
$
$
75
40,536
4,940
—
—
132
19,544
65,227
$
$
75
40,266
4,701
—
—
140
19,676
64,858
Securities with unrealized losses at December 31, 2018 and 2017, aggregated by investment category and length of time that
individual debt securities have been in a continuous unrealized loss position, are as follows:
December 31, 2018 (in thousands)
Available-for-sale debt securities:
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 available-for-sale debt securities
$
$
71,627 $
43,691
16,487
9,058
140,863 $
(598) $
(484)
(473)
(942)
(2,497) $
106,136 $
32,003
31,071
—
169,210 $
(1,056) $
(769)
(678)
—
(2,503) $
177,763 $
75,694
47,558
9,058
310,073 $
(1,654)
(1,253)
(1,151)
(942)
(5,000)
December 31, 2017 (in thousands)
Available-for-sale debt securities:
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
Total available-for-sale debt securities
$
$
209,165 $
61,348
30,963
301,476 $
(499) $
(617)
(642)
(1,758) $
88,415 $
10,192
18,603
117,210 $
(952) $
(256)
(433)
(1,641) $
297,580 $
71,540
49,566
418,686 $
(1,451)
(873)
(1,075)
(3,399)
117
December 31, 2018 (in thousands)
Held-to-maturity debt securities:
Collateralized mortgage obligations
Corporate bonds
Obligations of state and political subdivisions
Total held-to-maturity debt securities:
December 31, 2017 (in thousands)
Held-to-maturity debt securities:
Collateralized mortgage obligations
Corporate bonds
Obligations of state and political subdivisions
Total held-to-maturity debt securities:
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
$
— $
39,499
105
39,604 $
— $
(514)
(1)
(515) $
5,539 $
—
347
5,886 $
(46) $
—
(10)
(56) $
5,539 $
39,499
452
45,490 $
(46)
(514)
(11)
(571)
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
$
— $
4,997
458
5,455 $
— $
(3)
(6)
(9) $
6,390 $
—
—
6,390 $
(17) $
—
—
(17) $
6,390 $
4,997
458
11,845 $
(17)
(3)
(6)
(26)
At December 31, 2018, the Bank’s portfolio consisted of 182 securities, 65 of which were in an unrealized loss position.
At December 31, 2017, the Bank’s portfolio consisted of 185 securities, 58 of which were in an unrealized loss position.
Corporate Bonds
From 2013 to 2018, the Bank purchased various floating-rate corporate bonds. These 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 10%
and 9% of the Bank’s investment portfolio as of December 31, 2018 and 2017. During 2018, one of these bonds was downgraded to
BBB+ (S&P/Fitch), driving a significant decrease in the bond’s market value. As of December 31, 2018, this bond reflected an
unrealized loss of $942,000. The Bank does not intend to sell this bond, and it is likely that it will not be required to sell this bond
before the bond’s anticipated recovery, therefore, management does not consider this bond to have OTTI.
Mortgage Backed Securities and Collateralized Mortgage Obligations
At December 31, 2018, with the exception of the $3.7 million private label mortgage backed security, all other mortgage backed
securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FNMA. At
December 31, 2018 and December 31, 2017, there were gross unrealized losses of $2.4 million and $1.9 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.
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 rate plus 159 basis points. The Company performed an initial
analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.
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;
118
• 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 $3.7 million at December 31, 2018. This
security 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 14
“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)
2018
2017
2016
Balance, beginning of period
Recovery of losses previously recorded
Balance, end of period
$
$
1,765 $
(152)
1,613 $
1,765 $
—
1,765 $
1,765
—
1,765
Further deterioration in economic conditions could cause the Bank to record an additional impairment charge related to credit losses of
up to $2.3 million, which is the current gross amortized cost of the Bank’s remaining private label mortgage backed security.
Pledged Debt Securities
Debt 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)
Carrying amount
Fair value
2018
2017
$
240,590 $
240,700
262,679
262,902
119
Equity Securities
The following tables present the carrying value, gross unrealized gains and losses, and fair value of equity securities with readily
determinable fair values:
December 31, 2018 (in thousands)
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
Freddie Mac preferred stock
Community Reinvestment Act mutual fund
Total equity securities with readily determinable fair values
$
$
— $
2,500
2,500 $
410 $
—
410 $
— $
(104)
(104) $
410
2,396
2,806
December 31, 2017 (in thousands)
Gross
Gross
Amortized
Cost
Unrealized
Unrealized
Gains
Losses
Fair
Value
Freddie Mac preferred stock
Community Reinvestment Act mutual fund
Total equity securities with readily determinable fair values
$
$
— $
2,500
2,500 $
473 $
—
473 $
— $
(45)
(45) $
473
2,455
2,928
For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the
Company’s consolidated statements of income were as follows:
(in thousands)
Year Ended December 31, 2018
Gains (Losses) Recognized on Equity Securities
Unrealized
Realized
Total
Freddie Mac preferred stock
Community Reinvestment Act mutual fund
Total equity securities with readily determinable fair value
$
$
— $
—
— $
(63) $
(59)
(122) $
(63)
(59)
(122)
Freddie Mac Preferred Stock
During 2008, the U.S. Treasury, the FRB, and the 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, 2018, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $410,000.
3.
LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale
are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans
originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 15 “Mortgage Banking Activities” of
this section of the filing.
Consumer Loans Held for Sale, at Fair Value
From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment-loan product across the
United States using a third-party marketer/service. As part of the program, the Bank sold 100% of the balances generated through the
program back to the third-party marketer/servicer approximately 21 days after origination. The Bank carried all unsold loans under the
120
program as “held for sale” on the its balance sheet. At the initiation of this program in 2016, the Bank elected to carry these loans at
fair value under a fair-value option, with the portfolio thereafter marked to market monthly.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any new loans,
and the subsequent sale of all recently-originated loans under this program, while the two parties evaluated the future offering of this
product due to changes in the applicable state law impacting the product. Concurrent with the suspension of this program, the Bank
reclassified approximately $2.2 million of these loans from held for sale on the balance sheet into the held-for-investment category
and revalued these loans accordingly.
Activity for consumer loans held for sale and carried at fair value was as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
2,677 $
Origination of consumer loans held for sale
Loans transferred to held for investment
Proceeds from the sale of consumer loans held for sale
Net gain (loss) recognized on consumer loans held for sale
16,985
(2,237)
(17,022)
(403)
Balance, end of period
$
— $
2,198 $
59,467
—
(59,380)
392
2,677 $
—
45,274
—
(43,410)
334
2,198
Consumer Loans Held for Sale, at Lower of Cost or Fair Value
RCS originates balances for a line-of-credit product and, through December 31, 2018, originated balances on a credit-card product.
The Bank has sold 90% of the balances maintained through these products within two days of transactional activity and retained a
10% interest. The line-of-credit product represents the substantial majority of balances retained as consumer loans held for sale that
are carried at the lower of cost or fair value. During the third quarter of 2018, the Bank and its third-party marketer/servicer agreed to
sell 100% of the existing credit-card portfolio to an unrelated third party. As a result, the Bank reclassified its 10% interest into a held-
for-sale category and charged the entire RCS credit-card portfolio down to its estimated net realizable value. The Bank and its third-
party marketer/servicer closed the sale of the credit-card portfolio in January 2019. Gains or losses on the sale of RCS 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)
2018
2017
2016
Balance, beginning of period
Origination of consumer loans held for sale
Loans transferred from held for investment
Proceeds from the sale of consumer loans held for sale
Net gain on sale of consumer loans held for sale
Balance, end of period
$
$
8,551 $
761,491
1,392
(764,929)
6,333
12,838 $
1,310 $
603,704
—
(601,718)
5,255
8,551 $
514
334,792
—
(336,497)
2,501
1,310
121
4.
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Ending loan balances at December 31, 2018 and 2017 were as follows:
December 31, (in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent*
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit*
Total Core Banking
Republic Processing Group*:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Total loans**
Allowance for loan and lease losses
Total loans, net
$
2018
2017
$
907,005
94,827
242,846
1,248,940
175,178
430,355
15,031
332,548
19,095
1,102
63,475
46,642
3,577,044
468,695
4,045,739
—
13,744
88,744
102,488
4,148,227
(44,675)
921,565
116,792
205,081
1,207,293
150,065
341,692
16,580
347,655
16,078
974
65,650
20,501
3,409,926
525,572
3,935,498
—
11,648
66,888
78,536
4,014,034
(42,769)
$
4,103,552
$
3,971,265
*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, 2018 and 2017:
December 31, (in thousands)
2018
2017
Contractually receivable
Unearned income(1)
Unamortized premiums(2)
Unaccreted discounts(3)
Net unamortized deferred origination fees and costs(4)
Carrying value of loans
$
$
4,147,249 $
(1,038)
588
(3,174)
4,602
4,148,227 $
4,014,673
(1,157)
1,069
(4,643)
4,092
4,014,034
(1) Unearned income relates to lease financing receivables.
(2) Unamortized premiums predominately relate to loans acquired through the Bank’s Correspondent Lending channel.
(3) Unaccreted discounts include accretable and non-accretable discounts and relate to loans acquired in the Bank’s 2016 Cornerstone acquisition and its 2012
FDIC-assisted transactions.
(4) Primarily attributable to the Traditional Banking segment.
122
Purchased-Credit-Impaired Loans
The following table reconciles the contractually required and carrying amounts of all PCI loans at December 31, 2018 and 2017:
December 31, (in thousands)
2018
2017
Contractually required principal
Non-accretable amount
Accretable amount
Carrying value of loans
$
$
4,251 $
(1,521)
(50)
2,680 $
5,435
(1,691)
(140)
3,604
The following table presents a rollforward of the accretable amount on all PCI loans for years ended December 31, 2018, 2017 and
2016:
Years Ended December 31, (in thousands)
2018
2017
2016
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
$
$
(140) $
(573)
663
—
(50) $
(3,600) $
(28)
3,488
—
(140) $
(4,125)
(206)
1,120
(389)
(3,600)
*Transfers are primarily attributable to changes in estimated cash flows of the underlying loans.
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 C&I, CRE and C&D loans, the Bank’s CCAD 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 senior management. When circumstances warrant a review and possible change in the credit quality grade, loan
officers are required to notify the Bank’s CCAD.
• 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, CCAD, Accounting, Special Assets
and Retail Collections attend a Special Asset Committee 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 CCAD 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
FICO credit report score for the underlying collateral, average LTV for the underlying collateral and other factors deemed
relevant.
123
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.
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: 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 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: 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-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
124
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.
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 RPG loans, which 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 no less than quarterly 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.
125
The following tables include loans by risk category based on the Bank’s internal analysis performed:
December 31, 2018
(in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Total rated loans
December 31, 2017
(in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Total rated loans
Special
Doubtful /
PCI Loans -
PCI Loans -
Pass
Mention
Substandard
Loss
Group 1
Substandard
Total Rated
Loans*
$
— $
14,536 $
11,690 $
— $
170 $
1,476 $
—
—
1,239,576
175,113
428,897
15,031
—
—
—
—
—
1,858,617
468,695
2,327,312
—
—
—
—
—
575
5,281
—
813
—
—
—
—
—
—
21,205
—
21,205
—
—
—
—
382
1,889
3,162
65
620
—
1,361
—
—
91
462
19,722
—
19,722
—
—
138
138
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
921
—
25
—
5
—
—
—
—
1,121
—
1,121
—
—
—
—
—
—
—
—
—
—
81
—
—
—
2
1,559
—
1,559
—
—
—
—
27,872
382
2,464
1,248,940
175,178
430,355
15,031
1,447
—
—
91
464
1,902,224
468,695
2,370,919
—
—
138
138
$
2,327,312 $
21,205 $
19,860 $
— $
1,121 $
1,559 $
2,371,057
Pass
Special
Mention
Doubtful /
PCI Loans -
PCI Loans -
Substandard
Loss
Group 1
Substandard
Total Rated
Loans*
$
— $
18,054 $
12,056 $
— $
180 $
1,658 $
—
—
1,197,299
149,332
341,377
16,580
—
—
—
—
—
1,704,588
525,572
2,230,160
—
11,648
—
11,648
—
635
4,824
—
267
—
33
—
—
—
—
23,813
—
23,813
—
—
—
—
—
1,240
3,798
733
21
—
1,609
—
—
108
571
20,136
—
20,136
—
—
1,066
1,066
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
248
1,372
—
27
—
6
—
—
—
—
1,833
—
1,833
—
—
—
—
31,948
—
2,123
1,207,293
150,065
341,692
16,580
1,758
—
—
108
574
1,752,141
525,572
2,277,713
—
—
—
—
—
—
110
—
—
—
3
1,771
—
1,771
—
—
—
—
—
11,648
1,066
12,714
$
2,241,808 $
23,813 $
21,202 $
— $
1,833 $
1,771 $
2,290,427
* The above tables exclude all non-classified or non-rated residential real estate, home equity and consumer loans at the respective period ends.
126
Subprime Lending
Both the Traditional Banking segment and the RCS 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 $49 million and $47 million at December 31, 2018 and 2017.
Approximately $18 million and $12 million of the outstanding Traditional Bank subprime loan portfolio at December 31, 2018 and
2017 were originated for CRA purposes. Management does not consider these loans to possess significantly higher credit risk due to
other underwriting qualifications.
The RCS segment originates a short-term line-of-credit product and, through December 31, 2018, originated a credit card product. The
Bank has traditionally sold 90% of the balances maintained through these two products within two days of loan origination and
retained a 10% interest. Both of these RCS 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 $32 million and $33 million at December 31,
2018 and 2017. The balance held as of December 31, 2018 includes only the Bank’s line-of-credit product because the Bank settled
the sale of 100% of its interest in its RCS credit-card product in January 2019.
Allowance for Loan and Lease Losses
The following tables present the activity in the Allowance by portfolio class for the years ended December 31, 2018, 2017 and 2016:
(in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Allowance Rollforward
Years Ended December 31,
2018
Beginning
Balance Provision
Charge-
offs
Ending
Recoveries Balance
Beginning
Balance Provision
Ending
Recoveries Balance
2017
Charge-
offs
$ 6,182 $
292
1,396
9,043
2,364
2,198
174
3,754
225 $
(55)
559
863
161
824
(16)
(473)
(855) $
—
(332)
(7)
—
(200)
—
(115)
246 $ 5,798
—
237
39
1,662
10,030
131
30
2,555
51
2,873
—
158
311
3,477
$ 7,158 $ (933) $
(81)
272
826
508
842
38
37
373
1,139
8,078
1,850
1,511
136
3,757
(300) $
—
(30)
—
—
(189)
—
(222)
257 $ 6,182
—
292
15
1,396
139
9,043
6
2,364
34
2,198
—
174
182
3,754
607
974
687
1,162
28,833
1,314
30,147
906
1,082
57
(423)
3,710
(142)
3,568
(416)
(1,215)
(24)
(444)
(3,608)
—
(3,608)
43
261
4
296
1,412
—
1,412
1,140
1,102
724
591
30,347
1,172
31,519
490
675
526
771
26,464
1,464
27,928
247
1,031
188
948
3,923
(150)
3,773
(168)
(960)
(30)
(884)
(2,783)
—
(2,783)
38
228
3
327
1,229
—
1,229
607
974
687
1,162
28,833
1,314
30,147
— 10,760
159
12
16,881
27,800
12,610
12,622
(12,478)
(74)
(17,692)
(30,244)
1,718
10
1,250
2,978
—
107
13,049
13,156
—
25
4,967
4,992
6,789
(254)
17,396
23,931
(8,121)
—
(10,659)
(18,780)
1,332
241
906
2,479
—
12
12,610
12,622
Total
$ 42,769 $ 31,368 $ (33,852) $ 4,390 $ 44,675
$ 32,920 $ 27,704 $ (21,563) $ 3,708 $ 42,769
127
(in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Refund Anticipation Loans
Commercial & industrial
Republic Credit Solutions
Total Republic Processing Group
Total
Beginning
Balance
$
8,301 $
623
1,052
7,672
1,303
1,455
89
2,996
448
351
56
479
24,825
967
25,792
—
—
—
1,699
1,699
Allowance Rollforward
Year Ended December 31, 2016
Charge-
offs
Provision
Recoveries
(1,148)
(250)
79
768
513
259
47
961
154
898
481
686
3,448
497
3,945
3,048
(301)
25
7,776
10,548
$
(416) $
—
—
(514)
(44)
(330)
—
(351)
(164)
(816)
(12)
(735)
(3,382)
—
(3,382)
(3,474)
—
—
(5,000)
(8,474)
421
—
8
152
78
127
—
151
52
242
1
341
1,573
—
1,573
426
301
—
492
1,219
$
Ending
Balance
7,158
373
1,139
8,078
1,850
1,511
136
3,757
490
675
526
771
26,464
1,464
27,928
—
—
25
4,967
4,992
$
27,491 $
14,493
$
(11,856) $
2,792
$
32,920
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans and nonperforming assets and select credit quality ratios follows:
December 31, (dollars in thousands)
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
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
2018
2017
$
$
15,993
145
16,138
160
16,298
$ 14,118
956
15,074
115
$ 15,189
0.39 %
0.39
0.31
0.38 %
0.38
0.30
0.40 %
0.40
0.32
0.36 %
0.36
0.28
*Loans on nonaccrual status include impaired loans.
**Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
128
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)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Nonaccrual
2018
2017
Past Due 90-Days-or-More
and Still Accruing Interest*
2018
2017
$
$
10,800 $
382
669
2,318
—
630
—
1,095
—
—
75
24
15,993
—
15,993
—
—
—
—
9,230
—
257
3,247
67
—
—
1,217
—
—
68
32
14,118
—
14,118
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
13
13
—
13
—
4
128
132
—
—
—
—
—
—
—
—
—
—
—
19
19
—
19
—
—
937
937
Total
$
15,993 $
14,118
$
145 $
956
* Loans past due 90-days-or-more and still accruing consist of 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 collectively evaluated for impairment and individually 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.
129
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, 2018 and 2017:
December 31, 2018
(in thousands)
Owner
Occupied
Occupied -
Nonowner
Correspondent Occupied
Home
Equity
Credit
Cards
Overdrafts
Automobile
Loans
Other
Consumer
Residential Real Estate
Owner
Consumer
Republic
Credit
Solutions
Performing
Nonperforming
Total
$
896,205
10,800
$
94,445
382
$
242,177
669
$
331,453
1,095
$
19,095
—
$
1,102
—
$
63,400
75
$
46,605 $
37
88,616
128
$
907,005
$
94,827
$
242,846
$
332,548
$
19,095
$
1,102
$
63,475
$
46,642 $
88,744
December 31, 2017
(in thousands)
Owner
Occupied
Occupied -
Nonowner
Correspondent Occupied
Home
Equity
Credit
Cards
Overdrafts
Automobile
Loans
Other
Consumer
Residential Real Estate
Owner
Consumer
Republic
Credit
Solutions
Performing
Nonperforming
Total
Delinquent Loans
$
912,335
9,230
$
116,792
—
$
204,824
257
$
346,438
1,217
$
16,078
—
$
$
974
—
65,582
68
$
20,450
51
$
65,951
937
$
921,565
$
116,792
$
205,081
$
347,655
$
16,078
$
974
$
65,650
$
20,501
$
66,888
The following tables present the aging of the recorded investment in loans by class of loans:
December 31, 2018
(dollars in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
30 - 59
Days
Delinquent
60 - 89
Days
Delinquent
90 or More
Days
Delinquent*
Total
Delinquent**
Total
Current
Total
$
1,137
—
349
511
—
—
—
558
82
223
—
27
2,887
—
2,887
—
2
5,734
5,736
$
748
—
—
—
—
—
—
—
46
5
28
7
834
—
834
—
4
1,215
1,219
$
3,640
—
659
588
—
25
—
226
1
2
—
13
5,154
—
5,154
—
4
128
132
$
5,525
—
1,008
1,099
—
25
—
784
129
230
28
47
8,875
—
8,875
—
10
7,077
7,087
$
901,480 $
94,827
241,838
1,247,841
175,178
430,330
15,031
331,764
907,005
94,827
242,846
1,248,940
175,178
430,355
15,031
332,548
18,966
872
63,447
46,595
3,568,169
468,695
4,036,864
19,095
1,102
63,475
46,642
3,577,044
468,695
4,045,739
—
13,734
81,667
95,401
—
13,744
88,744
102,488
Total
Delinquency ratio***
$
8,623
$
0.21 %
2,053
$
0.05 %
5,286
$
0.13 %
15,962
$ 4,132,265 $ 4,148,227
0.38 %
*All loans past due 90-days-or-more, excluding small balance consumer 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 by aging category divided by total loans.
130
December 31, 2017
(dollars in thousands)
30 - 59
Days
Delinquent
60 - 89
Days
Delinquent
90 or More
Days
Delinquent*
Total
Delinquent**
Total
Current
Total
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
$
$
2,559
—
47
398
67
15
—
723
34
230
36
93
4,202
—
4,202
—
—
3,631
3,631
$
1,166
—
—
—
—
—
—
50
40
3
—
21
1,280
—
1,280
—
—
1,073
1,073
$
1,057
—
99
1,329
—
—
—
448
—
—
24
21
2,978
—
2,978
—
—
937
937
4,782
—
146
1,727
67
15
—
1,221
74
233
60
135
8,460
—
8,460
—
—
5,641
5,641
$
916,783 $
116,792
204,935
1,205,566
149,998
341,677
16,580
346,434
921,565
116,792
205,081
1,207,293
150,065
341,692
16,580
347,655
16,004
741
65,590
20,366
3,401,466
525,572
3,927,038
16,078
974
65,650
20,501
3,409,926
525,572
3,935,498
—
11,648
61,247
72,895
—
11,648
66,888
78,536
Total
Delinquency ratio***
$
7,833
$
0.20 %
2,353
$
0.06 %
3,915
$
0.10 %
14,101
$ 3,999,933 $ 4,014,034
0.35 %
*All loans past due 90 days-or-more, excluding small-dollar consumer 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:
Years Ended December 31, (in thousands)
2018
2017
2016
Loans with no allocated Allowance
Loans with allocated Allowance
Total recorded investment in impaired loans
Amount of the allocated Allowance
Average of individually impaired loans during the year
Interest income recognized during impairment
Cash basis interest income recognized
$
$
$
19,555 $
21,880
41,435 $
3,764 $
45,620
1,245
—
18,540 $
27,076
45,616 $
4,685 $
47,361
1,392
—
21,416
31,268
52,684
4,925
56,981
1,466
—
131
Approximately $3 million and $4 million of impaired loans at December 31, 2018 and 2017 were PCI loans. Approximately $2
million and $2 million of impaired loans at December 31, 2018 and 2017 were formerly PCI loans which became classified as
“impaired” through a post-acquisition troubled debt restructuring.
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, 2018 and 2017:
Allowance for Loan and Lease Losses
PCI with
Collectively Post-Acquisition
Total
Individually
Evaluated
Excluding PCI Evaluated
Individually
Evaluated
Loans
PCI with
Collectively Post-Acquisition Post-Acquisition
Impairment
PCI without
Impairment
Evaluated
Impairment
Allowance Excluding PCI
Total
Loans
Allowance to
Total Loans
December 31, 2018
(dollars in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
$
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Total
December 31, 2017
(dollars in thousands)
Traditional Banking:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer:
Credit cards
Overdrafts
Automobile loans
Other consumer
Total Traditional Banking
Warehouse lines of credit
Total Core Banking
Republic Processing Group:
Tax Refund Solutions:
Easy Advances
Other TRS loans
Republic Credit Solutions
Total Republic Processing Group
Total
2,052 $
—
4
294
4
130
—
286
3,365 $
237
1,658
9,727
2,551
2,743
158
3,117
—
—
91
421
3,282
—
3,282
1,140
1,102
633
170
26,601
1,172
27,773
381 $
—
—
9
—
—
—
74
5,798 $
237
1,662
10,030
2,555
2,873
158
3,477
24,860 $
382
2,406
8,104
65
1,020
—
1,361
880,500 $
94,445
240,440
1,239,915
175,113
429,310
15,031
331,101
—
—
—
—
464
—
464
1,140
1,102
724
591
30,347
1,172
31,519
—
—
91
449
38,738
—
38,738
19,095
1,102
63,384
46,190
3,535,626
468,695
4,004,321
1,645 $
—
—
919
—
—
—
86
—
—
—
3
2,653
—
2,653
— $
—
—
2
—
25
—
—
907,005
94,827
242,846
1,248,940
175,178
430,355
15,031
332,548
0.64 %
0.25
0.68
0.80
1.46
0.67
1.05
1.05
—
—
—
—
27
—
27
19,095
1,102
63,475
46,642
3,577,044
468,695
4,045,739
5.97
100.00
1.14
1.27
0.85
0.25
0.78
—
—
18
18
—
107
13,031
13,138
$
3,300 $ 40,911 $
—
—
—
—
464 $ 44,675 $
—
107
13,049
13,156
—
—
44
44
—
13,744
88,700
102,444
38,782 $ 4,106,765 $
—
—
—
—
2,653 $
—
—
13,744
—
88,744
—
—
102,488
27 $ 4,148,227
—
0.78
14.70
12.84
1.08 %
Allowance for Loan and Lease Losses
PCI with
Collectively Post-Acquisition
Total
Individually
Evaluated
Excluding PCI Evaluated
Individually
Evaluated
Loans
PCI with
Collectively Post-Acquisition Post-Acquisition
Impairment
PCI without
Impairment
Evaluated
Impairment
Allowance Excluding PCI
Total
Loans
Allowance to
Total Loans
$
2,361 $
—
4
407
107
288
—
425
3,501 $
292
1,390
8,588
2,257
1,910
174
3,218
320 $
—
2
48
—
—
—
111
6,182 $
292
1,396
9,043
2,364
2,198
174
3,754
27,605 $
—
1,814
9,185
733
308
—
1,609
892,122 $
116,792
203,019
1,196,736
149,332
341,357
16,580
345,930
—
—
32
528
4,152
—
4,152
607
974
655
631
24,197
1,314
25,511
—
—
—
3
484
—
484
607
974
687
1,162
28,833
1,314
30,147
—
—
108
552
41,914
—
41,914
16,078
974
65,542
19,946
3,364,408
525,572
3,889,980
1,838 $
—
248
1,369
—
—
—
115
—
—
—
3
3,573
—
3,573
— $
—
—
3
—
27
—
1
921,565
116,792
205,081
1,207,293
150,065
341,692
16,580
347,655
0.67 %
0.25
0.68
0.75
1.58
0.64
1.05
1.08
—
—
—
—
31
—
31
16,078
974
65,650
20,501
3,409,926
525,572
3,935,498
3.78
100.00
1.05
5.67
0.85
0.25
0.77
—
—
49
49
—
12
12,561
12,573
$
4,201 $ 38,084 $
—
—
—
—
484 $ 42,769 $
—
12
12,610
12,622
—
—
129
129
—
11,648
66,759
78,407
42,043 $ 3,968,387 $
—
—
—
—
3,573 $
—
—
11,648
—
66,888
—
—
78,536
31 $ 4,014,034
—
0.10
18.85
16.07
1.07 %
132
The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2018, 2017 and 2016.
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 allocated Allowance:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Total impaired loans
(in thousands)
Impaired loans with no allocated Allowance:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Nonowner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Total impaired loans
As of
December 31, 2018
Twelve Months Ended
December 31, 2018
Unpaid
Principal
Balance
Recorded
Investment
Allocated
Allowance
Average
Recorded
Investment
Interest
Income
Cash Basis
Interest
Income
Recognized
Recognized
$
$
$
$
11,676 $
382
2,729
5,688
—
712
—
919
33
16,215
—
78
4,416
65
416
—
572
554
44,455 $
10,703 $
382
2,350
4,607
—
604
—
876
33
15,802
—
56
4,416
65
416
—
571
554
41,435 $
— $
—
—
—
—
—
—
—
—
2,433
—
4
303
4
130
—
360
530
3,764 $
10,817 $
385
2,561
5,040
119
755
—
682
49
17,754
—
136
5,495
113
158
—
925
631
45,620 $
198 $
—
87
151
—
3
—
17
2
528
—
—
206
3
19
—
9
22
1,245 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
As of
December 31, 2017
Unpaid
Principal
Balance
Recorded
Investment
Allocated
Allowance
Twelve Months Ended
December 31, 2017
Average
Recorded
Investment
Interest
Income
Cash Basis
Interest
Income
Recognized
Recognized
11,664 $
—
1,784
5,504
591
20
—
1,071
25
18,676
—
361
6,124
142
288
—
743
767
47,760 $
10,789 $
—
1,704
4,430
591
20
—
981
25
18,654
—
358
6,124
142
288
—
743
767
45,616 $
— $
—
—
—
—
—
—
—
—
2,681
—
6
455
107
288
—
536
612
4,685 $
11,253 $
—
1,526
4,863
565
116
—
1,205
62
20,212
—
416
5,501
209
225
—
820
388
47,361 $
179 $
—
86
71
29
4
—
11
1
655
—
14
294
3
8
—
17
20
1,392 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
133
(in thousands)
Impaired loans with no allocated Allowance:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Non owner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied
Owner occupied - correspondent
Non owner occupied
Commercial real estate
Construction & land development
Commercial & industrial
Lease financing receivables
Home equity
Consumer
Total impaired loans
Troubled Debt Restructurings
As of
December 31, 2016
Unpaid
Principal
Balance
Recorded
Investment
Allocated
Allowance
Twelve Months Ended
December 31, 2016
Average
Recorded
Investment
Interest
Income
Cash Basis
Interest
Income
Recognized
Recognized
$
$
13,727 $
—
1,399
6,610
476
67
—
1,358
45
21,595
—
491
7,397
405
619
—
742
37
54,968 $
12,629 $
—
1,376
5,536
476
67
—
1,287
45
21,576
—
493
7,397
406
619
—
741
36
52,684 $
— $
—
—
—
—
—
—
—
—
3,361
—
73
577
120
227
—
532
35
4,925 $
13,219 $
—
1,293
6,462
476
115
—
1,674
70
22,867
—
799
8,592
421
621
—
331
41
56,981 $
140 $
—
20
106
20
7
—
15
—
782
—
24
292
19
1
—
39
1
1,466 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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 consecutive 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, 2018 and
2017, $8 million and $6 million of TDRs were on nonaccrual status.
134
Detail of TDRs differentiated by loan type and accrual status follows:
December 31, 2018 (dollars in thousands)
Residential real estate
Commercial real estate
Construction & land development
Commercial & industrial
Consumer
Total troubled debt restructurings
December 31, 2017 (dollars in thousands)
Residential real estate
Commercial real estate
Construction & land development
Commercial & industrial
Consumer
Total troubled debt restructurings
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
60 $
3
—
2
—
65 $
6,378
1,203
—
571
—
8,152
156 $
14
1
3
256
430 $
17,232
6,571
65
408
435
24,711
216 $
17
1
5
256
495 $
23,610
7,774
65
979
435
32,863
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
62 $
2
1
—
—
65 $
4,926
1,366
67
—
—
6,359
183 $
14
3
2
830
1,032 $
20,189
6,499
666
287
637
28,278
245 $
16
4
2
830
1,097 $
25,115
7,865
733
287
637
34,637
135
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, 2018 and 2017 follows:
December 31, 2018 (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
Legal modification
Total commercial TDRs
Consumer loans:
Rate reduction
Principal deferral
Legal modification
Total consumer TDRs
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
— $
145
11
35
191
—
16,892
1,171
1,500
19,563
2
8
12
—
22
1
255
—
256
752
2,962
5,076
—
8,790
16
419
—
435
1 $
12
4
8
25
—
—
—
1
1
—
—
—
—
970
978
1,871
228
4,047
1 $
157
15
43
216
970
17,870
3,042
1,728
23,610
—
—
—
28
28
—
—
—
—
2
8
12
1
23
1
255
—
256
752
2,962
5,076
28
8,818
16
419
—
435
Total troubled debt restructurings
469 $
28,788
26 $
4,075
495 $
32,863
December 31, 2017 (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
Consumer loans:
Principal deferral
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
2 $
161
14
42
219
3
7
9
19
463
18,777
1,455
1,997
22,692
837
3,185
3,430
7,452
— $
17
2
7
26
—
1
2
3
—
1,902
121
400
2,423
—
79
1,354
1,433
2 $
178
16
49
245
3
8
11
22
830
637
—
—
830
463
20,679
1,576
2,397
25,115
837
3,264
4,784
8,885
637
34,637
Total troubled debt restructurings
1,068 $
30,781
29 $
3,856
1,097 $
136
As of December 31, 2018 and 2017, 88% and 89% of the Bank’s TDRs were performing according to their modified terms. The Bank
had provided $3 million and $4 million of specific reserve allocations to clients whose loan terms have been modified in TDRs as of
December 31, 2018 and 2017. The Bank had no commitments to lend any additional material amounts to its existing TDR
relationships at December 31, 2018 and 2017.
A summary of the categories of TDR loan modifications and respective performance as of December 31, 2018, 2017 and 2016 that
were modified during the years ended December 31, 2018, 2017 and 2016 follows:
December 31, 2018 (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:
Principal deferral
Legal modification
Total commercial TDRs
Consumer loans:
Principal deferral
Total consumer TDRs
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
— $
2
3
7
12
6
—
6
1
1
—
465
43
121
629
1,402
—
1,402
52
52
1 $
—
3
1
5
—
1
1
—
—
970
—
1,849
18
2,837
—
28
28
—
—
1 $
2
6
8
17
6
1
7
1
1
970
465
1,892
139
3,466
1,402
28
1,430
52
52
Total troubled debt restructurings
19 $
2,083
6 $
2,865
25 $
4,948
December 31, 2017 (dollars in thousands)
Residential real estate loans (including home equity loans):
Rate reduction
Principal deferral
Legal modification
Total residential TDRs
Commercial related and construction/land development loans:
Principal deferral
Legal modification
Total commercial TDRs
Consumer loans:
Principal deferral
Total consumer TDRs
Troubled Debt
Restructurings
Performing to
Modified Terms
Troubled Debt
Restructurings
Not Performing to
Modified Terms
Total
Troubled Debt
Restructurings
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
1 $
4
6
11
2
—
2
830
830
219
1,013
351
1,583
266
—
266
637
637
— $
—
2
2
—
—
—
—
—
—
—
197
197
—
—
—
—
—
1 $
4
8
13
2
—
2
830
830
219
1,013
548
1,780
266
—
266
637
637
Total troubled debt restructurings
843 $
2,486
2 $
197
845 $
2,683
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.
137
December 31, 2016 (dollars in thousands)
Residential real estate loans (including home equity loans):
Interest only payments
Rate reduction
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
Troubled Debt
Restructurings
Performing to
Modified Terms
Troubled Debt
Restructurings
Not Performing to
Modified Terms
Total
Troubled Debt
Restructurings
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
Number of Recorded
Investment
Loans
1 $
6
4
11
2
2
1
5
16 $
146
566
319
1,031
1,718
749
465
2,932
3,963
— $
3
7
10
—
1
1
2
12 $
—
149
741
890
—
135
1,429
1,564
2,454
1 $
9
11
21
2
3
2
7
28 $
146
715
1,060
1,921
1,718
884
1,894
4,496
6,417
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, 2018, 2017 and 2016, 42%, 93% and 62% of the Bank’s TDRs that occurred during the years ended December
31, 2018, 2017 and 2016 were performing according to their modified terms. The Bank provided approximately $472,000, $885,000
and $377,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during 2018, 2017 and 2016.
There was no significant change between the pre and post modification loan balances at December 31, 2018, 2017 and 2016.
The following tables present loans by class modified as troubled debt restructurings within the previous 12 months of December 31,
2018, 2017 and 2016 and for which there was a payment default during 2018, 2017 and 2016:
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Number of
Loans
Recorded
Investment
Residential real estate:
Owner occupied
Commercial real estate
Construction & land development
Home equity
Consumer
Total
Foreclosures
6 $
1
—
—
—
7 $
2,920
28
—
—
—
2,948
2 $
—
—
—
823
825 $
197
—
—
—
129
326
5 $
—
1
1
—
7 $
498
—
86
286
—
870
The following table presents the carrying amount of foreclosed properties held at December 31, 2018 and 2017 as a result of the Bank
obtaining physical possession of such properties:
December 31, (in thousands)
Residential real estate
2018
2017
$
160 $
115
Total other real estate owned
$
160 $
115
138
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, 2018 and 2017:
December 31, (in thousands)
2018
2017
Recorded investment in consumer residential real estate mortgage loans in the process of
foreclosure
$
3,293
$
1,392
Easy Advances
The Company’s TRS segment offered its EA product during the first two months of 2018, 2017 and 2016. The Company based its
estimated provision for loan losses of EAs on current year EA delinquency information and prior year IRS funding patterns of federal
tax refunds subsequent to the first quarter. At December 31, 2018, 2017 and 2016, all EAs originated had been either charged-off or
collected.
Information regarding EAs follows:
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Easy Advances originated
Net charge to the Provision for Easy Advances
Provision to total Easy Advances originated
Easy Advances net charge-offs
Easy Advances net charge-offs to total Easy Advances originated
$
$
430,210
10,760
$
2.50 %
10,760
$
2.50 %
5.
PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and equipment follows:
$
328,523
6,789
2.07 %
6,789
2.07 %
$
123,230
3,048
2.47 %
3,048
2.47 %
December 31, (in thousands)
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Total premises and equipment
Less: Accumulated depreciation and amortization
Premises and equipment, net
2018
2017
$
4,185 $ 4,185
34,513
35,264
40,550
43,245
18,760
19,638
98,008
102,332
55,420
59,206
$ 43,126 $ 42,588
The Company held three former banking centers for sale as of December 31, 2018. The Company closed its Hudson, Florida banking
center in January 2015 and has held the property for sale since closing. Additionally, the Company obtained two Florida-based, former
banking centers in its May 17, 2016 Cornerstone acquisition. The Company carried all three former banking centers at a value of $2
million, inclusive of accumulated depreciation, at December 31, 2018.
In 2018, the Company sold its banking center in Port Richey, Florida and recognized a $14,000 loss on the transaction. The premises
of the banking center were carried at approximately $778,000, 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)
2018
2017
2016
Depreciation expense
$
9,347 $
8,472 $
7,304
139
6.
GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
A progression of the balance for goodwill follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Beginning of period
Acquired goodwill
Impairment
End of period
$
$
16,300 $
—
—
16,300 $
16,300 $
—
—
16,300 $
10,168
6,132
—
16,300
The goodwill balance relates entirely to the Company’s Traditional Banking operations.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2018 and 2017, 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, 2018, 2017 and 2016.
The Company recorded a $1 million core deposit intangible asset in association with its May 17, 2016 Cornerstone acquisition. For the
years ending December 31, 2018, 2017 and 2016, aggregate CDI amortization expense was immaterial to the Company’s financial
statements.
7.
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 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, 2018 and 2017:
December 31, 2018
December 31, 2017
(dollars in thousands)
Notional
Amount
Pay
Rate
Receive
Rate
Term
Assets /
(Liabilities)
Unrealized
Gain (Loss)
AOCI
Assets /
(Liabilities)
Unrealized
Gain (Loss)
in AOCI
Interest rate swap on money market deposits
Interest rate swap on FHLB advance
Total
$
$
10,000
10,000
20,000
2.17 % 1M LIBOR 12/2013 - 12/2020
2.33 % 3M LIBOR 12/2013 - 12/2020
$
$
58 $
57
115 $
45 $
45
90 $
(60) $
(31)
(91) $
(25)
(48)
(73)
140
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, 2018, 2017 and 2016:
December 31, (in thousands)
2018
2017
2016
Interest rate swap on money market deposits
Interest rate swap on FHLB advance
Total interest expense on swap transactions
$
$
18 $
10
28 $
109 $
110
219 $
168
164
332
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, 2018, 2017 and 2016:
December 31, (in thousands)
2018
2017
2016
Gains (losses) recognized in OCI on derivative (effective portion)
$
178 $
83 $
(125)
Losses reclassified from OCI on derivative (effective portion)
(28)
(219)
(332)
Gains (losses) recognized in income on derivative (ineffective portion)
—
—
—
The estimated net amount of the existing losses reported in AOCI at December 31, 2018 expected to be reclassified into earnings
within the next 12 months is considered immaterial.
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, 2018 and 2017 is included in the following table:
December 31, (in thousands)
Interest rate swaps with Bank clients - Assets
Interest rate swaps with Bank clients - Liabilities
Interest rate swaps with Bank clients - Total
Bank Position
Pay variable/receive fixed
Pay variable/receive fixed
Pay variable/receive fixed
Offsetting interest rate swaps with institutional swap dealer
Pay fixed/receive variable
Total
2018
2017
Notional
Amount
Fair Value
Notional
Amount
Fair Value
$
$
$
26,398 $
54,718
81,116 $
1,264 $
(908)
356 $
48,942 $
12,477
61,419 $
81,116
162,232 $
(356)
— $
61,419
122,838 $
312
(228)
84
(84)
—
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 $0 and $1.5 million at December 31, 2018 and 2017.
141
8.
DEPOSITS
Ending deposit balances at December 31, 2018 and 2017 were as follows:
December 31, (in thousands)
2018
2017
Core Bank:
Demand
Money market accounts
Savings
Individual retirement accounts(1)
Time deposits, $250 and over(1)
Other certificates of deposit(1)
Reciprocal money market and time deposits(1)(2)
Brokered deposits(1)
Total Core Bank interest-bearing deposits
Total Core Bank noninterest-bearing deposits
Total Core Bank deposits
Republic Processing Group:
Money market accounts
Total RPG interest-bearing deposits
Brokered prepaid card deposits
Other noninterest-bearing deposits
Total RPG noninterest-bearing deposits
Total RPG deposits
$
937,402 $
717,954
187,868
53,524
84,104
239,324
217,153
9,394
2,446,723
971,422
3,418,145
5,453
5,453
4,350
28,197
32,547
38,000
944,812
546,998
182,800
47,982
77,891
189,661
346,613
72,718
2,409,475
988,537
3,398,012
1,641
1,641
1,509
31,996
33,505
35,146
Total deposits
$
3,456,145 $
3,433,158
(1) Represents a time deposit.
(2) Prior to June 2018, reciprocal deposits were classified as “brokered deposits.” The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted
in May 2018, provides that most reciprocal deposits are no longer classified as brokered deposits if the Bank meets certain regulatory criteria.
Time deposits at or above the FDIC insured limit of $250,000 are presented in the table below:
December 31, (in thousands)
Time deposits of $250 or more
2018
2017
$ 84,104 $ 77,891
At December 31, 2018, the scheduled maturities and weighted average rate of all time deposits, including brokered and reciprocal
certificates of deposit, were as follows:
Year (dollars in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
142
Weighted
Average
Rate
Principal
$ 177,702
91,045
53,494
34,014
60,220
—
$ 416,475
1.42 %
1.86
2.17
2.12
2.93
—
1.89
9.
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, 2018 and 2017, 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)
2018
2017
Outstanding balance at end of period
Weighted average interest rate at end of period
$
182,990
$
204,021
0.83 %
0.31 %
Fair value of securities pledged:
U.S. Treasury securities and U.S. Government agencies
Mortgage backed securities - residential
Collateralized mortgage obligations
Total securities pledged
$
$
110,854
84,657
10,136
205,647
$
$
71,824
83,452
84,693
239,969
Additional information regarding securities sold under agreements to repurchase for the years ended December 31, 2018, 2017 and
2016 follows:
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Average outstanding balance during the period
Average interest rate during the period
Maximum outstanding at any month end during the period
$
225,145
$
219,515
$
280,296
0.50 %
0.23 %
0.02 %
$
260,147
$
293,944
$
367,373
10.
FEDERAL HOME LOAN BANK ADVANCES
At December 31, 2018 and 2017, FHLB advances were as follows:
December 31, (dollars in thousands)
2018
2017
Overnight advances
Variable interest rate advance indexed to 3-Month LIBOR plus 0.14%
Fixed interest rate advances
Total FHLB advances
$
$
510,000
10,000
290,000
810,000
$
$
330,000
10,000
397,500
737,500
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 2018 or 2017.
FHLB advances are collateralized by a blanket pledge of eligible real estate loans. At December 31, 2018 and 2017, Republic had
available borrowing capacity of $254 million and $347 million, respectively, from the FHLB. In addition to its borrowing capacity
with the FHLB, Republic also had unsecured lines of credit totaling $125 million and $125 million available through various other
financial institutions as of December 31, 2018 and 2017.
143
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)
2019 (Overnight)
2019 (Term)
2020
2021
2022
2023
2024
Thereafter
Total
Weighted
Average
Rate
Principal
$ 510,000
110,000
120,000
30,000
20,000
20,000
—
—
$ 810,000
2.45 %
1.91
1.81
1.93
2.12
2.56
—
—
2.26 %
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 overnight FHLB advances follows:
December 31, (dollars in thousands)
2018
2017
Outstanding balance at end of period
Weighted average interest rate at end of period
Years Ended December 31, (dollars in thousands)
$
2018
510,000 $
2.45 %
330,000
1.42 %
2017
2016
Average outstanding balance during the period
Average interest rate during the period
Maximum outstanding at any month end during the period
$
$
202,830 $
1.98 %
560,000 $
141,918 $
1.09 %
625,000 $
91,087
0.43 %
495,000
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
December 31, (in thousands)
2018
2017
First lien, single family residential real estate
Home equity lines of credit
$
1,129,588 $
311,419
1,123,402
320,649
11.
SUBORDINATED NOTE
In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TRS. 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 3-month 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, 2019, and carried the note at a cost of 3-month LIBOR + 1.42%, or 4.22%, at
December 31, 2018.
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
144
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.
12.
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.
The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments for each year ended:
December 31, (in thousands)
2018
2017
Unused warehouse lines of credit
Unused home equity lines of credit
Unused loan commitments - other
Standby letters of credit
FHLB letter of credit
Total commitments
$
$
591,305 $
377,277
720,645
10,642
10,000
1,709,869 $
525,328
367,887
598,002
12,643
10,000
1,513,860
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.
13.
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, 2018, the
Bank could, without prior approval, declare dividends of approximately $111 million.
145
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, 2018 and 2017,
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 phased in from 2016 to
2019 based on the following schedule: a capital conservation buffer of 0.625% 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. The capital
ratios for capital adequacy and “well capitalized” do not include considerations of the capital conservation buffer.
is
(dollars in thousands)
Amount Ratio
Amount
Ratio
Amount
Ratio
Actual
Minimum Requirement
for Capital Adequacy
Purposes
Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions
As of December 31, 2018
Total capital to risk-weighted assets
Republic Bancorp, Inc.
Republic Bank & Trust Company
$ 757,726
654,258
16.80 % $
14.52
360,911
360,359
8.00 %
8.00
$
NA
450,449
NA
10.00 %
Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.
Republic Bank & Trust Company
673,051
609,583
14.92
13.53
203,012
202,702
4.50
4.50
NA
292,792
NA
6.50
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
713,051
609,583
15.81
13.53
270,683
270,269
6.00
6.00
NA
360,359
NA
8.00
713,051
609,583
14.11
12.06
202,119
202,126
4.00
4.00
NA
252,658
NA
5.00
146
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Actual
Minimum Requirement
for Capital Adequacy
Purposes
Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions
As of December 31, 2017
Total capital to risk-weighted assets
Republic Bancorp, Inc.
Republic Bank & Trust Company
694,369
$
591,592
16.04 % $
13.69
346,215
345,589
8.00 %
8.00
NA
431,987
$
NA
10.00 %
Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.
Republic Bank & Trust Company
612,315
548,823
14.15
12.70
194,746
194,394
4.50
4.50
NA
280,791
NA
6.50
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
14.
FAIR VALUE
651,600
548,823
15.06
12.70
259,662
259,192
6.00
6.00
NA
345,589
NA
8.00
651,600
548,823
13.21
11.15
197,309
196,961
4.00
4.00
NA
246,201
NA
5.00
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:
Available-for-sale debt securities: Except for the Bank’s private label mortgage backed security and its TRUP investment, the fair
value of available-for-sale debt securities 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 Measurement. 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 2 “Investment Securities” for additional discussion regarding the Bank’s private label
mortgage backed security.
147
The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate
market value at December 31, 2018. 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.
Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s CRA
mutual fund investment and fall within Level 1 of the fair value hierarchy.
The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).
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: From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a
consumer installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold
100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after origination.
The Bank carried all unsold loans under the program as “held for sale” on the its balance sheet. At the initiation of this program in
2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter marked to market on a
monthly basis.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any new loans,
and the subsequent sale of all recently-originated loans under this program, while the two parties evaluate the future offering of this
product due to changes in the applicable state law impacting the product. Concurrent with the suspension of this program, the Bank
reclassified approximately $2.2 million of these loans from held for sale on the balance sheet into the held for investment category and
revalued these loans accordingly.
Through the first quarter of 2018, the fair value for these loans was based on contractual sales terms, which are classified as Level 3
inputs. As of December 31, 2018, the fair value of these loans was based on the discounted cash flows of the underlying loans, which
are also classified as Level 3 inputs.
From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted a credit-card product to generally subprime
borrowers across the United States through one third-party marketer/servicer. For outstanding cards, RCS sold 90% of the balances
generated within two business days of each transaction occurrence to its third-party marketer/servicer and retained the remaining 10%
interest. During the second quarter of 2018, the Bank and its third-party marketer/servicer discontinued the marketing of the product to
potential new clients, as the two parties deliberated the future direction of the program. During the third quarter of 2018, the Bank and
its third-party marketer/servicer reached an agreement in concept to sell 100% of the existing portfolio to an unrelated third party. As a
result, the Bank reclassified its 10% interest with a book value of $3.5 million into a held-for-sale category and charged the entire RCS
credit-card portfolio down to its estimated net realizable value of $1.5 million. The sale of this portfolio was settled in January 2019.
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 dealer 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.
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 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
148
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.
Premises carried at fair value: Premises and equipment are accounted for at the lower of cost less accumulated depreciation or fair
value less estimated costs to sell. The fair value of Bank premises is commonly based on recent real estate appraisals. These appraisals
may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the independent appraisers 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.
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 CCAD 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 at least 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 tranche exceeds fair value, impairment is recorded, and the
respective individual tranche is carried at fair value. If the carrying amount of an individual tranche 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 can
generally be validated against available market data (Level 2). There were no MSR tranches carried at fair value at December 31,
2018 and 2017.
149
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:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
Private label mortgage backed security
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Trust preferred security
Total available-for-sale debt securities
Equity securities with readily determinable fair value:
Freddie Mac preferred stock
Community Reinvestment Act mutual fund
Total equity securities with readily determinable fair value
Mortgage loans held for sale
Consumer loans held for investment
Rate lock loan commitments
Interest rate swap agreements
Financial liabilities:
Mandatory forward contracts
Interest rate swap agreements
Fair Value Measurements at
December 31, 2018 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
$
$
$
$
$
$
$
—
—
—
—
—
—
$
216,873
—
169,209
72,811
9,058
—
$
—
3,712
—
—
—
4,075
—
$
467,951
$
7,787
$
$
$
$
—
2,396
2,396
—
—
—
—
$
$
$
410
—
410
8,971
—
356
1,264
$
$
$
—
—
—
—
1,922
—
—
$
—
—
262
1,149
$
$
—
—
216,873
3,712
169,209
72,811
9,058
4,075
475,738
410
2,396
2,806
8,971
1,922
356
1,264
262
1,149
150
(in thousands)
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
Private label mortgage backed security
Mortgage backed securities - residential
Collateralized mortgage obligations
Corporate bonds
Trust preferred security
Total available-for-sale debt securities
Equity securities with readily determinable fair value:
Freddie Mac preferred stock
Community Reinvestment Act mutual fund
Total equity securities with readily determinable fair value
Mortgage loans held for sale
Consumer loans held for sale
Rate lock loan commitments
Interest rate swap agreements
Financial liabilities:
Mandatory forward contracts
Interest rate swap agreements
$
$
$
$
$
$
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Fair Value Measurements at
December 31, 2017 Using:
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
$
—
—
—
—
—
—
—
—
2,455
2,455
—
—
—
—
$
$
$
$
$
307,592
—
106,374
87,163
15,125
—
516,254
473
—
473
5,761
—
310
312
$
$
$
$
$
—
4,449
—
—
—
3,600
8,049
—
—
—
—
2,677
—
—
Total
Fair
Value
307,592
4,449
106,374
87,163
15,125
3,600
524,303
473
2,455
2,928
5,761
2,677
310
312
$
—
—
9
403
$
$
—
—
9
403
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, 2018 and 2017.
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, 2018, 2017 and 2016:
Private Label Mortgage Backed Security
Years Ended December 31, (in thousands)
2018
2017
2016
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
$
4,449 $
4,777 $
5,132
(20)
152
(869)
3,712 $
298
—
(626)
4,449 $
(9)
—
(346)
4,777
$
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.
151
The following tables present quantitative information about recurring Level 3 fair value measurements at December 31, 2018 and
2017:
December 31, 2018 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable Inputs
Range
Private label mortgage backed security
$ 3,712 Discounted cash flow (1) Constant prepayment rate 6.5% - 8.9%
(2) Probability of default
1.8% - 4.7%
(3) Loss severity
50% - 75%
December 31, 2017 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable Inputs
Range
Private label mortgage backed security
$ 4,449 Discounted cash flow (1) Constant prepayment rate 3.5% - 6.5%
(2) Probability of default
1.8% - 8.0%
(3) Loss severity
60% - 85%
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, 2018,
2017 and 2016:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
Total gains or losses included in earnings:
Discount accretion
Net change in unrealized gain
Balance, end of period
$
3,600
$
3,200
$
3,405
40
435
4,075
44
356
3,600
$
44
(249)
3,200
$
$
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, 2018 and 2017.
As of December 31, 2018 and 2017, the aggregate fair value, contractual balance (including accrued interest), and unrealized gain was
as follows:
December 31, (in thousands)
2018
2017
Aggregate fair value
Contractual balance
Unrealized gain
$
8,971 $
8,676
295
5,761
5,668
93
152
The total amount of gains and losses from changes in fair value of mortgage loans held for sale included in earnings for 2018, 2017
and 2016 are presented in the following table:
Years Ended December 31, (in thousands)
2018
2017
2016
Interest income
Change in fair value
Total included in earnings
$
$
402 $
203
605 $
346 $
(1)
345 $
200
4
204
Consumer Loans Held for Investment/Sale
Prior to the second quarter of 2018, all consumer installment loans originated through RCS were originated with the intent to sale and
carried at fair value. During the second quarter of 2018, approximately $2 million of these loans were transferred from the held for
sale category into the held for investment category and recorded at their fair market value as of the date of transfer. Interest income for
these loans 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, 2018 and 2017.
A reconciliation of the Company’s consumer loans measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the years ended December 30, 2018 and 2017 is included in Footnote 3 of this section of the filing.
Prior to the second quarter of 2018, the significant unobservable inputs in the fair value measurement of the Bank’s consumer loans
were the net contractual premiums and level of loans sold at a discount price. As of December 31, 2018, the significant unobservable
inputs in the fair value measurement of the Bank’s consumer loans were the constant prepayment rate, probability of default, and loss
severity for these loans under a discounted-cash-flow model. Significant fluctuations in any of these 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, 2018 and 2017:
December 31, 2018 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable Inputs
Rate
Consumer loans held for investment
$
1,922 Discounted Cash Flows
(1) Constant prepayment rate
15.0%
(2) Probability of default
45.0%
(3) Loss severity
20.0%
December 31, 2017 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable Inputs
Rate
Consumer loans held for sale
$
2,677 Contractual Sales Terms
(1) Net Premium
0.9%
(2) Discounted Sales
5.0%
As of December 31, 2018 and 2017, the aggregate fair value, contractual balance, and unrealized gain (loss) on consumer loans held
for sale, at fair value, was as follows:
December 31, (in thousands)
2018
2017
Aggregate fair value
Contractual balance
Unrealized (loss) gain
$
1,922 $
2,170
(248)
2,677
2,535
142
153
The total amount of net gains from changes in fair value included in earnings for the years ended December 31, 2018, 2017, and 2016
for consumer loans held for sale, at fair value, are presented in the following table:
Years Ended December 31, (in thousands)
2018
2017
2016
Interest income
Change in fair value
Total included in earnings
$
$
602 $
(390)
212 $
962 $
29
991 $
700
114
814
Assets measured at fair value on a non-recurring basis are summarized below:
(in thousands)
Consumer loans held for sale
Impaired loans:
Residential real estate:
Owner occupied
Nonowner occupied
Commercial real estate
Commercial & industrial
Home equity
Total impaired loans*
Premises
(in thousands)
Impaired loans:
Residential real estate:
Owner occupied
Nonowner occupied
Commercial real estate
Home equity
Total impaired loans*
Other real estate owned:
Residential real estate
Total other real estate owned
Premises
Fair Value Measurements at
December 31, 2018 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
$
$
$
$
—
$
—
$
1,249
$
1,249
—
—
—
—
—
—
$ —
—
—
—
—
—
$
—
$
—
$
$
$
4,708
1,007
1,255
609
356
7,935
1,694
$
$
$
4,708
1,007
1,255
609
356
7,935
1,694
Fair Value Measurements at
December 31, 2017 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
$
$
$
$
$
—
—
—
—
—
$ —
—
—
—
—
$
—
—
$ —
—
$
—
$
—
$
$
$
$
$
4,107
237
1,366
393
6,103
83
83
3,017
$
$
$
$
$
4,107
237
1,366
393
6,103
83
83
3,017
* 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.
154
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, 2018 and 2017:
December 31, 2018 (dollars in thousands)
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted
Average)
Consumer loans held for sale
$
1,249 Sales comparison approach Adjustments determined for
6% (6%)
differences between comparable
sales
Impaired loans - residential real estate owner occupied
$
4,708 Sales comparison approach Adjustments determined for
0% - 67% (9%)
differences between comparable
sales
Impaired loans - residential real estate nonowner occupied
$
1,007 Sales comparison approach Adjustments determined for
0% - 27% (15%)
differences between comparable
sales
Impaired loans - commercial real estate
$
123 Sales comparison approach Adjustments determined for
21% (21%)
differences between comparable
sales
Impaired loans - commercial real estate
$
1,132 Income approach
Adjustments for differences
17% (17%)
between net operating income
expectations
Impaired loans - commercial & industrial
$
609 Sales comparison approach Adjustments determined for
3% (3%)
differences between comparable
sales
Impaired loans - home equity
$
356 Sales comparison approach Adjustments determined for
0% - 22% (8%)
differences between comparable
sales
Premises
$
1,694 Sales comparison approach Adjustments determined for
27% - 72% (40%)
differences between comparable
sales
December 31, 2017 (dollars in thousands)
Impaired loans - residential real estate owner occupied
Impaired loans - residential real estate nonowner occupied
Impaired loans - commercial real estate
Impaired loans - commercial real estate
Impaired loans - home equity
Other real estate owned - residential real estate
Premises
$
$
$
$
$
$
$
Fair
Value
Valuation
Technique
Unobservable
Inputs
Range
(Weighted
Average)
4,107 Sales comparison approach Adjustments determined for differences
0% - 54% (10%)
between comparable sales
237 Sales comparison approach Adjustments determined for differences
0% - 8% (5%)
between comparable sales
79 Sales comparison approach Adjustments determined for differences
21% (21%)
between comparable sales
1,287
Income approach
Adjustments for differences between
net operating income expectations
17% (17%)
393 Sales comparison approach Adjustments determined for differences
0% - 23% (15%)
between comparable sales
83 Sales comparison approach Adjustments determined for differences
86% (86%)
between comparable sales
3,017 Sales comparison approach Adjustments determined for differences
4% - 67% (21%)
between comparable sales
155
Consumer Loans Held for Sale
Details of consumer loans held for sale follow:
December 31, (in thousands)
December 31, 2018
Carrying amount of loans measured at fair value
Estimated discount for loan losses
Total fair value
$
$
2,867
(1,618)
1,249
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)
2018
2017
Carrying amount of loans measured at fair value
Estimated selling costs considered in carrying amount
Valuation allowance
Total fair value
$
$
7,380 $
913
(358)
7,935 $
5,358
752
(7)
6,103
Years Ended December 31, (in thousands)
2018
2017
2016
Provisions on collateral-dependent, impaired loans
$
1,629 $
169 $
552
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)
2018
2017
2016
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
$
$
$
— $
160
160 $
— $
83 $
32
115 $
155 $
400
991
1,391
270
156
Premises
The Company’s Traditional Banking segment classified three of its former banking centers as held for sale as of December 31, 2018,
with one additional banking center classified as held for sale as of December 31, 2017 and sold during 2018. Impairment charges are
recorded when the value of a piece of property is reappraised or reassessed below the property’s then-carrying value. Impairment
charges related to these properties were as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Impairment charges on premises
$
482 $
1,175 $
191
The carrying amounts and estimated fair values of financial instruments, at December 31, 2018 and 2017 are as follows:
(in thousands)
Assets:
Cash and cash equivalents
Available-for-sale debt securities
Held-to-maturity debt securities
Equity securities with readily determinable fair values
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
Rate lock loan commitments
Interest rate swap agreements
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
Mandatory forward contracts
Interest rate swap agreements
NA - Not applicable
Fair Value Measurements at
December 31, 2018:
Carrying
Value
Level 1
Level 2
Level 3
$
351,474 $
351,474 $
— $
— $
475,738
65,227
2,806
8,971
12,838
4,103,552
32,067
13,942
356
1,264
—
—
2,396
—
—
—
—
—
—
—
467,951
64,858
410
8,971
12,838
—
—
13,942
356
1,264
7,787
—
—
—
—
4,062,457
—
—
—
—
$
1,003,969
— $
1,003,969
— $
2,035,701
416,475
182,990
810,000
41,240
1,084
262
1,149
—
—
—
—
—
—
—
—
2,035,701
412,477
182,990
804,251
33,724
1,084
262
1,149
—
—
—
—
—
—
—
—
Total
Fair
Value
351,474
475,738
64,858
2,806
8,971
12,838
4,062,457
NA
13,942
356
1,264
1,003,969
2,035,701
412,477
182,990
804,251
33,724
1,084
262
1,149
157
(in thousands)
Assets:
Cash and cash equivalents
Available-for-sale debt securities
Held-to-maturity debt securities
Equity securities with readily determinable fair values
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
Rate lock loan commitments
Interest rate swap agreements
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
Mandatory forward contracts
Interest rate swap agreements
NA - Not applicable
Fair Value Measurements at
December 31, 2017:
Carrying
Value
Level 1
Level 2
Level 3
$
299,351 $
299,351 $
— $
— $
524,303
64,227
2,928
5,761
2,677
8,551
3,971,265
32,067
12,082
310
312
—
—
2,455
—
—
—
—
—
—
—
—
516,254
65,133
473
5,761
—
8,551
—
—
12,082
310
312
8,049
—
—
—
2,677
—
3,938,998
—
—
—
—
$
1,022,042
— $
1,022,042
— $
2,049,493
361,623
204,021
737,500
41,240
1,100
9
403
—
—
—
—
—
—
—
—
2,049,493
358,627
204,021
730,712
31,763
1,100
9
403
—
—
—
—
—
—
—
—
Total
Fair
Value
299,351
524,303
65,133
2,928
5,761
2,677
8,551
3,938,998
NA
12,082
310
312
1,022,042
2,049,493
358,627
204,021
730,712
31,763
1,100
9
403
15.
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)
2018
2017
2016
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
$
$
5,761 $
176,916
—
(177,545)
3,839
8,971 $
11,662 $
160,091
—
(169,969)
3,977
5,761 $
4,083
216,812
71,201
(287,090)
6,656
11,662
Mortgage loans serviced for others are not reported as assets. The Bank serviced loans for others, primarily FHLMC, totaling $972
million and $969 million at December 31, 2018 and 2017. 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 $10 million and $9 million at December 31, 2018 and
2017.
158
The following table presents the components of Mortgage Banking income:
Years Ended December 31, (in thousands)
2018
2017
2016
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
Loan servicing income
Amortization of mortgage servicing rights
Net servicing income recognized
Total Mortgage Banking income
Activity for capitalized mortgage servicing rights was as follows:
$
3,843 $
4,180 $
5,478
—
203
46
(253)
3,839
—
(1)
11
(213)
3,977
2,418
(1,432)
986
4,825 $
2,169
(1,504)
665
4,642 $
$
1,129
4
(8)
53
6,656
1,983
(1,757)
226
6,882
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
Additions
Amortized to expense
Balance, end of period
$
$
5,044 $
1,307
(1,432)
4,919 $
5,180 $
1,368
(1,504)
5,044 $
4,912
2,025
(1,757)
5,180
There was no balance or activity in the valuation allowance for capitalized mortgage servicing rights for the years ended
December 31, 2018, 2017 and 2016.
Other information relating to mortgage servicing rights follows:
December 31, (in thousands)
2018
2017
Fair value of mortgage servicing rights portfolio
Monthly weighted average prepayment rate of unpaid principal balance*
Discount rate
Weighted average default rate
Weighted average life in years
$
9,357
$
160 %
10.00 %
4.25 %
6.32
7,984
200 %
10.00 %
3.75 %
5.49
* Rates are applied to individual tranches with similar characteristics.
159
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
2019
2020
2021
2022
2023
2024
2025
Total
(in thousands)
$
$
796
778
756
721
638
523
707
4,919
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.
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:
Mortgage loans held for sale, at fair value
Included in other assets:
Rate lock loan commitments
Included in other liabilities:
Mandatory forward contracts
2018
Notional
Amount
Fair Value
2017
Notional
Amount
Fair Value
$
8,676 $
8,971 $
5,668 $
5,761
$
14,788 $
356 $
14,696 $
310
$
20,063 $
262 $
17,159 $
9
160
16.
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,
2018
2017
2016
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected life of options (in years)
Estimated fair value per share
3.00 %
2.01 %
18.59 %
5
8.09
$
2.07 %
2.41 %
20.36 %
5
5.46
$
1.43 %
3.16 %
20.17 %
5
3.27
$
161
The following table summarizes stock option activity from January 1, 2017 through December 31, 2018:
Outstanding, January 1, 2017
Granted
Exercised
Forfeited or expired
Outstanding, December 31, 2017
Outstanding, January 1, 2018
Granted
Exercised
Forfeited or expired
Outstanding, December 31, 2018
Options
Class A
Shares
312,600 $
4,500
(3,500)
(18,600)
295,000 $
295,000 $
165,000
(3,500)
(23,300)
433,200 $
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
24.49
35.54
19.63
24.99
24.68
24.68
48.08
24.10
26.51
33.50
2.86 $
3,935,010
3.15 $
3,786,820
Unvested
Exercisable (vested) at December 31, 2018
433,200 $
— $
33.50
—
3.15 $
— $
3,786,820
—
Information related to the stock options during each year follows:
Years Ended December 31, (in thousands, except per share data)
2018
2017
2016
Intrinsic value of options exercised
Cash received from options exercised, net of shares redeemed
$
79 $
83
71 $
68
18
80
Loan balances of non-executive officer employees that were originated solely to fund stock option exercises were as follows:
December 31, (in thousands)
Outstanding loans
Restricted Stock Awards
2018
2017
$
134 $
139
Restricted stock awards generally vest within 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.
162
The following table summarizes restricted stock activity from January 1, 2017 through December 31, 2018:
Outstanding, January 1, 2017
Granted
Forfeited
Earned and issued
Outstanding, December 31, 2017
Outstanding, January 1, 2018
Granted
Forfeited
Earned and issued
Outstanding, December 31, 2018
Unvested
Restricted
Stock Awards
Class A Shares
77,000
7,413
(750)
(42,053)
41,610
41,610
48,323
(1,500)
(37,323)
51,110
$
$
$
$
51,110
$
Weighted-Average
Grant Date Fair Value
20.02
35.77
19.85
21.66
21.18
21.18
40.16
19.85
21.33
39.06
39.06
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 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 ROA, 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 ROA 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.
• The Compensation Committee (the “Committee”) makes all determinations regarding the achievement of ROA based
on the Company’s audited financial statements and average assets as reported in the Company's Annual Report on Form
10- K with the Securities and Exchange Commission, and the determination of the Committee is final and binding on all
parties. The Committee reserves the right, in its sole discretion, to adjust the calculation of ROA downward for income or
expense items that it considers to be infrequent or nonrecurring in nature.
163
The following table summarizes PSU activity from January 1, 2017 through December 31, 2018:
Outstanding, January 1, 2017
Granted
Forfeited
Earned and issued
Outstanding, December 31, 2017
Outstanding, January 1, 2018
Granted
Forfeited
Earned and issued
Outstanding, December 31, 2018
Expected to vest
Performance
Stock Units
Class A Shares
Weighted-Average
Grant Date Fair Value
55,000 $
—
(6,500)
—
48,500 $
48,500 $
—
(2,500)
—
46,000 $
46,000 $
23.13
—
23.48
—
23.08
23.08
—
23.08
—
23.08
23.08
Expense Related to Stock Incentive Plans
The Company recorded expense related to stock incentive plans for the years ended December 31, 2018, 2017 and 2016 as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Stock option expense
Restricted stock award expense
Performance stock unit expense
Total expense
$
$
265 $
630
106
1,001 $
227 $
424
491
1,142 $
248
258
524
1,030
Unrecognized expenses related to unvested awards under stock incentive plans are estimated as follows:
Year Ended (in thousands)
2019
2020
2021
2022
2023
2024 and beyond
Total
Deferred Compensation
Stock
Options
Restricted
Stock Awards
Total
$
$
415 $
320
291
249
106
3
1,384 $
606 $
261
261
237
119
16
1,500 $
1,021
581
552
486
225
19
2,884
On April 19, 2018, the shareholders of Republic approved an amendment and restatement of the Non-Employee Director and Key
Employee Deferred Compensation Plan (the “Plan”). Prior to the Plan’s 2018 amendment and restatement, only directors participated
in the plan, with the 2018 amendment and restatement initiating key-employee participation. The Plan provides non-employee
directors and designated key employees the ability to defer compensation and have those deferred amounts paid later in the form of
Company Class A Common shares based on the shares that could have been acquired as the deferrals were made. The Company
maintains a bookkeeping account for each director or key-employee participant, and at the end of each fiscal quarter, deferred
164
compensation is converted to “stock units” equal to the amount of compensation deferred during the quarter divided by the quarter-
end fair market value of the Company’s Class A Common stock. Stock units for each participant’s account are also credited with an
amount equal to the cash dividends that would have been paid on the number of stock units in the account if the stock units were
deemed to be outstanding shares of stock. Any dividends credited are converted into additional stock units at the end of the fiscal
quarter in which the dividends were paid.
DIRECTORS
Members of the Board of Directors may defer board and committee fees from two to five years, with each director participant
retaining a nonforfeitable interest in his or her deferred compensation account.
The following table presents information on director deferred compensation under the Plan for the periods presented:
Outstanding, January 1, 2017
Deferred fees and dividend equivalents converted to stock units
Stock units converted to Class A Common Shares
Outstanding, December 31, 2017
Outstanding, January 1, 2018
Deferred fees and dividend equivalents converted to stock units
Stock units converted to Class A Common Shares
Outstanding, December 31, 2018
Vested
Director deferred compensation has been expensed as follows:
Outstanding
Stock
Units
Weighted-Average
Market Price
at Date of Deferral
22.94
36.81
22.84
24.08
64,155 $
5,199
(5,456)
63,898 $
63,898 $
5,081
(2,835)
66,144 $
24.08
41.82
23.94
25.45
66,144 $
25.45
Years Ended December 31, (in thousands)
2018
2017
2016
Director deferred compensation expense
$
214 $
191 $
170
KEY EMPLOYEES
Designated key employees may defer a portion of their base salaries on a pre-tax basis under the Plan, with the Company matching
employee deferrals up to a prescribed limit. With limited exception, the Company match amount remains unvested until December
31st of the year that is five years from the beginning of the year that the Company match is made.
165
The following table presents information on key-employee deferred compensation under the Plan for the periods presented:
Outstanding, January 1, 2018
Deferred base salaries and dividend equivalents converted to stock units
Matching stock units credited
Matching stock units forfeited
Stock units converted to Class A Common Shares
Outstanding, December 31, 2018
—
4,992
4,992
(362)
—
9,622
Outstanding
Stock
Units
Weighted-Average
Market Price
at Date of Deferral
—
$
43.09
43.09
42.99
—
43.10
$
Vested
Unvested
4,992
4,630
$
$
43.10
43.10
The following presents key-employee deferred compensation expense for the period presented:
Year Ended December 31, (in thousands)
Key-employee deferred compensation expense - base salary
Key-employee deferred compensation expense - employer match
Total
Employee Stock Purchase Plan
2018
$
$
215
215
430
On April 19, 2018, the shareholders of Republic approved the ESPP. Under the ESPP, participating employees may purchase shares of
the Company Class A Common Stock through payroll withholdings at a purchase price that cannot be less than 85% of the lower of
the fair market value of the Company’s Class A Common Stock on the first trading day of each offering period or on the last trading
day of each offering period. For 2018, participating employees were able purchase the Company’s Class A Common Stock through
the ESPP at 90% of its fair market value on the last day of each three-month offering period ended September 30, 2018 and December
31, 2018.
The following presents expense under the ESPP for the period presented:
Year Ended December 31, (in thousands)
ESPP expense
2018
$
23
17.
BENEFIT PLANS
401 (k) Plan
Republic maintains a 401(k) plan for eligible employees. All eligible employees are automatically enrolled at 6% of their eligible
compensation within 30-days of their date of hire, unless the eligible employee elects to enroll sooner. 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 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.
166
Republic may also contribute discretionary matching contributions in addition to the matching contributions if the Company achieves
certain operating goals. Normal and discretionary contributions for each of the periods ended were as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Employer matching contributions
Discretionary employer bonus matching contributions
Supplemental Executive Retirement Plan
$
2,890 $
392
2,190 $
335
1,789
583
In association with its May 17, 2016 Cornerstone acquisition, the Company inherited a 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
monthly. The SERP liability was approximately $2 million and $2 million at December 31, 2018 and 2017. Expense under the SERP
was $102,000, $93,000 and $81,000 for the years ended December 31, 2018, 2017 and 2016.
18.
INCOME TAXES
Allocation of federal income tax between current and deferred portion is as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Current expense:
Federal
State
Deferred expense:
$
10,638 $ 26,983 $ 24,295
465
1,532
486
SAB 118 related discrete items
Deferred tax asset devaluation upon enactment of TCJA
Federal
State
Total
$
(2,762)
—
6,815
188
—
—
(1,753)
53
16,411 $ 32,754 $ 23,060
—
6,326
(965)
(76)
Effective tax rates differ from federal statutory rate applied to income before income taxes due to the following:
Years Ended December 31,
Federal rate times financial statement income
Effect of:
SAB 118 related discrete items
Deferred tax asset devaluation upon enactment of TCJA
State taxes, net of federal benefit
General business tax credits
Nontaxable income
Other, net
Effective tax rate
2018
2017
2016
21.00 % 35.00 % 35.00 %
(2.93)
—
1.44
(1.44)
(0.99)
0.33
17.41
—
8.07
0.34
—
(1.90)
0.28
41.79
—
—
0.49
(0.33)
(2.12)
0.39
33.43
*Discrete items include the impact of a cost-segregation study, a research and development tax-credit study, and a tax-accounting-method change related to the
immediate recognition of loan origination costs.
167
The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018.
The Company incurred a charge of $6.3 million to income tax expense during 2017 representing the decrease in value of its net DTA
upon enactment of the TCJA. At December 31, 2017, except for a planned cost-segregation study, based on facts and circumstances
known at that time, the Company believed it had substantially completed its accounting for the tax effects of the TCJA.
In addition to the income tax benefit received during 2018 from the TCJA, Republic also recognized additional federal income tax
benefits of approximately $3.4 million as part of preparing its fiscal-year 2017 federal tax return due October 15, 2018.
Approximately $3.2 million of the $3.4 million in federal income tax benefits represented cumulative benefits for years prior to 2018.
The $3.4 million of additional tax benefits recognized during 2018 was primarily driven by three distinct items, which were comprised
of (1) a cost-segregation study, (2) an automatic change in tax-accounting method, and (3) R&D federal tax credits.
During 2018, the Company began and completed a cost-segregation study. The Company’s cost-segregation study assigned revised
tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets
allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income
tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. The Company also
made the decision to adopt an automatic tax-accounting-method change related to loan origination costs during 2018, as it was
preparing its 2017 federal tax return. The Company’s tax-accounting-method change related to the immediate recognition of loan
origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The cost-segregation
study and the change in tax-accounting method did result in a further impact from the TCJA, as they affected the Company’s 2017
federal tax return due October 15, 2018.
In addition to the completed cost-segregation study and the change in the tax-accounting method related to loan origination costs, the
Company also completed an R&D tax-credit study during 2018, which resulted in the recognition of R&D credits dating back to 2014.
168
Year-end DTAs and DTLs were due to the following:
December 31, (in thousands)
Deferred tax assets:
Allowance for loan and lease losses
Accrued expenses
Net operating loss carryforward(1)
Other-than-temporary impairment
Partnership losses
OREO writedowns
Fair value of cash flow hedges
Acquisition fair value adjustments
Unrealized investment security losses
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Federal Home Loan Bank dividends
Deferred loan fees
Leases
Mortgage servicing rights
Bargain purchase gain
Unrealized investment securities gains
Fair value of cash flow hedges
Partnership losses
Other
Total deferred tax liabilities
Less: Valuation allowance
Net deferred tax asset
2018
2017
$
9,746 $
3,802
3,514
478
—
—
—
580
289
1,644
20,053
9,057
3,009
3,934
462
156
17
19
748
—
1,620
19,022
(3,970)
(2,676)
(1,921)
(1,839)
(1,106)
(553)
—
(24)
(11)
—
(12,100)
(783)
(2,659)
(7)
(1,633)
(1,127)
(599)
(130)
—
—
(23)
(6,961)
(1,475)
(1,718)
6,478 $ 10,343
$
(1) The Company has federal and state net operating loss carryforwards (acquired in its 2016 Cornerstone acquisition) of $8.7
million (federal) and $5.7 million (state). These carryforwards begin to expire in 2030 for both federal and state purposes. The
use of these federal and state carryforwards is 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 carryforward of $28.6 million which began expiring in
2013. The company maintains a valuation allowance as it does not anticipate generating taxable income in Kentucky to utilize
this carryforward prior to expiration. Finally, the Company has AMT credit carryforwards of $87,000 with no expiration date.
Unrecognized Tax Benefits
The following table shows a reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
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
$
$
912 $
306
339
(34)
(196)
—
1,327 $
1,495 $
259
—
(42)
(800)
—
912 $
1,800
268
—
(90)
(340)
(143)
1,495
169
Of the 2018 total, $1.1 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the
effective income tax rate in future periods.
It is the Company’s policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax
benefits. Amounts related to interest and penalties recorded in the income statements for the years ended December 31, 2018, 2017
and 2016 and accrued on the balance sheets as of December 31, 2018, 2017 and 2016 are presented below:
Years Ended December 31, (in thousands)
2018
2017
2016
Interest and penalties recorded in the income statement as a component of income tax expense
Interest and penalties accrued on balance sheet
$
42 $
341
(258) $
299
(290)
557
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 2013.
Low Income Housing Tax Credits
The Company is a limited partner in several low-income housing partnerships whose purpose is to invest in qualified affordable
housing. The Company expects to recover its remaining investments in these partnerships through the use of tax credits that are
generated by the investments.
The following table summarizes information related to the Company’s qualified low-income housing investments and commitments:
December 31, (in thousands)
2018
2017
Investment
Low income housing tax credit investments
Accounting Method
Proportional amortization
Investment
Unfunded
Commitment
Investment
$
3,971 $
14,029 $
1,264 $
Unfunded
Commitment
9,736
170
19.
EARNINGS PER SHARE
The Company calculates earnings per share under the two-class method. Under the two-class method, earnings available to common
shareholders for the period are allocated between Class A Common Stock and Class B Common Stock according to dividends
declared (or accumulated) and participation rights in undistributed earnings. The difference in earnings per share between the two
classes of common stock results from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on
Class B Common Stock. See Footnote 13, “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)
2018
2017
2016
Net income
Dividends declared on Common Stock:
Class A Shares
Class B Shares
Undistributed net income for basic earnings per share
Weighted average potential dividends on Class A shares upon exercise of dilutive options
Undistributed net income for diluted earnings per share
Weighted average shares outstanding:
Class A Shares
Class B Shares
Effect of dilutive securities on Class A Shares outstanding
Weighted average shares outstanding including dilutive securities
Basic earnings per share:
Class A Common Stock:
Per share dividends distributed
Undistributed earnings per share*
Total basic earnings per share - Class A Common Stock
Class B Common Stock
Per share dividends distributed
Undistributed earnings per share*
Total basic earnings per share - Class B Common Stock
Diluted earnings per share:
Class A Common Stock:
Per share dividends distributed
Undistributed earnings per share*
Total diluted earnings per share - Class A Common Stock
Class B Common Stock:
Per share dividends distributed
Undistributed earnings per share*
Total diluted earnings per share - Class B Common Stock
$
$
$
$
$
$
$
$
$
$
77,852
$
45,632
$
45,903
(18,076)
(1,955)
57,821
(102)
57,719
18,736
2,224
105
21,065
0.97
2.79
3.76
0.88
2.53
3.41
0.97
2.77
3.74
0.88
2.52
3.40
$
$
$
$
$
$
$
$
$
(16,158)
(1,773)
27,701
(75)
27,626
18,678
2,243
86
21,007
0.87
1.34
2.21
0.79
1.22
2.01
0.87
1.33
2.20
0.79
1.21
2.00
$
$
$
$
$
$
$
$
$
(15,359)
(1,685)
28,859
(10)
28,849
18,697
2,245
12
20,954
0.83
1.39
2.22
0.75
1.27
2.02
0.83
1.39
2.22
0.75
1.26
2.01
*To arrive at undistributed earnings per share, undistributed net income is first pro rated between Class A and Class B Common Shares, with Class A Common Shares
receiving a 10% premium. The resulting pro-rated, undistributed net income for each class is then divided by the weighted average shares for each class.
Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Antidilutive stock options
Average antidilutive stock options
165,000
47,712
4,500
2,375
5,000
3,125
171
20.
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 Vice Chair are partners. Rent expense under these leases was as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Rent expense under leases from related parties
$
4,487 $
4,008 $
3,791
Total minimum lease commitments under non-cancelable operating leases are as follows:
Year (in thousands)
Affiliate
Other
Total
2019
2020
2021
2022
2023
Thereafter
Total
$
$
4,632
4,590
4,175
3,312
3,312
15,914
35,935 $
2,661
2,541
2,311
1,908
1,377
2,572
13,370 $
7,293
7,131
6,486
5,220
4,689
18,486
49,305
Loans made to executive officers and directors of Republic and their related interests during 2018 were as follows:
Beginning balance
Effect of changes in composition of related parties
New loans
Repayments
Ending balance
(in thousands)
$
$
37,152
703
8,177
(7,662)
38,370
Deposits from executive officers, directors, and their affiliates totaled $102 million and $86 million at December 31, 2018 and 2017.
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 million and $2 million as of December 31, 2018 and 2017.
Pursuant to the terms of the trust, the beneficiaries of the trust will each receive the proceeds of the policies after the repayment of any
unreimbursed portion of the $690,000 annual premiums paid by the Company. The unreimbursed portion constitutes indebtedness
from the trust to the Company and is secured by a collateral assignment of the policies. As of December 31, 2018 and 17, the
unreimbursed portion was $640,000 and $690,000, and the net death benefit under the policies was approximately $3 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.
172
21.
OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Available-for-Sale Debt Securities:
Change in unrealized (loss) gain on AFS debt securities (2018), debt and equity securities (2017 and 2016)
Adjustment for adoption of ASU 2016-01
Reclassification adjustment for net (gain) loss on AFS debt securities recognized in earnings
Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
Net unrealized (losses) gains
Tax effect
$
Net of tax
Cash Flow Hedges:
Change in fair value of derivatives used for cash flow hedges
Reclassification amount for net derivative losses realized in income
Net unrealized gains
Tax effect
Net of tax
(1,548) $
(428)
—
(20)
(1,996)
419
(1,577)
(1,265) $
—
136
298
(831)
377
(454)
178
28
206
(42)
164
83
219
302
(119)
183
(2,294)
—
—
(9)
(2,303)
807
(1,496)
(125)
332
207
(73)
134
Total other comprehensive (loss) income components, net of tax
$
(1,413) $
(271) $
(1,362)
Amounts reclassified out of each component of accumulated OCI for the years ended December 31, 2018, 2017 and 2016:
Years Ended December 31, (in thousands)
Available for Sale Debt Securities:
Net losses on debt securities
Tax effect
Net of tax
Cash Flow Hedges:
Interest rate swap on money market deposits
Interest rate swap on FHLB advance
Total derivative losses on cash flow hedges
Tax effect
Net of tax
Affected Line Items
in the Consolidated
Statements of Income
Amounts Reclassified From
Accumulated Other
Comprehensive Income
2017
2016
2018
Noninterest income
Income tax expense (benefit)
Net income
$
— $
—
—
(136) $
48
(88)
Interest expense on deposits
Interest expense on FHLB advances
Total interest expense
Income tax expense
Net income
(18)
(10)
(28)
6
(22)
(109)
(110)
(219)
77
(142)
—
—
—
(168)
(164)
(332)
116
(216)
Net of tax, total all reclassification amounts
Net income
$
(22) $
(230) $
(216)
The following is a summary of the accumulated OCI balances, net of tax:
(in thousands)
Unrealized loss on AFS debt securities and reclassification of equity securities
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings
Unrealized gain (loss) on cash flow hedges
Total unrealized gain (loss)
December 31, 2017 Change
December 31, 2018
2018
$
$
(604) $ (1,561) $
1,093
(73)
416 $ (1,413) $
(15)
163
(2,165)
1,078
90
(997)
173
(in thousands)
Unrealized gain on AFS debt and equity securities
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
Unrealized gain (loss) on cash flow hedges
Total unrealized gain
December 31, 2016 Change
December 31, 2017
2017
$
$
237 $
706
(256)
687 $
(841) $
387
183
(271) $
(604)
1,093
(73)
416
22.
PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
December 31, (in thousands)
2018
2017
Assets:
Cash and cash equivalents
Available-for-sale debt security
Investment in bank subsidiary
Investment in non-bank subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Subordinated note
Other liabilities
Stockholders’ equity
$ 99,440 $ 98,943
3,600
569,162
3,211
5,512
4,075
625,814
3,343
4,854
$ 737,526 $ 680,428
$ 41,240 $ 41,240
6,764
632,424
6,352
689,934
Total liabilities and stockholders’ equity
$ 737,526 $ 680,428
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, (in thousands)
2018
2017
2016
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
Net income
Comprehensive income
$
$
$
22,385 $
231
45
1,508
469
20,063 $
186
45
1,094
394
20,684
348
21,032
56,820
18,806
116
18,922
26,710
19,114
162
45
915
446
17,960
394
18,354
27,549
77,852 $
45,632 $
45,903
76,439 $
45,361 $
44,541
174
STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands)
2018
2017
2016
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
77,852 $
45,632 $
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 subsidiary bank
Net cash used in investing activities
Financing activities:
Payoff of subordinated note, net of common security interest
Common Stock repurchases
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
Net proceeds from Common Stock options exercised
Cash dividends paid
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
(40)
(56,820)
117
605
(976)
20,738
—
(230)
(230)
—
(827)
230
83
(19,497)
(20,011)
(44)
(26,710)
108
1,215
1,623
21,824
—
—
—
—
(1,048)
—
68
(17,656)
(18,636)
497
3,188
98,943
95,755
Cash and cash equivalents at end of period
$
99,440 $
98,943 $
45,903
(44)
(27,549)
103
(1,366)
(313)
16,734
(31,795)
—
(31,795)
(4,000)
(1,207)
—
80
(16,768)
(21,895)
(36,956)
132,711
95,755
175
23. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company’s net revenue by reportable segment for the year ended December 31, 2018:
(dollars in thousands)
Core Banking
Republic Processing Group
Year Ended December 31, 2018
Traditional Warehouse Mortgage
Banking
Banking
Lending
Total
Core
Banking
Tax
Refund
Solutions
Republic
Credit
Solutions
Total
RPG
Total
Company
Net interest income(1)
$ 160,398
$
15,726
$
402
$ 176,526
$
19,203
$
30,329
$
49,532
$ 226,058
Noninterest income:
Service charges on deposit accounts
Net refund transfer fees
Mortgage banking income(1)
Interchange fee income
Program fees(1)
Increase in cash surrender value of BOLI(1)
Net gains (losses) on OREO
Other
Total noninterest income
14,233
—
—
10,868
—
1,527
729
2,608
29,965
40
—
—
—
—
—
—
—
40
—
—
4,825
—
—
—
—
550
5,375
14,273
—
4,825
10,868
—
1,527
729
3,158
35,380
—
20,029
—
226
295
—
—
1,003
21,553
—
—
—
65
5,930
—
—
497
6,492
—
20,029
—
291
6,225
—
—
1,500
28,045
14,273
20,029
4,825
11,159
6,225
1,527
729
4,658
63,425
Total net revenue
$ 190,363
$
15,766
$
5,777
$ 211,906
$
40,756
$
36,821
$
77,577
$ 289,483
Net-revenue concentration(2)
66 %
5 %
2 %
73 %
14 %
13 %
27 %
100 %
(1) This revenue is not subject to ASU 2014-09, Revenue from Contracts with Customers.
(2) Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company
net revenue.
The following represents information for significant revenue streams subject to ASC 606:
Service charges on deposits – The Company earns revenue for account-based and event-driven services on its retail and commercial
deposit accounts. Contracts for these services are generally in the form of deposit agreements, which disclose fees for deposit services.
Revenue for event-driven services is recognized in close proximity or simultaneously with service performance. Revenue for certain
account-based services may be recognized at a point in time or over the period the service is rendered, typically no longer than a
month. Examples of account-based and event-driven service charges on deposits include per item fees, paper-statement fees, check-
cashing fees, and analysis fees.
Net refund transfer fees – An RT is a fee-based product offered by the Bank through third-party tax preparers located throughout the
United States, as well as tax-preparation software providers (collectively, the “Tax Providers”), with the Bank acting as an
independent contractor of the Tax Providers. An RT allows a taxpayer to pay any applicable tax preparation and filing related fees
directly from his federal or state government tax refund, with the remainder of the tax refund disbursed directly to the taxpayer. RT
fees and all applicable tax preparation, transmitter, audit, and any other taxpayer authorized amounts are deducted from the tax refund
by either the Bank or the Bank’s service provider and automatically forwarded to the appropriate party as authorized by the taxpayer.
RT fees generally receive first priority when applying fees against the taxpayer’s refund, with the Bank’s share of RT fees generally
superior to the claims of other third-party service providers, including the Tax Providers. The remainder of the refund is disbursed to
the taxpayer by a Bank check printed at a tax office, direct deposit to the taxpayer’s personal bank account, loaded to a Net Spend
Visa® Prepaid Card or Walmart Direct2Cash.
The Company executes contracts with individual Tax Providers to offer RTs to their taxpayer customers. RT revenue is recognized by
the Bank immediately after the taxpayer’s refund is disbursed in accordance with the RT contract with the taxpayer customer. The fee
paid by the taxpayer for the RT is shared between the Bank and the Tax Providers based on contracts executed between the parties.
The Company presents RT revenue net of any amounts shared with the Tax Providers. The Bank’s share of RT revenue is generally
based on the obligations undertaken by the Tax Provider for each individual RT program, with more obligations generally
corresponding to higher RT revenue share. The significant majority of net RT revenue is recognized and obligations under RT
contracts fulfilled by the Bank during the first half of each year. Incremental expenses associated with the fulfilment of RT contracts
are generally expensed during the first half of the year.
176
Interchange fee income – As an “issuing bank” for card transactions, the Company earns interchange fee income on transactions
executed by its cardholders with various third-party merchants. Through third-party intermediaries, merchants compensate the
Company for each transaction for the ability to efficiently settle the transaction and for the Company’s willingness to accept certain
risks inherent in the transaction. There is no written contract between the merchant and the Company, but a contract is implied
between the two parties by customary business practices. Interchange fee income is recognized almost simultaneously by the
Company upon the completion of a related card transaction.
The Company compensates its cardholders by way of cash or other “rewards” for generating card transactions. These rewards are
disclosed in cardholder agreements between the Company and its cardholders. Reward costs are accrued over time based on card
transactions generated by the cardholder. Interchange fee income is presented net of reward costs within noninterest income.
Net gains/(losses) on other real estate – The Company routinely sells OREO it has acquired through loan foreclosure. Net
gains/(losses) on OREO reflect both 1) the gain or loss recognized upon an executed deed and 2) mark-to-market write-downs the
Company takes on its OREO inventory.
The Company generally recognizes gains or losses on OREO at the time of an executed deed, although gains may be recognized over
a financing period if the Company finances the sale. For financed OREO sales, the Company assesses whether the buyer is committed
to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are
met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.
In determining the gain or loss on sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant
financing component is present.
Mark-to-market write-downs taken by the Company during the property’s holding period are generally at least 10% per year but may
be higher based on updated real estate appraisals or BPOs. Incremental expenditures to bring OREO to salable condition are generally
expensed as-incurred.
Capital commitment fee (within other income) – The Company received and recorded a $1.0 million nonrefundable capital
commitment fee during the first quarter of 2018. The fee was paid by a third party upon the Company’s completion of its contractual
obligations to build the infrastructure and disburse funds for a new collaborative credit product offered to the third party’s customers
through the Bank. The completion of the infrastructure and the first disbursement of funds were made for this new credit product
during the first quarter of 2018. Incremental expenses incurred by the Company to fulfil its obligation under this contract were
expensed as-incurred.
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, 2018, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage
Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking”
operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the
Company’s national branchless banking platform, MemoryBank, are considered part of the Traditional Banking segment.
177
The nature of segment operations and the primary drivers of net revenues by reportable segment are provided below:
Reportable Segment:
Nature of Operations:
Primary Drivers of Net Revenue:
Core Banking:
Traditional Banking
Provides traditional banking products to clients in its market footprint primarily via its
network of banking centers and to clients outside of its market footprint primarily via
its Digital and Correspondent Lending delivery channels.
Loans, investments, and deposits.
Warehouse Lending
Provides short-term, revolving credit facilities to mortgage bankers across the United
States.
Mortgage warehouse lines of credit.
Mortgage Banking
Primarily originates, sells and services long-term, single family, first lien residential
real estate loans primarily to clients in the Bank's market footprint.
Loan sales and servicing.
Republic Processing Group:
Tax Refund Solutions
TRS offers tax-related credit products and facilitates the receipt and payment of
federal and state tax refund products. The RPS division of TRS offers general-purpose
reloadable cards. TRS and RPS products are primarily provided to clients outside of
the Bank’s market footprint.
Loans, refund transfers, and prepaid
cards.
Republic Credit Solutions
Offers consumer credit products. RCS products are primarily provided to clients
outside of the Bank’s market footprint, with a substantial portion of RCS clients
considered subprime or near-prime borrowers.
Unsecured, consumer loans.
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.
Segment information for the years ended December 31, 2018, 2017 and 2016 is as follows:
Core Banking
Republic Processing Group
Year Ended December 31, 2018
(dollars in thousands)
Traditional Warehouse Mortgage
Banking
Banking
Lending
Total
Core
Banking
Tax
Refund
Solutions
Republic
Credit
Solutions
Total
RPG
Total
Company
Net interest income
$
160,398
$
15,726
$
402
$
176,526
$
19,203
$
30,329
$
49,532
$
226,058
Provision for loan and lease losses
3,710
(142)
—
3,568
10,919
16,881
27,800
Net refund transfer fees
Mortgage banking income
Program fees
Other noninterest income
Total noninterest income
—
—
—
29,965
29,965
—
—
—
40
40
—
4,825
—
550
5,375
—
4,825
—
30,555
35,380
20,029
—
295
1,229
21,553
—
—
5,930
562
6,492
20,029
—
6,225
1,791
28,045
31,368
20,029
4,825
6,225
32,346
63,425
Total noninterest expense
136,439
3,367
4,356
144,162
14,686
5,004
19,690
163,852
Income before income tax expense
Income tax expense
Net income
50,214
6,819
43,395
12,541
2,869
9,672
$
1,421
298
1,123
$
$
64,176
9,986
54,190
15,151
3,033
12,118
14,936
3,392
11,544
$
30,087
6,425
23,662
$
$
$
94,263
16,411
77,852
$
Period-end assets
$ 4,647,037
$ 470,126
$ 14,246
$ 5,131,409
$
20,288
$
88,707
$
108,995
$ 5,240,404
Net interest margin
3.76 %
3.17 %
NM
3.70 %
NM
NM
NM
4.62 %
Net-revenue concentration*
66 %
5 %
2 %
73 %
14 %
13 %
27 %
100 %
178
Core Banking
Republic Processing Group
Year Ended December 31, 2017
(dollars in thousands)
Traditional Warehouse Mortgage
Banking
Banking
Lending
Total
Core
Banking
Tax
Refund
Solutions
Republic
Credit
Solutions
Total
RPG
Total
Company
Net interest income
$
142,823
$
17,533
$
346
$
160,702
$
15,197
$
22,621
$
37,818
$
198,520
Provision for loan and lease losses
3,923
(150)
—
3,773
6,535
17,396
23,931
Net refund transfer fees
Mortgage banking income
Program fees
Other noninterest income
Total noninterest income
—
—
—
27,452
27,452
—
—
—
37
37
—
4,642
—
279
4,921
—
4,642
—
27,768
32,410
18,500
—
176
164
18,840
—
—
5,648
1,516
7,164
18,500
—
5,824
1,680
26,004
27,704
18,500
4,642
5,824
29,448
58,414
Total noninterest expense
124,637
3,392
4,765
132,794
14,491
3,559
18,050
150,844
Income before income tax expense
Income tax expense (benefit)
Net income
41,715
18,202
23,513
14,328
5,421
8,907
$
$
502
(526)
1,028
$
56,545
23,097
33,448
13,011
4,721
8,290
$
8,830
4,936
3,894
21,841
9,657
12,184
$
$
$
78,386
32,754
45,632
$
Period-end assets
Net interest margin
$ 4,470,932
$ 525,246
$
11,115
$ 5,007,293
$
12,450
$
65,619
$
78,069
$ 5,085,362
3.55 %
3.53 %
NM
3.55 %
NM
NM
NM
4.32 %
Net-revenue concentration*
66 %
7 %
2 %
75 %
13 %
12 %
25 %
100 %
Core Banking
Republic Processing Group
Year Ended December 31, 2016
(dollars in thousands)
Traditional Warehouse Mortgage
Banking
Banking
Lending
Total
Core
Banking
Tax
Refund
Solutions
Republic
Credit
Solutions
Total
RPG
Total
Company
Net interest income
$
121,692
$
16,529
$
200
$
138,421
$
6,607
$
11,026
$
17,633
$
156,054
Provision for loan and lease losses
3,448
497
—
3,945
2,772
7,776
10,548
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
—
210
189
19,639
—
—
2,834
1,686
4,520
19,240
—
3,044
1,875
24,159
14,493
19,240
6,882
3,044
28,343
57,509
Total noninterest expense
108,360
3,142
4,688
116,190
11,701
2,216
13,917
130,107
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
35,974
11,015
24,959
12,908
4,798
8,110
$
$
2,754
964
1,790
51,636
16,777
34,859
$
$
Period-end assets
$ 4,169,557
$ 584,916
$
17,453
$ 4,771,926
11,773
4,270
7,503
$
5,554
2,013
3,541
17,327
6,283
11,044
$
68,963
23,060
45,903
$
13,575
$
30,808
$
44,383
$ 4,816,309
$
$
Net interest margin
3.26 %
3.59 %
NM
3.30 %
NM
NM
NM
3.65 %
Net-revenue concentration*
70 %
8 %
3 %
81 %
12 %
7 %
19 %
100 %
*Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net
revenue divided by total Company net revenue.
NM - Not Meaningful
179
25.
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2018 and 2017.
(dollars in thousands, except per share data)
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter(1)
2018
Interest income
Interest expense
Net interest income
Provision for loan and lease losses(2)
Net interest income after provision
Noninterest income
Noninterest expense(3)
Income before income taxes
Income tax expense(4)
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(2)
Net interest income after provision
Noninterest income
Noninterest expense(43
Income before income taxes
Income tax expense(4)
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
$
$
$
$
$
$
$
$
$
$
62,902
8,626
54,276
5,104
49,172
10,119
38,963
20,328
3,022
17,306
0.83
0.76
0.83
0.75
0.242
0.220
56,349
5,711
50,638
6,071
44,567
10,190
38,145
16,612
11,774
4,838
0.23
0.21
0.23
0.21
0.220
0.200
$
$
$
$
$
$
$
$
$
$
Fourth
Quarter
61,090
8,057
53,033
4,077
48,956
11,465
41,212
19,209
1,798
17,411
0.84
0.76
0.83
0.76
0.242
0.220
$
$
$
$
$
2017
Third
Quarter
Second
Quarter
53,725
5,418
48,307
4,221
44,086
10,374
38,026
16,434
5,728
10,706
0.51
0.47
0.51
0.47
0.220
0.200
$
$
$
$
$
58,356
7,272
51,084
4,932
46,152
14,296
40,632
19,816
4,150
15,666
0.75
0.68
0.74
0.68
0.242
0.220
47,821
4,684
43,137
5,061
38,076
12,927
35,734
15,269
5,198
10,071
0.48
0.44
0.48
0.44
0.220
0.200
$
$
$
$
$
$
$
$
$
$
73,833
6,168
67,665
17,255
50,410
27,545
43,045
34,910
7,441
27,469
1.32
1.21
1.32
1.20
0.242
0.220
60,883
4,445
56,438
12,351
44,087
24,923
38,939
30,071
10,054
20,017
0.97
0.88
0.96
0.88
0.209
0.190
First
Quarter(1)
(1) The first quarters of 2018 and 2017 were significantly impacted by the TRS segment of RPG.
(2) Provision expense:
The relatively higher levels of provision expense during the first quarters of 2018 and 2017 were driven by the TRS segment’s EA
product. Provision expense for EAs during the first quarters of 2018 and 2017 was $13.2 million and $8.6 million.
(3) Noninterest expense:
During the fourth quarters of 2018 and 2017, the Company reversed $2.8 million and $1.1 million of incentive compensation accruals
based on revised payout estimates.
180
(4) Income tax expense:
The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1,
2018. The Company’s quarters for the year ended December 31, 2018 reflect this reduction in the federal corporate tax rate.
During the second quarter of 2018, the Company began a cost-segregation study that was completed during the third quarter of 2018.
The Company’s cost-segregation study assigned revised tax lives to select fixed assets resulting from a detailed engineering-based
analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation
expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive
for these deductions in the future. The Company also made the decision to adopt an automatic tax-accounting-method change related
to deferred loan costs during the third quarter of 2018, as it was preparing its 2017 federal tax return. The Company’s tax-
accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the
amortization of those costs over the life of the loan. The cost-segregation study and the change in tax-accounting-method did result in
a further impact from the TCJA, as they affected the Company’s 2017 federal tax return due October 15, 2018.
In addition to the completed cost-segregation study and the change in the tax-accounting-method related to loan origination costs, the
Company also completed a R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits
dating back to 2014. In total, these three tax-related items provided $3.4 million in federal income tax benefits for 2018, of which $3.2
million was the cumulative benefit related to years prior to 2018.
Upon enactment of the TCJA on December 22, 2017, the Company recorded a charge to income tax expense of $6.3 million due to the
remeasurement of its deferred tax assets and liabilities at a 21% corporate tax rate.
181
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, 2018 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
182
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 for the 2019 Annual Meeting of Shareholders (“Proxy Statement”) to be held
April 24, 2019, 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
58 Chairman and CEO
66 Vice Chairman and President
47 EVP, CFO and Chief Accounting Officer
55 President, Republic Processing Group
51 EVP, Republic Bank & Trust Company
50 EVP, Republic Bank & Trust Company
60 SVP, Republic Bank & Trust Company
58 EVP, Republic Bank & Trust Company
49 EVP, 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 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 Vice Chairman of Republic and the Bank since April 2017. He has also served as Director and President
of Republic since 2012. He served as President of the Bank from 1984 to 2017 and Vice Chairman of the Bank from 1994 to 2012.
Kevin Sipes joined the Company in 1995 and has served as EVP 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 the Bank 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 EVP 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.
183
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. In 2018, he was named EVP and Chief Risk
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. In 2018, he was named EVP and Chief Mortgage Banking Officer.
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, 2018. Republic’s security holders approved each of the three equity
compensation plans listed in the table below. There were no equity compensation plans not approved by security holders at December
31, 2018.
(a) (1)
(b)
(c)
Number of Securities Remaining
Available for Future Issuance
Plan Category
2005 Stock Incentive Plan
2015 Stock Incentive Plan
2018 Employee Stock Purchase Plan (3)
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 (a))
and Rights
3,000
$
603,076 (2) $
$
—
24.13
33.74
—
—
2,390,924
244,590
(1) Column (a) above includes options issued for Class A Common Stock only. Options for Class B Common Stock have been
authorized but are not issued.
(2) Includes 75,766 shares of Class A Common Stock subject to issuance in accordance with the Republic Bancorp, Inc. Non-
Employee Director and Key Employee Deferred Compensation Plan for service previously rendered. Republic’s security holders
previously approved this plan. These shares are to be issued from shares available for issuance under the 2015 Stock Incentive
Plan; the weighted-average exercise price in Column (b) does not take these awards into account. Also includes 46,000 shares of
Class A Common Stock for performance stock units; the weighted-average exercise price in Column (b) does not take these
awards into account. For further information, see Footnote 16 “Stock Plans and Stock Based Compensation” of Part II Item 8
“Financial Statements and Supplementary Data.”
(3) The 2018 Employee Stock Purchase Plan is a qualified Employee Stock Purchase Plan under Section 423 of the Code, pursuant
to which up to 250,000 shares of Class A Common Stock were authorized for issuance. Under the ESPP, employees may purchase
shares at a purchase price that cannot be less than 85% of the lower of the fair market value of the Company’s Class A Common
Stock on the first trading day of each offering period or on the last trading day of each offering period. No offering period may
exceed 27 months in length. As of the close of business on December 31, 2018, there were no shares of Class A Common Stock
subject to purchase during open offering periods.
Additional information required by this Item appears under the heading “SHARE OWNERSHIP” of the Proxy Statement, which is
incorporated herein by reference.
184
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.
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, 2018 and 2017
Consolidated statements of income and comprehensive income — years ended December 31, 2018, 2017 and 2016
Consolidated statements of stockholders’ equity — years ended December 31, 2018, 2017 and 2016
Consolidated statements of cash flows — years ended December 31, 2018, 2017 and 2016
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.
Item 16. Form 10K Summary.
Not applicable.
185
INDEX TO EXHIBITS
No.
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*
Description
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))
Restated Bylaws (Incorporated by reference to Exhibit 3(ii) of Registrant’s Form 8-K filed March 15, 2017
(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,
2005 (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 January 1, 2005
(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,
2005 (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 January 1, 2005
(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))
186
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, 2005
(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 January 1, 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 Jaytee Properties, dated August 1, 2008, as amended, relating to
2801 Bardstown Road, Louisville (Incorporated by reference to Exhibit 10.23 of Registrant’s Form 10-K filed March 9,
2018 (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))
187
No.
Description
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 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))
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.
(Incorporated by reference to exhibit 10.31 of Registrant’s Form 10-K for the year ended December 31, 2016
(Commission File Number: 0-24649))
Assignment of Lease relating to property at 601 West Market Street (Floor 4), Louisville, KY. (Incorporated by
reference to exhibit 10.32 of Registrant’s Form 10-K for the year ended December 31, 2016 (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))
188
No.
Description
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
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))
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 10Q for
the quarter ended September 30, 2015 (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 10.23 of Registrant’s Form 10-K
filed March 9, 2018 (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))
189
No.
Description
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
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 10.2 of
Registrant’s Form 10-Q for the quarter ended June 30, 2006 (Commission File Number: 0-24649))
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))
Lease between Republic Bank & Trust Company and Jaytee Properties, dated March 15, 2017, as amended, relating to
9600 Brownsboro Road (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 10-Q for the quarter ended
March 31, 2017 (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 March 1, 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))
190
No.
Description
10.64
10.65
10.66*
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*
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated March 15 2017 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 March 31, 2017 (Commission File Number: 0-24649))
Lease between Republic Bank & Trust Company and Jaytee Properties II SPE, LLC, dated September 20 2017, 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 September 30, 2017 (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 Exhibit 10.1 of Registrant’s 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))
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 for 2005 Stock Incentive Plan, (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 Exhibit 23.2 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))
191
No.
Description
10.80*
10.81*
10.82*
10.83*
10.84
10.85*
10.86
10.87**
10.88**
10.89**
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 Exhibit 10.2 of Registrant’s 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))
Republic Bancorp, Inc. and subsidiaries Non-Employee Director and Key Employee Deferred Compensation, as
adopted November 18 2004 and then amended and restated as on March 16, 2005, March 19, 2008, and again on
January 24, 2018 (Incorporated by reference to Annex A of Registrant’s 2018 Proxy Statement (Commission File
Number: 0-24649))
Republic Bancorp, Inc. Employee Stock Purchase Plan (Incorporated by reference to Annex B of Registrant’s 2018
Proxy Statement (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))
Amended and Restated Joint Marketing Agreement, dated July 1, 2015, by and between Republic Bank & Trust
Company and Elevate@Work, LLC
Written Consent to the Amended and Restated Joint Marketing Agreement, dated September 1, 2016, by and between
Republic Bank & Trust Company and Elevate@Work, LLC
Amended and Restated License and Support Agreement, dated July 1, 2015, by and between Republic Bank & Trust
Company and Elevate Decision Sciences, LLC
10.90**
Participation Agreement, dated July 1, 2015, by and between Elastic SPV, Ltd. and Republic Bank & Trust Company
21
23
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
32***
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
192
No.
101
Description
Interactive data files: (i) Consolidated Balance Sheets at December 31, 2018 and 2017, (ii) Consolidated Statements of
Income and Comprehensive Income for the years ended December 31, 2018, 2017 and 2016, (iii) Consolidated
Statement of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016, (iv) Consolidated
Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 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
**
including the redacted portions, has been filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of the agreement,
***
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.
193
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 15, 2019
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 15, 2019
and Director
Vice Chairman, President and Director
March 15, 2019
Chief Financial Officer and
Chief Accounting Officer
Director
Director
Director
Director
Director
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
194