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Republic Bancorp, Inc. (RBCAA)

Filed: 8 Mar 18, 7:00pm

0

 

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, 2017

 

Commission File Number: 0-24649

 

 

REPUBLIC BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Kentucky

 

61-0862051

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

601 West Market Street, Louisville, Kentucky

 

40202

(Address of principal executive offices)

 

(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

 

NASDAQ Global Select Market

(Title of each class)

 

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒ 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  ☐

Accelerated filer  ☒

Non-accelerated filer  ☐

Smaller reporting company  ☐

Emerging growth 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, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $349,890,313 (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 9, 2018 was 18,609,173 and 2,242,624.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 2018 are incorporated by reference into Part III of this Form 10-K.

 

 

 


 

TABLE OF CONTENTS

 

 

2


 

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K contains statements relating to future results of Republic Bancorp, Inc. that are considered “forward-looking” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 1 “Business,” Part I Item 1A “Risk Factors” and Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

As used in this filing, the terms “Republic,” the “Company,” “we,” “our” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries; and the term the “Bank” or “RB&T” refers to the Company’s subsidiary bank: Republic Bank & Trust Company.

 

Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management may not update them to reflect changes that occur subsequent to the date the statements are made.

 

Broadly speaking, forward-looking statements include:

 

·

projections of revenue, income, expenses, losses, earnings per share, capital expenditures, dividends, capital structure or other financial items;

·

descriptions of plans or objectives for future operations, products or services;

·

forecasts of future economic performance; and

·

descriptions of assumptions underlying or relating to any of the foregoing.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:

 

·

changes in political and economic conditions;

·

new information concerning the impact of the Tax Cuts and Jobs Act (“TCJA”);

·

the magnitude and frequency of changes to the Federal Funds Target Rate (“FFTR”) implemented by the Federal Open Market Committee (“FOMC”) of the Federal Reserve Bank (“FRB”);

·

long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;

·

competitive product and pricing pressures in each of the Company’s 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;

3


 

·

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 Securities and Exchange Commission (“SEC”), including Part 1 Item 1A “Risk Factors.”

 

PART I

 

Item 1. Business.

 

Republic Bancorp, Inc. (“Republic” or the “Company”) is a financial holding company headquartered in Louisville, Kentucky. Republic is the parent company of Republic Bank & Trust Company (“RB&T” or the “Bank”) and Republic Insurance Services, Inc. (the “Captive”). The Bank is a Kentucky-based, state chartered non-member financial institution that provides both traditional and non-traditional banking products through 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. 

 

Republic Bancorp Capital Trust is a Delaware statutory business trust that is a 100%-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.

 

As of December 31, 2017, Republic had 45 full-service banking centers and one loan production office (“LPO”) with locations as follows:

 

Kentucky — 33

Metropolitan Louisville — 19

Central Kentucky — 9

Elizabethtown — 1

Frankfort — 1

Georgetown — 1

Lexington — 5

Shelbyville — 1

Western Kentucky — 2

Owensboro — 2

Northern Kentucky — 3

Covington — 1

Florence — 1

Independence — 1

Southern Indiana — 3

Floyds Knobs — 1

Jeffersonville — 1

New Albany — 1

Metropolitan Tampa, Florida — 6

Metropolitan Cincinnati, Ohio — 1

Metropolitan Nashville, Tennessee — 3*

 


*Includes one LPO

 

Republic’s headquarters are located in Louisville, which is the largest city in Kentucky based on population.

 

4


 

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, 2017, Republic had total assets of $5.1 billion, total deposits of $3.4 billion and total stockholders’ equity of $632 million. Based on total assets as of December 31, 2017, 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.

 

General Business Overview

 

As of December 31, 2017, the Company was divided into five reportable segments: Traditional Banking, Warehouse Lending (“Warehouse”), Mortgage Banking, Tax Refund Solutions (“TRS”) and Republic Credit Solutions (“RCS”). Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute Republic Processing Group (“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.

 

Prior to the third quarter of 2017, management reported RPG as a segment consisting of its largest division, TRS, along with its relatively smaller divisions, Republic Payment Solutions (“RPS”) and RCS. During the third quarter of 2017, due to RCS’s growth in revenues relative to the total Company’s revenues, management identified TRS and RCS as separate reportable segments under the newly classified RPG operations. Also, as part of the updated segmentation, management will report the RPS division, which remained below thresholds to be classified a separate reportable segment, within the newly classified TRS segment. The reportable segments within RPG operations and divisions within those segments operate through the Bank. All prior periods have been reclassified to conform to the current presentation.

 

Net income, total period-end assets, net interest margin, and net-revenue concentration by reportable segment for the years ended December 31, 2017, 2016 and 2015 are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2017

 

 

Core Banking

 

 

Republic Processing Group ("RPG")

 

 

 

 

 

    

    

 

    

    

 

    

    

 

    

Total

  

    

Tax

    

Republic

    

 

    

 

    

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

Core

 

 

Refund

 

Credit

 

Total

 

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

Banking

 

 

Solutions

 

Solutions

 

RPG

 

 

Company

 

Net income

 

$

23,513

 

$

8,907

 

$

1,028

 

$

33,448

 

 

$

8,290

 

$

3,894

 

$

12,184

 

 

$

45,632

 

Period-end  total assets

 

 

4,470,932

 

 

525,246

 

 

11,115

 

 

5,007,293

 

 

 

12,450

 

 

65,619

 

 

78,069

 

 

 

5,085,362

 

Net interest margin

 

 

3.55

%  

 

3.53

%  

 

NM

 

 

3.55

%  

 

 

NM

 

 

NM

 

 

NM

 

 

 

4.32

%  

Net-revenue concentration*

 

 

66

%  

 

 7

%  

 

 2

%  

 

75

%  

 

 

13

%  

 

12

%  

 

25

%  

 

 

100

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2016

 

 

Core Banking

 

 

Republic Processing Group ("RPG")

 

 

 

 

 

    

    

 

    

    

 

    

    

 

    

Total

  

    

Tax

    

Republic

    

 

    

 

    

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

Core

 

 

Refund

 

Credit

 

Total

 

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

Banking

 

 

Solutions

 

Solutions

 

RPG

 

 

Company

 

Net income

 

$

24,959

 

$

8,110

 

$

1,790

 

$

34,859

 

 

$

7,503

 

$

3,541

 

$

11,044

 

 

$

45,903

 

Period-end  total assets

 

 

4,169,557

 

 

584,916

 

 

17,453

 

 

4,771,926

 

 

 

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*

 

 

69

%  

 

 8

%  

 

 3

%  

 

80

%  

 

 

13

%  

 

 7

%  

 

20

%  

 

 

100

%  

 

5


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2015

 

 

Core Banking

  

 

Republic Processing Group ("RPG")

 

 

 

 

 

    

    

 

    

    

 

    

    

 

    

Total

  

    

Tax

    

Republic

    

 

    

 

    

 

 

 

 

Traditional

 

Warehouse

 

Mortgage

 

Core

 

 

Refund

 

Credit

 

Total

 

 

Total

 

(dollars in thousands)

 

Banking

 

Lending

 

Banking

 

Banking

 

 

Solutions

 

Solutions

 

RPG

 

 

Company

 

Net income (loss)

 

$

23,919

 

$

5,964

 

$

(26)

 

$

29,857

 

 

$

5,729

 

$

(420)

 

$

5,309

 

 

$

35,166

 

Period-end  total assets

 

 

3,809,526

 

 

386,414

 

 

9,348

 

 

4,205,288

 

 

 

18,891

 

 

6,110

 

 

25,001

 

 

 

4,230,289

 

Net interest margin

 

 

3.20

%  

 

3.58

%  

 

NM

 

 

3.24

%  

 

 

NM

 

 

NM

 

 

NM

 

 

 

3.27

%  

Net-revenue concentration*

 

 

77

%  

 

 7

%  

 

 3

%  

 

87

%  

 

 

11

%  

 

 2

%  

 

13

%  

 

 

100

%  


*Net revenues are equal to net interest income plus noninterest income.

 

NM — Not Meaningful

 

For expanded segment financial data see Footnote 24 “Segment Information” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

(I)  Traditional Banking segment

 

As of December 31, 2017 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 home equity amortizing loans (“HEALs”) and home equity lines of credit (“HELOCs”) through its retail banking centers. Such loans are generally collateralized by owner occupied property.  During 2017, the Bank continued to market its HELOCs utilizing a promotional rate product.  Under the terms of the promotional product during 2017, clients received a fixed interest rate for 6-12 months with no upfront closing costs.  At the expiration of the promotional rate period, rates are adjusted to an index based on the New York Prime Rate (“Prime”). 

  

For those loans originated through the Bank’s retail banking centers, the collateral is predominately located in the Bank’s market footprint, while loans originated through the Correspondent Lending 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, adjustable rate mortgages (“ARM”s) with interest rate adjustments tied to various market indices with specified minimum and maximum adjustments. The Bank generally charges a higher interest rate for its ARMs if the property is not owner occupied. The interest rates on the majority of ARMs are adjusted after their fixed rate periods on an annual basis, with most having annual and lifetime limitations on upward rate adjustments to the loan. These loans typically feature amortization periods of up to 30 years and have fixed interest rate periods generally ranging from five to ten years, with demand dependent upon market conditions.  In general, ARMs containing longer fixed rate periods have historically been more attractive to the Bank’s clients in a relatively low rate environment, while ARMs with shorter fixed rate periods have historically been more attractive to the Bank’s clients in a relatively high rate environment.  While there is no requirement for clients to refinance their loans at the end of the fixed rate period, clients have historically done so the majority of the time, as most clients are interest rate risk averse on their first mortgage loans.

 

Depending on the term and amount of the ARM, loans collateralized by single family, owner-occupied first lien residential real estate may be originated with a loan-to-value (“LTV”) up to 90% and a combined LTV up to 100%.  The Bank also offers a 100% LTV product for home purchase transactions within its primary markets. The Bank does not require the borrower to obtain private mortgage insurance for ARM loans.  Except for the HEAL product under $150,000, the Bank requires mortgagee’s title insurance on single family, first lien residential real estate loans to protect the Bank against defects in its liens on the properties

6


 

that collateralize the loans. The Bank normally requires title, fire, and extended casualty insurance to be obtained by the borrower and, when required by applicable regulations, flood insurance. The Bank maintains an errors and omissions insurance policy to protect the Bank against loss in the event a borrower fails to maintain proper fire and other hazard insurance policies.

 

Single family, first lien residential ARMs originated prior to January 10, 2014 generally contain an early termination penalty (“ETP”). Effective January 10, 2014, with the implementation of the Ability to Repay (“ATR”) Rule, the Bank eliminated ETPs for subsequently originated ARMs.

 

Single family, first lien residential real estate loans with fixed rate periods of 15, 20 and 30 years are primarily sold into the secondary market. Mortgage Servicing Rights (“MSRs”) attached to the sold portfolio are either sold along with the loan or retained.  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 in low-to-moderate income areas in order to meet its obligations under the Community Reinvestment Act (“CRA”). The Bank generally applies secondary market underwriting criteria to the review of these purchased loan portfolios and generally reserves the right to reject particular loans from a loan package being purchased that do not meet its underwriting criteria. In connection with loan purchases, the Bank receives various representations and warranties from the sellers regarding the quality and characteristics of the loans.

 

Commercial Lending — The Bank conducts commercial lending activities primarily through Corporate Banking, Business Banking, and Retail Banking channels.

 

In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department (“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 Commercial & Industrial (“C&I”), Commercial Real Estate (“CRE”), and to a lesser degree Construction and Development (“C&D”) lending.  The targeted C&I credit size for client relationships is typically between $2 million to $15 million, with some exceptions for large corporate borrowers of higher credit quality. 

 

C&I loans typically include those secured by General Business Assets (“GBA”), which consist of equipment, accounts receivable, inventory, and other business assets owned by the borrower/guarantor.  Credit facilities include annually renewable lines of credit and term loans with maturities typically from three to 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 Earnings Before Interest, Taxes, Depreciation and Amortization (“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 $5 million to $20 million.  Primary underwriting considerations are property cash flow (current and historical), quality of leases, financial capacity of sponsors, and collateral value of property financed. The majority of interest rates offered are based on the 30-day London Interbank Offered Rate (“LIBOR”).  Fixed rate terms of up to 10 years are 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. 

 

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.

 

7


 

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. The needs of these clients range from expansion or acquisition, equipment financing, owner-occupied real estate financing, and operating lines of credit.  The Bank’s lenders utilize all appropriate programs of the Small Business Administration (“SBA”) to reduce credit risk exposure.  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 — 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 of time. 

 

Commercial construction loans are made in the Bank’s market to established commercial builders with solid financial records.  Typically these loans are made for investment properties and have tenants pre-committed for some or all of the space.  Some projects may begin as speculative, with the builder contracting to lease or sell the property during the construction period.  Generally, commercial construction loans are made for the duration of the construction period and slightly beyond and will either convert to permanent financing with the Bank or with another lender at or before maturity. 

 

Construction-to-permanent loans are another type of construction-related financing offered by the Bank.  These loans are made to borrowers who are going to build a property and retain it for ownership after construction completion.  The construction phase is handled just like all other construction loans, and the permanent phase offers similar terms to a permanent CRE loan, while allowing the borrower a one-time closing process at loan origination.  These loans are offered on both owner occupied and non-owner occupied CRE properties.

 

Internet Lending — The Bank accepts online loan applications for its RB&T brand through its website at www.republicbank.com.  Historically, the majority of loans originated through Internet Lending have been within the Bank’s traditional markets of Kentucky, Florida and Indiana.  Other states where loans are marketed include California, Colorado, Georgia, Illinois, Michigan, Minnesota, North Carolina, Ohio, Tennessee and Virginia, as well as, the District of Columbia.

 

Correspondent Lending — Primarily from its Warehouse clients, the 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 consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. With the exception of home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other traditional consumer loan products, while available, are not and have not been actively promoted in the Bank’s markets.

 

The Bank has, from time to time, acquired unsecured consumer installment loans for investment from a third-party originator. Such consumer loans were purchased at par and were selected by the Bank based on certain underwriting characteristics.

 

8


 

Dealer Services —  The Bank offers dealer floor plan loans, consumer indirect automobile loans, and consumer aircraft loans through its Dealer Services Department.  Dealer floor plan loans are commercial loans to automobile dealers secured by the dealer’s current inventory of vehicles, typically in 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. First offered by the Bank in August 2017, consumer aircraft loans typically range in amounts from $55,000 to $500,000, with terms up to 20 years, to purchase or refinance aircrafts, 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 5 “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 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 Automated Clearing House (“ACH”) processing are additional services offered to commercial businesses through the Bank’s Treasury Management department.

 

Internet Banking — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com. 

 

Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.

 

Other Banking Services — The Bank also provides title insurance and other financial institution related products and services.

 

Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies. 

 

See additional discussion regarding the Traditional Banking segment under Footnote 24 “Segment Information” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

(II)  Warehouse Lending segment

 

The Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit.  These credit facilities are primarily secured by single family, first lien residential real estate loans.  The credit facility enables the mortgage banking clients to close single family, first lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank or purchased by the Bank through its Correspondent Lending channel. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans.  Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.

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See additional discussion regarding the Warehouse Lending segment under Footnote 24 “Segment Information” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

(III)  Mortgage Banking segment

 

Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first lien residential real estate loans that are sold into the secondary market, primarily to the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and the Federal National Mortgage Association (“FNMA” or “Fannie Mae”). The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. A fee is received by the Bank for performing these standard servicing functions.

 

As part of the sale of loans with servicing retained, the Bank records MSRs. MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs, which the Bank expects to receive on loans sold with servicing retained by the Bank. MSRs are capitalized as separate assets. This transaction is posted to net gain on sale of loans, a component of “Mortgage Banking income” in the income statement. Management considers all relevant factors, in addition to pricing considerations from other servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially sold with servicing retained by the Bank. The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and subsequently adjusted quarterly based on the weighted average remaining life of the underlying loans. The MSR amortization is recorded as a reduction to net servicing income, a component of Mortgage Banking income.

 

With the assistance of an independent third party, the MSRs asset is reviewed at least quarterly for impairment based on the fair value of the MSRs using groupings of the underlying loans based on predominant risk characteristics. Any impairment of a grouping is reported as a valuation allowance. A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs is expected to increase, as prepayment speeds on the underlying loans would be anticipated to decline.

 

See additional discussion regarding the Mortgage Banking segment under Footnote 24 “Segment Information” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

(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.

Refund Transfers (“RTs”) are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the refund directly from the governmental paying authority.

“Easy Advance” Product

 

The Easy Advance (“EA”) tax credit product is a loan that allows a taxpayer to receive an advance of a portion of their refund, with the taxpayer’s Tax Provider paying all fees to RB&T for the advance. 

��

TRS first offered its EA tax credit product during the first two months of 2016 and for a second successive year during the first two months of 2017.  For the first quarter 2017 tax season, the Company modified the EA product offering to allow more than one advance amount and a different price structure to the Tax Providers based on the amount borrowed by the taxpayer.  All other features of the product remained substantially the same as those from the first quarter 2016 tax season, including the following:  

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·

No EA fee charged to the taxpayer customer;

·

All fees for the product were paid by the Tax Providers with a restriction prohibiting the Tax Providers from passing along the fees to the taxpayer customer;

·

No requirement that the taxpayer customer pay for another bank product, such as an RT;

·

Multiple funds disbursement methods, including direct deposit, prepaid card, check or Walmart Direct2Cash®  product, based on the taxpayer customer’s election;

·

Repayment of the EA to the Bank was deducted from the taxpayer customer’s tax refund proceeds; and

·

If an insufficient refund to repay the EA occurred:

o

there was no recourse to the taxpayer customer, 

o

no negative credit reporting on the taxpayer customer, and

o

no collection efforts against the taxpayer customer.

Fees paid by the Tax Providers to the Company for the EA product are reported as interest income on loans.  EAs during 2017 and 2016 were generally repaid within three weeks after the taxpayer customer’s tax return was submitted to the applicable taxing authority.  EAs do not have a contractual due date but are eligible for delinquency consideration 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 all expected loss provisions made in the first quarter of each year. Unpaid EAs are charged-off within 81 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.  For the first quarter 2018 tax season, the Company modified the EA product offering to increase the maximum advance amount, which is expected to drive an increase in overall EA loan volume and a proportionate amount of EA chargeoffs.

 

See additional discussion regarding the EA product under the sections titled:

 

·

Part I Item 1A “Risk Factors”

·

Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

·

Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 5 “Loans and Allowance for Loan and Lease Losses”

 

Republic 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 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”

 

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(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 with maturities of 30-days-or-more, 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:

 

·

Line of credit – The Bank originates a line-of-credit product to generally subprime borrowers across the United States through one third-party service provider. RCS sells 90% of the balances generated within two business days of loan origination to its third-party service provider and retains the remaining 10% interest. The line-of-credit product represented the substantial majority of RCS activity during 2017 and 2016.  Loan balances held for sale are carried at the lower of cost or fair value.

 

·

Credit card – The Bank originates a credit card product to generally subprime borrowers across the United States through one third-party service provider. RCS sells 90% of the balances generated within two business days of each transaction occurrence to its third-party service provider and retains the remaining 10% interest.  Loan balances held for sale are carried at the lower of cost or fair value.

 

·

Healthcare receivables – 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 sells 100% of the receivables in other instances within one month of origination.  Loan balances held for sale are carried at the lower of cost or fair value.

 

·

Installment loan – The Bank originates an installment-loan product across the United States through a third-party service provider and sells 100% of the balances generated approximately 21 days after origination back to this third-party.  Unlike RCS’s other products, the Company carries these installment loans held for sale at fair value, with this portfolio marked to market on a monthly basis.

 

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, 2017, Republic had 997 full-time-equivalent employees (“FTE”s). Altogether, Republic had 984 full-time and 25 part-time employees. None of the Company’s employees are subject to a collective bargaining agreement, and Republic has never experienced a work stoppage. The Company believes that its employee relations have been and continue to be good.

 

Executive Officers

 

See Part III, Item 10. “Directors, Executive Officers and Corporate Governance.” for information about the Company’s executive officers.

 

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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. 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 Interactive Teller Machines (“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 internet 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 competes in the marketplace on the basis of various revenue-share and pricing incentives, as well as product features and overall service levels.

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Republic Payment Solutions division:

 

The prepaid card industry is subject to intense and increasing competition. The Bank competes with a number of companies that market different types of prepaid card products, such as GPR, gift, incentive and corporate disbursement cards. There is also competition from large retailers who are seeking to integrate more financial services into their product offerings. Increased competition is also expected from alternative financial services providers who are often well-positioned to service the “underbanked” and who may wish to develop their own prepaid card programs.

 

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 subject to extensive federal and state banking laws and regulations, which establish a comprehensive framework of activities in which the Company and the Bank may engage.  These laws and regulations are primarily intended to provide protection to clients and depositors, not stockholders. 

 

The Company is a financial holding company, a legal entity separate and distinct from the Bank that is subject to direct supervision by the FRB. The Company’s principal source of funds is the payment of cash dividends from the Bank. The Company files regular routine reports with the FRB in addition to the Bank’s filings with the FDIC concerning business activities and financial condition. These regulatory agencies conduct periodic examinations to review the Company’s safety and soundness, and compliance with various requirements.

 

The Bank is a Kentucky-chartered commercial banking and trust corporation and as such, it is subject to supervision and regulation by the FDIC and the Kentucky Department of Financial Institutions (“KDFI”). The Bank also operates physical locations in Florida, Indiana, Ohio, and Tennessee; 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 regulates the Company with monetary policies and operational rules that directly impact the Bank. The Bank is a member of the Federal Home Loan Bank (“FHLB”) System. As a member of the FHLB system, the Bank must also comply with applicable regulations of the Federal Housing Finance Board. Regulation by these agencies is intended primarily for the protection of the Bank’s depositors and the Deposit Insurance Fund (“DIF”) and not for the benefit of the Company’s stockholders. The Bank’s activities are also regulated under consumer protection laws applicable to the Bank’s lending, deposit and other activities. The Bank and the Company are also subject to regulations issued by the Consumer Financial Protection Bureau (“CFPB”), an independent bureau of the FRB created by the Dodd-Frank Act. An adverse ruling against the Company or the Bank under these laws could have a material adverse effect on results of operations.

 

Regulators have extensive discretion in connection with their supervisory and enforcement authority and examination policies, including, but not limited to, policies that can materially impact the classification of assets and the establishment of adequate loan loss reserves. Any change in regulatory requirements and policies, whether by the FRB, the FDIC, the KDFI the CFPB or state or federal legislation, could have a material adverse impact on Company operations.

 

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Regulators have broad enforcement powers over banks and their holding companies, including, but not limited to: the power to mandate or restrict particular actions, activities, or divestitures; impose monetary fines and other penalties for violations of laws and regulations; issue cease and desist or removal orders; seek injunctions; publicly disclose such actions; and prohibit unsafe or unsound practices. This authority includes both informal and formal actions to effect corrective actions and/or sanctions. In addition, the Bank is subject to regulation and potential enforcement actions by other state and federal agencies.

 

Certain regulatory requirements applicable to the Company and the Bank are referred to below or elsewhere in this filing. The description of statutory provisions and regulations applicable to banks and their holding companies set forth in this filing does not purport to be a complete description of such statutes and regulations. Their effect on the Company and the Bank is qualified in its entirety by reference to the actual laws and regulations.

 

Prepaid Card Regulation

 

The prepaid cards marketed by the RPS division are subject to various federal and state laws and regulations, including regulations issued by the CFPB, as well as those discussed below.  Prepaid cards issued by the Bank could be subject to the Electronic Fund Transfers Act (“EFTA”) and the FRB’s Regulation E. With the exception of those provisions comprising the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”); the Bank treats prepaid products such as GPR cards as being subject to certain provisions of the EFTA and Regulation E when applicable, such as those related to disclosure requirements, periodic reporting, error resolution procedures and liability limitations.

 

State Wage Payment Laws and Regulations

 

The use of payroll card programs as means for an employer to remit wages or other compensation to its employees or independent contractors is governed by state labor laws related to wage payments. RPS payroll cards are designed to allow employers to comply with such applicable state wage and hour laws. Most states permit the use of payroll cards as a method of paying wages to employees either through statutory provisions allowing such use, or, in the absence of specific statutory guidance, the adoption by state labor departments of formal or informal policies allowing for the use of such cards. Nearly every state allowing payroll card programs places certain requirements or restrictions on their use as a wage payment method. The most common of these requirements or restrictions involves obtaining the prior written consent of the employee, limitations on payroll card fees and disclosure requirements.

 

Card Association and Payment Network Operating Rules

 

In providing certain services, the Bank is required to comply with the operating rules promulgated by various card associations and network organizations, including certain data security standards, with such obligations arising as a condition to access or participation in the relevant card association or network organization. Each card association and network organization may audit the Bank from time to time to ensure compliance with these standards. The Bank maintains appropriate policies and programs and adapts business practices in order to comply with all applicable rules and standards of such associations and organizations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)

 

On July 21, 2010, the Dodd-Frank Act was signed into law, which was intended to cause a fundamental restructuring of federal banking regulation through implementation of extensive regulatory reforms. Many of these reforms have been implemented and others are expected to be implemented in the future.  Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial companies. Provisions of the Dodd-Frank Act that have been or will be implemented that have impacted or may impact the Company and the Bank include:

 

·

Requiring publicly traded companies to provide stockholders the opportunity to cast a non-binding vote on executive compensation at least every three years and on “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their

15


 

holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

 

·

Applying Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The exemption from Section 23A for transactions with financial subsidiaries was effectively eliminated. The Dodd-Frank Act additionally prohibits an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

 

·

Creating the CFPB, which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws.  The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance purposes.

 

·

Permanently increasing the maximum deposit insurance amount for financial institutions from $100,000 to $250,000 per depositor, retroactive to January 1, 2009. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also required the FDIC to increase the reserve ratio of the DIF from 1.15% to 1.35% of insured deposits by 2020, for which the FDIC issued final rules that became effective in July 2016, and eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

 

·

Imposing new requirements for mortgage lending, including prohibitions on certain compensation to mortgage originators and special consumer protections, including limitations on certain mortgage terms.  Additionally, requiring lenders to consider a consumer’s ability to repay a mortgage loan before extending credit to the consumer and limiting prepayment penalties.

 

·

Limiting permissible debit interchange fees for certain financial institutions.

 

·

Revising certain corporate governance requirements for public companies.

 

Incentive Compensation — In 2016, six federal agencies, including the FDIC, the FRB and the SEC, issued a new Notice of Proposed Rulemaking designed to implement section 956 of the Dodd-Frank Act, which applies only to financial institutions with total consolidated assets of $1 billion or more. This seeks to strengthen the incentive compensation practices at covered institutions by better aligning employee rewards with longer-term institutional objectives. The proposed orders are designed to:

 

·

prohibit incentive-based compensation arrangements that encourage inappropriate risks by providing covered persons with “excessive” compensation;

·

prohibit incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons with compensation that “could lead to a material financial loss” to an institution;

·

require certain incentive-based compensation arrangements for covered persons to include deferral of payments, risk of downward adjustment and forfeiture, and clawbacks in order to appropriately balance risk and reward;

·

require disclosures and record-keeping requirements that will enable the appropriate federal regulator to determine compliance with the rule; and

·

require the institution to maintain policies and procedures to ensure compliance with these requirements and prohibitions commensurate with the size and complexity of the organization and the scope of its use of incentive compensation.

 

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Volcker Rule — In December 2013, the final Volcker Rule provision of the Dodd-Frank Act was approved and implemented by the FRB, the FDIC, the SEC, and the Commodity Futures Trading Commission (“CFTC”) (collectively, the “Agencies”). The Volcker Rule aims to reduce risk and banking system instability by restricting U.S. banks from investing in or engaging in proprietary trading and speculation and imposing a strict framework to justify exemptions for underwriting, market making and hedging activities. U.S. banks are restricted from investing in funds with collateral comprised of less than 100% loans that are not registered with the SEC and from engaging in hedging activities that do not hedge a specific identified risk. Affected institutions were required to fully conform to the Volcker Rule by July 21, 2015.

 

Because some components of the Dodd-Frank Act still have not been finalized, it is difficult to predict the ultimate effect of the Dodd-Frank Act on the Company or the Bank at this time. In addition, the extent to which new legislation, existing and planned governmental initiatives, and the current presidential administration result in a meaningful change in the current regulatory environment and the national economy is uncertain. 

 

I.The Company

 

Acquisitions — The Company is required to obtain the prior approval of the FRB under the Bank Holding Company Act (“BHCA”) before it may, among other things, acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of any class of the voting shares of such bank. In addition, the Bank must obtain regulatory approval before entering into certain transactions, such as adding new banking offices and mergers with, or acquisitions of, other financial institutions. In approving bank acquisitions by bank holding companies, the FRB is required to consider the financial and managerial resources and future prospects of the bank holding company, its subsidiaries and related banks, and the target bank involved, the convenience and needs of the communities to be served and 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 bank holding company located outside of Kentucky, Florida, Indiana, Ohio or Tennessee may purchase a bank located inside Kentucky, Florida, Indiana, Ohio or Tennessee subject to appropriate regulatory approvals. In either case, however, state law restrictions may be placed on the acquisition of a bank that has been in existence for a limited amount of time, or would result in specified concentrations of deposits. For example, Kentucky law prohibits a bank holding company from acquiring control of banks located in Kentucky if the holding company would then hold more than 15% of the total deposits of all federally insured depository institutions in Kentucky.

 

The BHCA and the Change in Bank Control Act also generally require the approval of the Federal Reserve prior to any person or company acquiring control of a state bank or bank holding company. Acquiring control conclusively occurs if immediately after a transaction, the acquiring person or company owns, controls, or holds voting securities of the institution with the power to vote 25% or more of any class.  Acquiring control is refutably presumed if, immediately after a transaction, the acquiring person or company owns, controls, or holds voting securities of the institution with the power to vote 10% or more of any class, and (i) the institution has registered securities under section 12 of the Securities Exchange Act; or (ii) no other person will own, control, or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction.

 

Financial Activities — The activities permissible for bank holding companies and their affiliates were substantially expanded by the Gramm-Leach-Bliley Act (“GLBA”). The GLBA permits bank holding companies that qualify as, and elect to be, Financial Holding Company’s (“FHCs”), to engage in a broad range of activities that are financial in nature, incidental to financial activity, or complementary to financial activity that does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. These financial activities include, but are not limited to, the following: underwriting securities, dealing in and making a market in securities, insurance underwriting and agency activities without geographic or other limitation, as well as merchant banking. To achieve and maintain its status as a FHC, the Company and all of its affiliated depository institutions must be well capitalized, well-managed, and have at least a “satisfactory” CRA rating. The Company currently qualifies as and maintains an election as a FHC.

 

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Subject to certain exceptions, state banks are permitted to control or hold an interest in a financial subsidiary that engages in a broader range of activities than are permissible for national banks to engage in directly, subject to any restrictions imposed on a bank under the laws of the state under which it is organized. Conducting financial activities through a bank subsidiary can impact capital adequacy and regulatory restrictions may apply to affiliate transactions between the bank and its financial subsidiaries.

 

Safe and Sound Banking Practice — The FRB does not permit bank holding companies to engage in unsafe and unsound banking practices. The FDIC and the KDFI have similar restrictions with respect to the Bank.

 

Pursuant to the Federal Deposit Insurance Act (“FDIA”), the FDIC has adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

 

Source of Strength Doctrine — Under FRB policy, a bank holding company is expected to act as a source of financial strength to its banking subsidiaries and to commit resources for their support. Such support may restrict the Company’s ability to pay dividends, and may be required at times when, absent this FRB policy, a holding company may not be inclined to provide it. A bank holding company may also be required to guarantee the capital restoration plan of an undercapitalized banking subsidiary and any applicable cross-guarantee provisions that may apply to the Company. In addition, any capital loans by the Company to its bank subsidiary are subordinate in right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. The Dodd-Frank Act codifies the Federal Reserve Board’s existing “source of strength” policy that holding companies act as a source of strength to their insured institution subsidiaries by providing capital, liquidity and other support in times of distress.

 

Office of Foreign Assets Control (“OFAC”) — The Company and the Bank, like all U.S. companies and individuals, are prohibited from transacting business with certain individuals and entities named on the OFAC’s list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The OFAC issued guidance for financial institutions in whereby it asserted that it may, in its discretion, examine institutions determined to be high risk or to be lacking in their efforts to comply with its requirements.

 

Code of 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 operating in any other state, a federal savings bank or federal thrift, or meeting the qualified thrift lender test, provided it first obtains a legal opinion from counsel specifying the statutory or regulatory provisions that permit the activity.

 

Branching — Kentucky law generally permits a Kentucky chartered bank to establish a branch office in any county in Kentucky. A Kentucky bank may also, subject to regulatory approval and certain restrictions, establish a branch office outside of Kentucky. Well-capitalized Kentucky chartered banks that have been in operation at least three years and that satisfy certain criteria relating to, among other things, their composite and management ratings, may establish a branch in Kentucky without the approval of the Commissioner of the KDFI, upon notice to the KDFI and any other state bank with its main office located in the county where the new branch will be located. Branching by all banks not meeting these criteria requires the approval of the Commissioner of the KDFI, who must ascertain and determine that the public convenience and advantage will be served and promoted and that there is a reasonable probability of the successful operation of the branch. In any case, the proposed branch must also be approved by the FDIC, which considers a number of

18


 

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 with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from the Bank. Limitations are also imposed on loans and extensions of credit by a bank to its executive officers, directors and principal stockholders and each of their related interests.

 

The FRB promulgated Regulation W to implement Sections 23A and 23B of the FRA. This regulation contains many of the foregoing restrictions and also addresses derivative transactions, overdraft facilities and other transactions between a bank and its non-bank affiliates.

 

Restrictions on Distribution of Subsidiary Bank Dividends and Assets — Bank regulators may declare a dividend payment to be unsafe and unsound even if the Bank continues to meet its capital requirements after the dividend. Dividends paid by the Bank provide substantially all of the Company’s operating funds. Regulatory requirements limit the amount of dividends that may be paid by the Bank. Under federal regulations, the Bank cannot pay a dividend if, after paying the dividend, the Bank would be undercapitalized.

 

Under Kentucky and federal banking regulations, the dividends the Bank can pay during any calendar year are generally limited to its profits for that year, plus its retained net profits for the two preceding years, less any required transfers to surplus or to fund the retirement of preferred stock or debt, absent approval of the respective state or federal banking regulators. FDIC regulations also require all insured depository institutions to remain in a safe and sound condition, as defined in regulations, as a condition of having FDIC deposit insurance.

 

FDIC Deposit Insurance Assessments — All Bank deposits are insured to the maximum extent permitted by the DIF. These bank deposits are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the DIF.

 

In addition to assessments for deposit insurance premiums, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”), a mixed-ownership government corporation established to recapitalize the predecessor to the DIF. These assessments will continue until the last FICO 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.

 

In 2011, the FDIC Board of Directors adopted a final rule, which redefined the deposit insurance assessment base as required by the Dodd-Frank Act. The final rule:

 

·

Redefined the deposit insurance assessment base as average consolidated total assets minus average tangible equity (defined as Tier 1 Capital);

·

Made generally conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates;

·

Created a depository institution debt adjustment;

·

Eliminated the secured liability adjustment; and

19


 

·

Adopted a new assessment rate schedule, and, in lieu of dividends, other rate schedules when the reserve ratio reaches certain levels.

 

The FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the DIF increase from 1.15% to 1.35% of insured deposits by September 30, 2020. Banks with assets of less than $10 billion are exempt from any additional assessments necessary to increase the reserve fund above 1.15%.

 

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It may also suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that would result in termination of the Bank’s FDIC deposit insurance.

 

In 2014, the FDIC revised the risk-based deposit insurance assessment system to reflect changes in the regulatory capital rules in accordance with Basel III, which became effective for the Company and the Bank in January 2015. For deposit insurance assessment purposes, the updated system revised the ratios and ratio thresholds relating to capital evaluations.

 

Consumer Laws and Regulations — In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in their transactions with banks. While the discussion set forth in this filing is not exhaustive, these laws and regulations include Regulation E, the Truth in Savings Act, Check Clearing for the 21st Century Act and the Expedited Funds Availability Act, among others. These federal laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with consumers when accepting deposits. Certain laws also limit the Bank’s ability to share information with affiliated and unaffiliated entities. The Bank is required to comply with all applicable consumer protection laws and regulations, both state and federal, as part of its ongoing business operations.

 

Regulation E — A 2009 amendment to Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer affirmatively consents, or opts in, to the overdraft service for those types of transactions. Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service and the consumer’s choices. The final rules require institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.

 

The Bank earns a substantial majority of its deposit fee income related to overdrafts from the per item fee it assesses its clients for each insufficient funds check or electronic debit presented for payment. Both the per item fee and the daily fee assessed to the account resulting from its overdraft status, if computed as a percentage of the amount overdrawn, results in a high rate of interest when annualized and are thus considered excessive by some consumer groups.

 

In 2016, the CFPB issued a final rule establishing new consumer compliance requirements for prepaid accounts pursuant to Regulations E and Z. These requirements govern disclosures, limited liability and error resolution protections, credit features, and making account agreement information publicly available for prepaid accounts, among other provisions. Certain provisions of the rule are not effective until April 1, 2019.

 

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.

 

20


 

The USA Patriot Act (“Patriot Act”), Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) — The Patriot Act was enacted after September 11, 2001, to provide the federal government with powers to prevent, detect, and prosecute terrorism and international money laundering, and has resulted in promulgation of several regulations that have a direct impact on financial institutions. There are a number of programs that financial institutions must have in place such as: (i) BSA/AML controls to manage risk; (ii) Customer Identification Programs to determine the true identity of customers, document and verify the information, and determine whether the customer appears on any federal government list of known or suspected terrorists or terrorist organizations; and (iii) monitoring for the timely detection and reporting of suspicious activity and reportable transactions. Title III of the Patriot Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, savings banks, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the Patriot Act imposes the following obligations on financial institutions:

 

·

Establishment of enhanced anti-money laundering programs;

·

Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts;

·

Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering;

·

Prohibitions on correspondent accounts for foreign shell banks; and

·

Compliance with record keeping obligations with respect to correspondent accounts of foreign banks.

 

Depositor Preference — The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the U.S. and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

 

Liability of Commonly Controlled Institutions — FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of another FDIC-insured depository institution controlled by the same bank holding company, or for any assistance provided by the FDIC to another FDIC-insured depository institution controlled by the same bank holding company that is in danger of default. “Default” generally means the appointment of a conservator or receiver. “In danger of default” generally means the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. Such a “cross-guarantee” claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against that depository institution. At this time, the Bank is the only insured depository institution controlled by the Company. However, if the Company were to control other FDIC-insured depository institutions in the future, the cross-guarantee would apply to all such FDIC-insured depository institutions.

 

Federal Home Loan Bank System — The FHLB offers credit to its members, which include savings banks, commercial banks, insurance companies, credit unions, and other entities. The FHLB system is currently divided into eleven federally chartered regional FHLBs that are regulated by the Federal Housing Finance Board. The Bank is a member and owns capital stock in the FHLB Cincinnati. The amount of capital stock the Bank must own to maintain its membership depends on its balance of outstanding advances. It is required to acquire and hold shares in an amount at least equal to 1% of the aggregate principal amount of its unpaid single-family residential real estate loans and similar obligations at the beginning of each year, or 1/20th of its outstanding advances from the FHLB, whichever is greater. Advances are secured by pledges of loans, mortgage backed securities and capital stock of the FHLB. FHLBs also purchase mortgages in the secondary market through their Mortgage Purchase Program (“MPP”). The Bank has never sold loans to the MPP.

 

In the event of a default on an advance, the Federal Home Loan Bank Act establishes priority of the FHLB’s claim over various other claims. Regulations provide that each FHLB has joint and several liability for the obligations of the other FHLBs in the system. If an FHLB falls below its minimum capital requirements, the FHLB may seek to require its members to purchase additional capital stock of the FHLB. If problems within the FHLB system were to occur, it could adversely affect the pricing or availability of advances, the amount and timing of dividends on capital stock issued by FHLBs to its members, or the ability of members to have their FHLB capital stock redeemed on a timely basis. Congress continues to consider various proposals that could establish a new regulatory structure for the FHLB system, as well as for other government-sponsored entities. The Bank cannot predict at this time, which, if any, of these proposals may be adopted or what effect they would have on the Bank’s business.

21


 

 

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.

 

General Lending Regulations

 

Pursuant to FDIC regulations, the Bank may extend credit subject to certain restrictions. State law may impose additional restrictions. While the discussion of extensions of credit set forth in this filing is not exhaustive, federal laws and regulations include but are not limited to the following:

 

·

Community Reinvestment Act

·

Home Mortgage Disclosure Act

·

Equal Credit Opportunity Act

·

Truth in Lending Act

·

Real Estate Settlement Procedures Act

·

Fair Credit Reporting Act

·

CARD Act

 

Community Reinvestment Act (“CRA”) — Under the CRA, financial institutions have a continuing and affirmative obligation to help meet the credit needs of their designated community, including low and moderate income neighborhoods, consistent with safe and sound banking practices. The CRA does not establish specific lending requirements or programs for the Bank, nor does it limit the Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In particular, the CRA assessment system focuses on three tests:

 

·

a lending test, to evaluate the institution’s record of making loans in its assessment areas;

·

an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses in its assessment area or a broader area that includes its assessment area; and

·

a service test, to evaluate the institution’s delivery of services through its retail banking channels and the extent and innovativeness of its community development services.

 

The CRA requires all institutions to make public disclosure of their CRA ratings. In June 2015, the Bank received a “Satisfactory” CRA Performance Evaluation. A copy of the public section of this CRA Performance Evaluation is available to the public upon request.

 

Home Mortgage Disclosure Act (“HMDA”) — The HMDA grew out of public concern over credit shortages in certain urban neighborhoods. One purpose of the HMDA is to provide public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics, as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. The HMDA requires institutions to report data regarding applications for loans for the purchase or improvement of single family and multi-family dwellings, as well as information concerning originations and purchases of such loans. Federal bank regulators rely, in part, upon data provided under HMDA to determine whether depository institutions engage in discriminatory lending practices. The appropriate federal banking agency, or in some cases the Department of Housing and Urban Development, enforces compliance with HMDA and implements its regulations. Administrative sanctions, including civil money penalties, may be imposed by supervisory agencies for violations of the HMDA.

 

22


 

Equal Credit Opportunity Act; Fair Housing Act (“ECOA”) — The ECOA prohibits discrimination against an applicant in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs or good faith exercise of any rights under the Consumer Credit Protection Act. Under the Fair Housing Act, it is unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. Among other things, these laws prohibit a lender from denying or discouraging credit on a discriminatory basis, making excessively low appraisals of property based on racial considerations, or charging excessive rates or imposing more stringent loan terms or conditions on a discriminatory basis. In addition to private actions by aggrieved borrowers or applicants for actual and punitive damages, the U.S. Department of Justice and other regulatory agencies can take enforcement action seeking injunctive and other equitable relief or sanctions for alleged violations.

 

Truth in Lending Act (“TLA”) — The TLA governs disclosures of credit terms to consumer borrowers and is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As result of the TLA, all creditors must use the same credit terminology and expressions of rates, and disclose the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule for each proposed loan. Violations of the TLA may result in regulatory sanctions and in the imposition of both civil and, in the case of willful violations, criminal penalties. Under certain circumstances, the TLA also provides a consumer with a right of rescission, which if exercised within three business days would require the creditor to reimburse any amount paid by the consumer to the creditor or to a third party in connection with the loan, including finance charges, application fees, commitment fees, title search fees and appraisal fees. Consumers may also seek actual and punitive damages for violations of the TLA.

 

Real Estate Settlement Procedures Act (“RESPA”) — The RESPA requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. The RESPA also prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Violations of the RESPA may result in imposition of penalties, including: (i) civil liability equal to three times the amount of any charge paid for the settlement services or civil liability of up to $2,000 per claimant, depending on the violation; (ii) awards of court costs and attorneys’ fees; and (iii) fines of not more than $10,000 or imprisonment for not more than one year, or both. A rule requiring integrated disclosures from the TLA and RESPA became effective in October 2015.

 

Fair Credit Reporting Act (“FACT”) — The FACT requires the Bank to adopt and implement a written identity theft prevention program, paying particular attention to several identified “red flag” events. The program must assess the validity of address change requests for card issuers and for users of consumer reports to verify the subject of a consumer report in the event of notice of an address discrepancy. The FACT gives consumers the ability to challenge the Bank with respect to credit reporting information provided by the Bank. The FACT also prohibits the Bank from using certain information it may acquire from an affiliate to solicit the consumer for marketing purposes unless the consumer has been given notice and an opportunity to opt out of such solicitation for a period of five years.

 

Ability to Repay (“ATR”) Rule and Qualified Mortgage Loans (“QMs”) — In January 2014, the CFPB’s final rule implementing the ATR requirements in the Dodd-Frank Act became effective. The rule, among other things, requires lenders to consider a consumer’s ability to repay a mortgage loan before extending credit to the consumer and limits prepayment penalties. The rule also establishes certain protections from liability for mortgage lenders with regard to QMs they originate. For this purpose, the rule defines QMs to include loans with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by the FNMA or Freddie Mac while they operate under Federal conservatorship or receivership, and loans eligible for insurance or guarantee by the Federal Housing Administration (“FHA”), U.S. Department of Veterans Affairs (“VA”) or U.S. Department of Agriculture (“USDA”). Additionally, QMs may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or (iii) include interest-only or negative amortization payments.

 

The Dodd-Frank Act did not specify whether the presumption of ATR compliance is conclusive (i.e., creates a safe harbor) or is rebuttable. For mortgages that are not QMs, the final rule describes certain minimum requirements for creditors making ATR determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.

 

23


 

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.

 

Interagency Guidance on Non Traditional Mortgage Product Risks — In 2006, final guidance was issued to address the risks posed by residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest (such as “interest-only” mortgages and “payment option” ARMs). The guidance discusses the importance of ensuring that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity. The guidance also suggests that banks i) implement strong risk management standards, ii) maintain capital levels commensurate with risk and iii) establish an allowance that reflects the collectability of the portfolio. The guidance urges banks to ensure that consumers have sufficient information to clearly understand loan terms and associated risks before making product or payment choices.

 

Loans to Insiders — The Bank’s authority to extend credit to its directors, executive officers and principal shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:

 

·

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with non-insiders and that do not involve more than the normal risk of repayment or present other features that are unfavorable to the Bank; and

·

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

 

The regulations allow small discounts on fees on residential mortgages for directors, officers and employees. In addition, extensions of credit to insiders in excess of certain limits must be approved by the Bank’s Board of Directors.

 

Capital Adequacy Requirements

 

Capital Guidelines — 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 utilized a leverage ratio as a tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 Capital divided by its average total consolidated assets (less goodwill and certain other intangible assets).

 

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.

 

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 began phasing in during 2016 and continues to phase in 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.

 

24


 

As of December 31, 2017 and 2016, the Company’s capital ratios were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

 

 

 

Actual

 

Actual

 

December 31, (dollars in thousands)

    

 

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

 

$

694,369

 

16.04

%  

$

655,908

 

16.37

%  

Republic Bank & Trust Company

 

 

 

591,592

 

13.69

 

 

553,905

 

13.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

 

$

612,315

 

14.15

%  

$

584,530

 

14.59

%  

Republic Bank & Trust Company

 

 

 

548,823

 

12.70

 

 

520,985

 

13.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 (core) capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

 

$

651,600

 

15.06

%  

$

622,988

 

15.55

%  

Republic Bank & Trust Company

 

 

 

548,823

 

12.70

 

 

520,985

 

13.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

Republic Bancorp, Inc.

 

 

$

651,600

 

13.21

%  

$

622,988

 

13.54

%  

Republic Bank & Trust Company

 

 

 

548,823

 

11.15

 

 

520,985

 

11.34

 

 

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 bank holding company may face significant consequences if its bank subsidiary fails to maintain the required capital and management ratings, including entering into an agreement with the FRB that imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. More specifically, the FRB’s regulations require a FHC to notify the FRB within 15 days of becoming aware that any depository institution controlled by the company has ceased to be well-capitalized or well-managed. If the FRB determines that a FHC controls a depository institution that is not well-capitalized or well-managed, the FRB will notify the FHC that it is not in compliance with applicable requirements and may require the FHC to enter into an agreement acceptable to the FRB to correct any deficiencies, or require the FHC to decertify as a FHC. Until such deficiencies are corrected, the FRB may impose any limitations or conditions on the conduct or activities of the FHC and its affiliates that the FRB determines are appropriate, and the FHC may not commence any additional activity or acquire control of any company under Section 4(k) of the BHC Act without

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prior FRB approval. Unless the period of time for compliance is extended by the FRB, if a FHC fails to correct deficiencies in maintaining its qualification for FHC status within 180 days of notice to the FRB, the FRB may order divestiture of any depository institution controlled by the company. A company may comply with a divestiture order by ceasing to engage in any financial or other activity that would not be permissible for a bank holding company that has not elected to be treated as a FHC. The Company is currently classified as a FHC.

 

Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.

 

Other Legislative Initiatives

 

The U.S. Congress and state legislative bodies continually consider proposals for altering the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether, or in what form, any of these potential proposals or regulatory initiatives will be adopted, the impact the proposals will have on the financial institutions industry or the extent to which the business or financial condition and operations of the Company and its subsidiaries may be affected.

 

Statistical Disclosures

 

The statistical disclosures required by Part I Item 1 “Business” are located under Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Item 1A.  Risk Factors.  

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

An investment in Republic Bancorp, Inc.’s (“Republic” or the “Company”) common stock is subject to risks inherent in its business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this filing. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect its business, financial condition and results of operations in the future. The value or market price of the Company’s common stock could decline due to any of these identified or other risks, and an investor could lose all or part of their investment.

 

There are factors, many beyond the Company’s control, which may significantly change the results or expectations of the Company. Some of these factors are described below, however, many are described in the other sections of this Annual Report on Form 10-K.

 

ACCOUNTING POLICIES/ESTIMATES, ACCOUNTING STANDARDS AND INTERNAL CONTROL

 

The Company’s accounting policies and estimates are critical components of the Company’s presentation of its financial statements. Management must exercise judgment in selecting and adopting various accounting policies and in applying estimates. Actual outcomes may be materially different from amounts previously estimated. Management has identified several accounting policies and estimates as being critical to the presentation of the Company’s financial statements. These policies are described in Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section titled “Critical Accounting Policies and Estimates.” The Company’s management must exercise judgment in selecting and applying many accounting policies and methods in order to comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results. In some cases, management may select an accounting policy that might be reasonable under the circumstances, yet might result in the Company’s reporting different results than would have been reported under a different alternative. Materially different amounts could be reported under different conditions or using different assumptions or estimates.

 

Republic Bank & Trust Company (“RB&T” or the “Bank”) may experience goodwill impairment, which could reduce its earnings. The Bank performed its annual goodwill impairment test during the fourth quarter of 2017 as of September 30, 2017. The evaluation of the fair value of goodwill requires management judgment. If management’s judgment was incorrect and goodwill impairment was later deemed to exist, the Bank would be required to write down its goodwill resulting in a charge to earnings, which would adversely affect its results of operations, perhaps materially.

 

Changes in accounting standards could materially impact the Company’s financial statements. The Financial Accounting Standards Board (“FASB”) may change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations.  In addition, those who interpret the accounting standards, such as the Securities and Exchange Commission (“SEC”), the banking regulators and the Company’s independent registered public accounting firm may amend or reverse their previous interpretations or conclusions regarding how various standards should be applied. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the Company recasting, or possibly restating, prior period financial statements. See additional discussion regarding accounting standard updates in Part II Item 8 “Financial Statements and Supplemental Data” under the section titled “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.

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If the Bank’s other real estate owned (“OREO”) portfolio is not properly valued or sufficiently reserved to cover actual losses, or if the Bank is required to increase its valuation reserves, the Bank’s earnings could be reduced. Management typically obtains updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property is taken in as OREO and at certain other times during the asset’s holding period. The Bank’s net book value of the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A writedown is recorded for any excess in the asset’s net book value over its fair value. If the Bank’s valuation process is incorrect, or if property values decline, the fair value of the Bank’s OREO may not be sufficient to recover its carrying value in such assets, resulting in the need for additional writedowns. Significant additional writedowns to OREO could have a material adverse effect on the Bank’s financial condition and results of operations.

 

TRADITIONAL BANK LENDING AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES (“ALLOWANCE”)

 

The Allowance could be insufficient to cover the Bank’s actual loan losses. The Bank makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of its loans. In determining the amount of the Allowance, among other things, the Bank reviews its loss and delinquency experience, economic conditions, etc. If its assumptions are incorrect, the Allowance may not be sufficient to cover losses inherent in its loan portfolio, resulting in additions to its Allowance. In addition, regulatory agencies periodically review the Allowance and may require the Bank to increase its provision for loan and lease losses or recognize further loan charge-offs. A material increase in the Allowance or loan charge-offs would have a material adverse effect on the Bank’s financial condition and results of operations.

 

Deterioration in the quality of the Traditional Banking loan portfolio may result in additional charge-offs, which would adversely impact the Bank’s operating results. Despite the various measures implemented by the Bank to address the economic environment, there may be further deterioration in the Bank’s loan portfolio. When borrowers default on their loan obligations, it may result in lost principal and interest income and increased operating expenses associated with the increased allocation of management time and resources associated with the collection efforts. In certain situations where collection efforts are unsuccessful or acceptable “work-out” arrangements cannot be reached or performed, the Bank may charge-off loans, either in part or in whole. Additional charge-offs will adversely affect the Bank’s operating results and financial condition.

 

The Bank’s financial condition and earnings could be negatively impacted to the extent the Bank relies on borrower information that is false, misleading or inaccurate. The Bank relies on the accuracy and completeness of information provided by vendors, clients and other parties in deciding whether to extend credit, or enter into transactions with other parties. Additional charge-offs will adversely affect the Bank’s operating results and financial condition.

 

The Bank’s use of appraisals as part of the decision process to make a loan on or secured by real property does not ensure the value of the real property collateral. As part of the decision process to make a loan secured by real property, the Bank generally requires an independent third-party appraisal of the real property.  An appraisal, however, is only an estimate of the value of the property at the time the appraisal is made.  An error in fact or judgment could adversely affect the reliability of the appraisal. In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease. As a result of any of these factors, the value of collateral securing a loan may be less than supposed, and if a default occurs, the Bank may not recover the outstanding balance of the loan. Additional charge-offs will adversely affect the Bank’s operating results and financial condition.

 

The Bank is exposed to risk of environmental liabilities with respect to properties to which it takes title. In the course of its business, the Bank may own or foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Bank may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Bank is the owner or former owner of a contaminated site, the Bank may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect the Bank.

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Prepayment of loans may negatively impact the Bank’s business. The Bank’s clients may prepay the principal amount of their outstanding loans at any time. The speeds at which such prepayments occur, as well as the size of such prepayments, are within the Bank clients’ discretion. If clients prepay the principal amount of their loans, and the Bank is unable to lend those funds to other clients or invest the funds at the same or higher interest rates, the Bank’s interest income will be reduced. A significant reduction in interest income would have a negative impact on the Bank’s results of operations and financial condition.

 

The Bank is highly dependent upon programs administered by the Federal Home Loan Mortgage Corporation (“Freddie Mac” or the “FHLMC”) and the Federal National Mortgage Association (“FNMA” or “Fannie Mae”).  Changes in existing U.S. government-sponsored mortgage programs or servicing eligibility standards could materially and adversely affect its business, financial position, results of operations and cash flows. The Bank’s ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by Freddie Mac and Fannie Mae. These entities play powerful roles in the residential mortgage industry, and the Bank has significant business relationships with them. The Bank’s status as an approved seller/servicer for both is subject to compliance with their selling and servicing guides.

 

Any discontinuation of, or significant reduction or material change in, the operation of Freddie Mac or Fannie Mae or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of Freddie Mac or Fannie Mae would likely prevent the Bank from originating and selling most, if not all, of its mortgage loan originations.

 

Loans originated through the Bank’s Correspondent Lending channel subject the Bank to additional negative earnings sensitivity as the result of prepayments and additional credit risks that the Bank does not have through its historical origination channels. Loans acquired through the Bank’s Correspondent Lending channel are typically purchased at a premium and also represent out-of-market loans originated by a non-Republic representative.  Loans purchased at a premium inherently subject the Bank’s earnings to additional sensitivity related to prepayments, as increases in prepayment speeds will negatively affect the overall yield to maturity on such loans, potentially even causing the net loan yield to be negative for the period of time the loan is owned by the Bank.

 

Loans originated out of the Bank’s market footprint by non-Republic representatives will inherently carry additional credit risk from potential fraud due to the increased level of third-party involvement on such loans.  In addition, the Bank will also experience an increase in complexity for customer service and the collection process, given the number of different state laws the Bank could be subject to from loans purchased throughout the U.S. As of December 31, 2017, the Bank’s Correspondent Lending channel maintained loans with collateral in 25 different states, with the largest concentration of 72% from the state of California.

 

Failure to appropriately manage the additional risks related to this lending channel could lead to reduced profitability and/or operating losses through this origination channel.

 

Loans originated through the Bank’s Internet Lending channel will subject the Bank to credit and regulatory risks that the Bank does not have through its historical origination channels. The dollar volume of loans originated through the Bank’s Internet Lending channel is expected to be increasingly out-of-market.  Loans originated out of the Bank’s market footprint inherently carry additional credit risk, as the Bank will experience an increase in the complexity of the customer authentication requirements for such loans.  Failure to appropriately identify the end-borrower for such loans could lead to fraud losses.  Failure to appropriately manage these additional risks could lead to reduced profitability and/or operating losses through this origination channel.  In addition, failure to appropriately identify the end-borrower could result in regulatory sanctions resulting from failure to comply with various customer identification regulations.

 

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BANK OWNED LIFE INSURANCE (“BOLI”)

 

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, 2017, 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 Federal Home Loan Bank (“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 (“WAREHOUSE”)

 

The Warehouse Lending business is subject to numerous risks that may result in losses. Risks associated with warehouse loans include, without limitation, (i) credit risks relating to the mortgage bankers that borrow from the Bank, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers and their third-party service providers, (iii) changes in the market value of mortgage loans originated by the mortgage banker during the time in warehouse, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker. Failure to mitigate these risks could have a material adverse impact on the Bank’s financial statements and results of operations.

 

Outstanding Warehouse lines of credit can fluctuate significantly and negatively impact the Bank’s liquidity and earnings. The Bank has a lending concentration in outstanding Warehouse lines of credit. Because outstanding Warehouse balances are contingent upon residential mortgage lending activity, changes in the residential real estate market nationwide can lead to wide fluctuations of balances in this product. Additionally, Warehouse Lending period-end balances are generally higher than the average balance during the period due to increased mortgage activity that occurs at the end of a month. A sudden increase in loans may materially impact the Company’s liquidity position, while a sudden decrease in loans may materially impact the Company’s results of operations.

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Outstanding Warehouse lines of credit and their corresponding earnings could decline due to several factors, such as intense industry competition, overall mortgage demand and the interest rate environment.  The Bank may experience decreased earnings on its Warehouse lines of credit due primarily to strong industry competition, overall mortgage demand and the interest rate environment.  Such decreased earnings may materially impact the Company’s results of operations.

 

The Company may lose Warehouse clients due to mergers and acquisitions in the industry. The Bank’s Warehouse clients are primarily mortgage companies across the United States. Mergers and acquisitions affecting such clients may lead to an end to the client relationship with the Bank. The loss of a significant amount of clients may materially impact the Company’s results of operations.

 

REPUBLIC PROCESSING GROUP (“RPG”)

 

The Company’s lines of business and products not typically associated with traditional banking expose earnings to additional risks and uncertainties. The RPG operations are comprised of two reportable segments: Tax Refund Solutions (“TRS”) and Republic Credit Solutions (“RCS”).

 

RPG’s products represent a significant business risk and management believes the Bank could be subject to additional regulatory and public pressure to exit these product lines, which may have a material adverse effect on the Bank’s operations. 

 

Various governmental, regulatory and consumer groups have, from time to time, questioned the fairness of the products offered by RPG.  Actions of these groups and others could result in regulatory, governmental, or legislative action or litigation against the Bank, which could have a material adverse effect on the Bank’s operations.   If the Bank can no longer offer its RPG products, it will have a material adverse effect on its profits.

 

TAX REFUND SOLUTIONS (“TRS”)

 

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 of these systems could result in failures or disruptions in client relationship management and other systems. Significant operational problems could also cause a material portion of the Bank’s tax-preparer base to switch to a competitor to process their bank product transactions, significantly reducing the Bank’s projected revenue without a corresponding decrease in expenses.

 

The Bank’s Easy Advance (“EA”) and Refund Transfer (“RT”) products represent a significant third-party management risk, and if RB&T’s third-party 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

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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 Internal Revenue Service (“IRS”) revenue protection strategies, including audits of returns, errors in the tax return, tax return fraud and tax debts not previously disclosed to RB&T during its underwriting process. While RB&T’s underwriting during the EA approval process takes these factors into consideration based on prior years’ payment patterns, if the IRS significantly alters its revenue protection strategies, 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 insure 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 PATH Act, 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 (“RCS”)

 

Consumer loans originated through the RCS segment represent a higher credit risk than Traditional Bank loans.  RCS originates both a short-term line-of-credit product and a credit card product. The Bank sells 90% of the balances maintained through these two products within two days of balance origination and retains a 10% interest. Both of these products are unsecured and made to borrowers with below prime credit scores, therefore representing an elevated credit risk.  The loss rates for these two products have 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, 2017, RCS’s revenues and earnings were concentrated in one line-of-credit product. Through the Bank, RCS works with one third party service provider 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 disclosure requirements such as Regulation B, Fair Lending and Regulation Z, Truth in Lending, or with laws relating to the permissibility of interest rates and fees charged could have a material negative impact on the Company’s earnings.

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ASSET/LIABILITY MANAGEMENT AND LIQUIDITY

 

Fluctuations in interest rates could reduce profitability. The Bank’s asset/liability management strategy may not be able to prevent changes in interest rates from having a material adverse effect on results of operations and financial condition. The Bank’s primary source of income is from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. The Bank expects to periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either interest-bearing liabilities will be more sensitive to changes in market interest rates than interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to the Bank’s position, earnings may be negatively affected.

 

A flattening interest rate yield curve may reduce profitability. Changes in the slope of the “yield curve,” or the spread between short-term and long-term interest rates, could reduce the Bank’s net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because the Bank’s liabilities tend to be shorter in duration than its assets, when the yield curve flattens, as is the case in the current interest rate environment, or even inverts, the Bank’s net interest margin could decrease as its cost of funds increases relative to the yield it can earn on its assets.

 

Mortgage Banking activities could be adversely impacted by increasing or stagnant long-term interest rates. The Company is unable to predict changes in market interest rates. Changes in interest rates can impact the gain on sale of loans, loan origination fees and loan servicing fees, which account for a significant portion of Mortgage Banking income. A decline in market interest rates generally results in higher demand for mortgage products, while an increase in rates generally results in reduced demand. Generally, if demand increases, Mortgage Banking income will be positively impacted by more gains on sale; however, the valuation of existing mortgage servicing rights will decrease and may result in a significant impairment.  A decline in demand for Mortgage Banking products resulting from rising interest rates could also adversely impact other programs/products such as home equity lending, title insurance commissions and service charges on deposit accounts.

 

The Bank may be compelled to offer market-leading interest rates to maintain sufficient funding and liquidity levels. The Bank has traditionally relied on client deposits, brokered deposits and advances from the FHLB to fund operations. Such traditional sources may be unavailable, limited or insufficient in the future. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were canceled or curtailed, such as its borrowing line at the FHLB, or if the Bank cannot obtain brokered deposits, the Bank may be compelled to offer market-leading interest rates to meet its funding and liquidity needs. Obtaining funds at market-leading interest rates may have an adverse impact on the Company’s net interest income and overall results of operations.

 

COMPANY COMMON STOCK

 

The Company’s common stock generally has a low average daily trading volume, which limits a stockholder’s ability to quickly accumulate or quickly sell large numbers of shares of Republic’s stock without causing wide price fluctuations. Republic’s stock price can fluctuate widely in response to a variety of factors, as detailed in the next risk factor. A low average daily stock trading volume can lead to significant price swings even when a relatively small number of shares are being traded.

 

The market price for the Company’s common stock may be volatile. The market price of the Company’s common stock could fluctuate substantially in the future in response to a number of factors, including those discussed below. The market price of the Company’s common stock has in the past fluctuated significantly and is likely to continue to fluctuate significantly. Some of the factors that may cause the price of the Company’s common stock to fluctuate include:

 

·

Variations in the Company’s and its competitors’ operating results;

·

Actual or anticipated quarterly or annual fluctuations in operating results, cash flows and financial condition;

·

Changes in earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to the Bank or other financial institutions;

·

Announcements by the Company or its competitors of mergers, acquisitions and strategic partnerships;

·

Additions or departure of key personnel;

·

The announced exiting of or significant reductions in material lines of business within the Company;

·

Changes or proposed changes in banking laws or regulations or enforcement of these laws and regulations;

·

Events affecting other companies that the market deems comparable to the Company;

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·

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 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.

 

34


 

Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. Various federal and state regulatory agencies possess cease and desist powers, and other authority to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulations. The Federal Reserve (“FRB”) possesses similar powers with respect to bank holding companies. These, and other restrictions, can limit in varying degrees, the manner in which Republic conducts its business.

 

The Tax Cuts and Jobs Act (“TCJA”) may have a negative impact on demand for the Company’s mortgage-related products and services.    On December 22, 2017, President Donald Trump signed into law the TCJA.  The TCJA, among other things, reduces some of the individual tax benefits of home ownership, including the elimination of the deductibility of home equity interest and further limiting the deductibility of home mortgage interest. These changes may have an overall negative impact on demand for the Company’s mortgage-related products and services. 

 

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.

 

35


 

 

MANAGEMENT, INFORMATION SYSTEMS, ACQUISITIONS, ETC.

 

The Company is dependent upon the services of its management team and qualified personnel. The Company is dependent upon the ability and experience of a number of its key management personnel who have substantial experience with Company operations, the financial services industry and the markets in which the Company offers services. It is possible that the loss of the services of one or more of its senior executives or key managers would have an adverse effect on operations; moreover, the Company depends on its account executives and loan officers to attract bank clients by developing relationships with commercial and consumer clients, mortgage companies, real estate agents, brokers and others. The Company believes that these relationships lead to repeat and referral business. The market for skilled account executives and loan officers is highly competitive and historically has experienced a high rate of turnover. In addition, if a manager leaves the Company, other members of the manager’s team may follow. Competition for qualified account executives and loan officers may lead to increased hiring and retention costs. The Company’s success also depends on its ability to continue to attract, manage and retain other qualified personnel as the Company grows.

 

The Company’s operations could be impacted if its third-party service providers experience difficulty. The Company depends on a number of relationships with third-party service providers, including core systems processing and web hosting. These providers are well-established vendors that provide these services to a significant number of financial institutions. If these third-party service providers experience difficulty or terminate their services and the Company is unable to replace them with other providers, its operations could be interrupted, which would adversely impact its business.

 

The Company’s operations, including third-party and client interactions, are increasingly done via electronic means, and this has increased the risks related to cyber security. The Company is exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. Management has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access. While the Company has not incurred any material losses related to cyber-attacks, the Bank may incur substantial costs and suffer other negative consequences if the Bank or one of the Bank’s third-party service providers fall victim to successful cyber-attacks. Such negative consequences could include: remediation costs for stolen assets or information; system repairs; consumer protection costs; increased cyber security protection costs that may include organizational changes; deploying additional personnel and protection technologies, training employees, and engaging third-party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract clients following an attack; litigation and payment of damages; and reputational damage adversely affecting client or investor confidence.

 

The Company’s information systems may experience an interruption that could adversely impact the Company’s business, financial condition and results of operations. The Company relies heavily on communications and information systems to conduct its business. Any failure or interruption of these systems could result in failures or disruptions in client relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the impact of the failure or interruption of information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrences of any failures or interruptions of the Company’s information systems could damage the Company’s reputation, result in a loss of client business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

36


 

 

New lines of business or new products and services may subject the Company to additional risks. From time to time, the Company may develop and grow new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition. All service offerings, including current offerings and those that may be provided in the future, may become more risky due to changes in economic, competitive and market conditions beyond the Company’s control.

 

Negative public opinion could damage the Company’s reputation and adversely affect earnings. Reputational risk is the risk to Company operations from negative public opinion. Negative public opinion can result from the actual or perceived manner in which the Company conducts its business activities, including 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 its franchise and compete effectively in its market footprint. The Company has announced plans to pursue a policy of growth through acquisitions in the near future to supplement internal growth. The Company’s efforts to acquire other financial institutions and financial service companies or branches may not be successful. Numerous potential acquirers exist for many acquisition candidates, creating intense competition, which affects the purchase price for which the institution can be acquired. In many cases, the Company’s competitors have significantly greater resources than the Company has, and greater flexibility to structure the consideration for the transaction. The Company may also not be the successful bidder in acquisition opportunities that it pursues due to the willingness or ability of other potential acquirers to propose a higher purchase price or more attractive terms and conditions than the Company is willing or able to propose. The Company intends to continue to pursue acquisition opportunities in its market footprint. The risks presented by the acquisition of other financial institutions could adversely affect the Bank’s financial condition and results of operations.

 

Successful Company acquisitions present many risks that could adversely affect the Company’s financial condition and results of operations. An institution that the Company acquires may have unknown asset quality issues or unknown or contingent liabilities that the Company did not discover or fully recognize in the due diligence process, thereby resulting in unanticipated losses. The acquisition of other institutions also typically requires the integration of different corporate cultures, loan and deposit products, pricing strategies, data processing systems and other technologies, accounting, internal audit and financial reporting systems, operating systems and internal controls, marketing programs and personnel of the acquired institution, in order to make the transaction economically advantageous. The integration process is complicated and time consuming and could divert the Company’s attention from other business concerns and may be disruptive to its clients and the clients of the acquired institution. The Company’s failure to successfully integrate an acquired institution could result in the loss of key clients and employees, and prevent the Company from achieving expected synergies and cost savings. Acquisitions 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. 

37


 

 

REPUBLIC INSURANCE SERVICES, INC.

 

Transactions between the Company and its insurance subsidiary, Republic Insurance Services, Inc. (the “Captive”), may be subject to certain IRS responsibilities and penalties. The Company’s Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and the Bank as well as 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

38


 

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, 2017, Republic had 33 banking centers located in Kentucky, six 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. During the first quarter of 2018, Republic opened a banking center in Crestview Hills, Kentucky. Also, during the first quarter of 2018, Republic closed a banking center in Crestwood, Kentucky and another in Independence, Kentucky.

 

The location of Republic’s facilities, their respective approximate square footage and their form of occupancy are as follows:

 

 

 

 

 

 

 

   

Approximate

   

 

 

   

Square

   

Owned (O)/

Bank Offices

   

Footage

   

Leased (L)

 

 

 

 

 

Kentucky Banking Centers:

 

    

 

    

 

 

 

 

 

Louisville Metropolitan Area

 

 

 

 

2801 Bardstown Road, Louisville

 

5,000

 

L(1)  

601 West Market Street, Louisville

 

57,000

 

L(1)  

661 South Hurstbourne Parkway, Louisville

 

42,000

 

L(1)  

9600 Brownsboro Road, Louisville

 

15,000

 

L(1)  

5250 Dixie Highway, Louisville

 

5,000

 

O/L(2)  

10100 Brookridge Village Boulevard, Louisville

 

5,000

 

O/L(2)  

9101 U.S. Highway 42, Prospect

 

3,000

 

O/L(2)  

11330 Main Street, Middletown

 

6,000

 

O/L(2)  

3902 Taylorsville Road, Louisville

 

4,000

 

O/L(2)  

3811 Ruckriegel Parkway, Louisville

 

4,000

 

O/L(2)  

5125 New Cut Road, Louisville

 

4,000

 

O/L(2)  

4808 Outer Loop, Louisville

 

4,000

 

O/L(2)  

438 Highway 44 East, Shepherdsville

 

4,000

 

O/L(2)  

1420 Poplar Level Road, Louisville

 

3,000

 

O

4921 Brownsboro Road, Louisville

 

3,000

 

L

3950 Kresge Way, Suite 108, Louisville

 

1,000

 

L

3726 Lexington Road, Louisville

 

4,000

 

L

2028 West Broadway, Suite 105, Louisville

 

2,000

 

L

6401 Claymont Crossing, Crestwood

 

4,000

 

L(3)

 

 

 

 

 

Lexington

 

 

 

 

3098 Helmsdale Place

 

5,000

 

O/L(2)  

3608 Walden Drive

 

4,000

 

O/L(2)  

2401 Harrodsburg Road

 

6,000

 

O

641 East Euclid Avenue

 

3,000

 

O

333 West Vine Street

 

4,000

 

L

 

 

 

 

 

Northern Kentucky

 

 

 

 

535 Madison Avenue, Covington

 

4,000

 

L

25 Town Center Blvd., Suite 104, Crestview Hills

 

3,000

 

L(4)

8513 U.S. Highway 42, Florence

 

4,000

 

L

2051 Centennial Boulevard, Independence

 

2,000

 

L(3)

 

 

 

 

 

Owensboro

 

 

 

 

3500 Frederica Street

 

5,000

 

O

3332 Villa Point Drive, Suite 101

 

2,000

 

L

 

 

 

 

 

(continued)

 

 

 

 

 

39


 

 

 

 

 

 

 

 

   

Approximate

   

 

 

   

Square

   

Owned (O)/

Bank Offices

   

Footage

   

Leased (L)

(continued)

 

 

 

 

 

 

 

 

 

Elizabethtown, 1690 Ring Road

 

4,000

��

L

 

 

 

 

 

Frankfort, 100 Highway 676

 

3,000

 

O/L(2)  

 

 

 

 

 

Georgetown, 430 Connector Road

 

5,000

 

O/L(2)  

 

 

 

 

 

Shelbyville, 1614 Midland Trail

 

6,000

 

L(2)  

 

 

 

 

 

Florida Banking Centers:

 

 

 

 

12933 Walsingham Road, Largo

 

4,000

 

O

9037 U.S. Highway 19, Port Richey

 

11,000

 

O(5)

6300 4th Street N, St. Petersburg

 

10,000

 

O

6600 Central Avenue, St. Petersburg

 

9,000

 

O

7800 Seminole Blvd, Seminole

 

3,000

 

O

11502 North 56th Street, Temple Terrace

 

3,000

 

L

 

 

 

 

 

Southern Indiana Banking Centers:

 

 

 

 

4571 Duffy Road, Floyds Knobs

 

4,000

 

O/L(2)  

3141 Highway 62, Jeffersonville

 

4,000

 

O

3001 Charlestown Crossing Way, New Albany

 

2,000

 

L

 

 

 

 

 

Tennessee Banking Centers:

 

 

 

 

113 Seaboard Lane, Franklin

 

2,000

 

L

2034 Richard Jones Road, Nashville

 

3,000

 

L

 

 

 

 

 

Tennessee Loan Production Office:

 

 

 

 

8 Cadillac Drive, Brentwood

 

4,000

 

L

 

 

 

 

 

Ohio Banking Center:

 

 

 

 

4030 Smith Road, Norwood

 

5,000

 

L

 

 

 

 

 

Support and Operations:

 

 

 

 

200 South Seventh Street, Louisville, KY

 

64,000

 

L(1)  

 

 

 

 

 

Closed Banking Centers Currently Marketed for Sale:

 

 

 

 

9100 Hudson Avenue, Hudson, FL

 

4,000

 

O

5800 38th Avenue North, St. Petersburg, FL

 

3,000

 

O

3320 E. Bay Drive, Largo, FL

 

3,000

 

O


(1)

Locations are leased from partnerships in which Steven E. Trager, Chairman and Chief Executive Officer and A. Scott Trager, Vice Chairman and President, are partners. See additional discussion included under Part III Item 13 “Certain Relationships and Related Transactions, and Director Independence.” For additional discussion regarding Republic’s lease obligations, see Part II Item 8 “Financial Statements and Supplementary Data” Footnote 21 “Transactions with Related Parties and Their Affiliates.”

 

(2)

The banking centers at these locations are owned by Republic; however, the banking center is located on land that is leased through long-term agreements with third parties.

 

(3)

Banking center closed during the first quarter of 2018.

 

(4)

Banking center opened during the first quarter of 2018.

 

(5)

The Company intends to market this Banking center for sale.

 

 

40


 

Item 3.  Legal Proceedings.

 

In the ordinary course of operations, Republic Bancorp, Inc. (“Republic”) and Republic Bank & Trust Company (the “Bank”) are defendants in various legal proceedings. There is no proceeding pending or threatened litigation, to the knowledge of management, in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or the Bank.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market and Dividend Information

 

Republic Bancorp, Inc.’s (“Republic” or the “Company”) Class A Common Stock is traded on The NASDAQ Global Select Market® (“NASDAQ”) under the symbol “RBCAA.” The following table sets forth the high and low market value of the Class A Common Stock and the respective dividends declared during 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

Sales Price(1)

 

 

Dividends Declared

 

Quarter Ended

    

High

    

Low

    

Class A

    

Class B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31st

 

$

39.94

 

$

32.66

 

$

0.209

 

$

0.190

 

June 30th

 

 

37.05

 

 

32.28

 

 

0.220

 

 

0.200

 

September 30th

 

 

39.08

 

 

33.50

 

 

0.220

 

 

0.200

 

December 31st

 

 

43.05

 

 

37.60

 

 

0.220

 

 

0.200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

Sales Price(1)

 

 

Dividends Declared

 

Quarter Ended

    

High

    

Low

    

 

Class A

    

 

Class B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31st

 

$

26.71

 

$

23.53

 

$

0.198

 

$

0.180

 

June 30th

 

 

28.18

 

 

24.69

 

 

0.209

 

 

0.190

 

September 30th

 

 

32.62

 

 

27.14

 

 

0.209

 

 

0.190

 

December 31st

 

 

39.95

 

 

28.67

 

 

0.209

 

 

0.190

 


(1)

Sales price based on closing market price.

 

At February 9, 2018, the Company’s Class A Common Stock was held by 554 shareholders of record and the Class B Common Stock was held by 108 shareholders of record. There is no established public trading market for the Company’s Class B Common Stock. The Company intends to continue its historical practice of paying quarterly cash dividends; however, there is no assurance by the Board of Directors that such dividends will continue to be paid in the future. The payment of dividends in the future is dependent upon future income, financial position, capital requirements, the discretion and judgment of the Board of Directors and numerous other considerations.

 

For additional discussion regarding regulatory restrictions on dividends, see Part II Item 8 “Financial Statements and Supplementary Data” Footnote 14 “Stockholders’ Equity and Regulatory Capital Matters.”

41


 

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, 2017, the trustee held 233,382 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 2017 are included in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

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 Plan

 

Period

 

Shares Purchased

 

Paid Per Share

 

or Programs

 

or Programs

 

 

 

 

 

 

 

 

 

 

 

 

October 1 - October 31

 

 

$

 

 

 

 

November 1 - November 30

 

6,880

 

 

38.56

 

6,880

 

 

 

December 1 - December 31

 

5,400

 

 

41.61

 

5,400

 

 

 

Total

 

12,280

 

$

39.90

 

12,280

 

223,696

 

 

During 2017, the Company repurchased 26,629 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, 2017, the Company had 223,696 shares which could be repurchased under its current share repurchase programs.

 

During 2017, there were approximately 2,387 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.

 

42


 

STOCK PERFORMANCE GRAPH

 

The following stock performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the performance graph by reference therein.

 

The following stock performance graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) on Republic’s Class A Common Stock as compared to the NASDAQ Bank Stocks Index and the Standard & Poor’s (“S&P”) 500 Index. The graph covers the period beginning December 31, 2012 and ending December 31, 2017. 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, 2012. 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, 

  

 

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Republic Class A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock (RBCAA)

 

 

$

100.00

 

 

$

119.49

 

 

$

124.09

 

 

$

136.68

 

 

$

210.82

 

 

$

207.40

 

NASDAQ Bank Index

 

 

 

100.00

 

 

 

136.49

 

 

 

143.01

 

 

 

157.36

 

 

 

214.42

 

 

 

226.12

 

S&P 500 Index

 

 

 

100.00

 

 

 

132.37

 

 

 

148.39

 

 

 

149.51

 

 

 

166.05

 

 

 

202.28

 

 

 

 

 

 

43


 

Item 6.  Selected Financial Data.

 

The following table sets forth Republic Bancorp Inc.’s selected financial data from 2013 through 2017. 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Years Ended December 31, 

(in thousands)

    

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

299,351

 

$

289,309

 

$

210,082

 

$

72,878

 

$

170,863

Investment securities

 

 

591,458

 

 

534,139

 

 

555,785

 

 

481,348

 

 

483,537

Loans held for sale

 

 

16,989

 

 

15,170

 

 

4,597

 

 

6,388

 

 

3,506

Gross loans

 

 

4,014,034

 

 

3,810,778

 

 

3,326,610

 

 

3,040,495

 

 

2,589,792

Allowance for loan and lease losses ("Allowance")

 

 

(42,769)

 

 

(32,920)

 

 

(27,491)

 

 

(24,410)

 

 

(23,026)

Goodwill

 

 

16,300

 

 

16,300

 

 

10,168

 

 

10,168

 

 

10,168

Bank owned life insurance

 

 

63,356

 

 

61,794

 

 

52,817

 

 

51,415

 

 

25,086

Total assets

 

 

5,085,362

 

 

4,816,309

 

 

4,230,289

 

 

3,747,013

 

 

3,371,904

Noninterest-bearing deposits

 

 

1,022,042

 

 

971,952

 

 

634,863

 

 

502,569

 

 

488,642

Interest-bearing deposits

 

 

2,411,116

 

 

2,188,740

 

 

1,852,614

 

 

1,555,613

 

 

1,502,215

Total deposits

 

 

3,433,158

 

 

3,160,692

 

 

2,487,477

 

 

2,058,182

 

 

1,990,857

Securities sold under agreements to repurchase and other short-term borrowings

 

 

204,021

 

 

173,473

 

 

395,433

 

 

356,108

 

 

165,555

Federal Home Loan Bank advances

 

 

737,500

 

 

802,500

 

 

699,500

 

 

707,500

 

 

605,000

Subordinated note

 

 

41,240

 

 

41,240

 

 

41,240

 

 

41,240

 

 

41,240

Total liabilities

 

 

4,452,938

 

 

4,211,903

 

 

3,653,742

 

 

3,188,282

 

 

2,829,111

Total stockholders’ equity

 

 

632,424

 

 

604,406

 

 

576,547

 

 

558,731

 

 

542,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and other interest-earning deposits

 

$

188,427

 

$

130,889

 

$

68,847

 

$

118,803

 

$

145,970

Investment securities, including FHLB stock

 

 

574,027

 

 

572,599

 

 

546,655

 

 

525,748

 

 

527,681

Gross loans, including loans held for sale

 

 

3,831,406

 

 

3,568,383

 

 

3,174,234

 

 

2,738,304

 

 

2,575,146

Allowance

 

 

(39,202)

 

 

(29,880)

 

 

(25,570)

 

 

(23,067)

 

 

(23,287)

Total assets

 

 

4,826,208

 

 

4,485,829

 

 

3,982,840

 

 

3,559,617

 

 

3,385,345

Noninterest-bearing deposits

 

 

1,073,181

 

 

894,049

 

 

651,275

 

 

553,929

 

 

513,891

Interest-bearing deposits

 

 

2,267,663

 

 

2,058,592

 

 

1,714,214

 

 

1,510,201

 

 

1,514,847

Total interest-bearing liabilities

 

 

3,091,970

 

 

2,964,981

 

 

2,734,561

 

 

2,432,153

 

 

2,305,106

Total stockholders’ equity

 

 

628,329

 

 

597,463

 

 

574,766

 

 

557,378

 

 

546,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

218,778

 

$

173,992

 

$

142,432

 

$

132,377

 

$

134,568

Total interest expense

 

 

20,258

 

 

17,938

 

 

18,462

 

 

19,604

 

 

21,393

Net interest income

 

 

198,520

 

 

156,054

 

 

123,970

 

 

112,773

 

 

113,175

Provision for loan and lease losses

 

 

27,704

 

 

14,493

 

 

5,396

 

 

2,859

 

 

2,983

Total noninterest income

 

 

58,414

 

 

57,509

 

 

47,994

 

 

42,519

 

 

46,230

Total noninterest expense

 

 

150,844

 

 

130,107

 

 

113,324

 

 

108,118

 

 

115,924

Income before income tax expense

 

 

78,386

 

 

68,963

 

 

53,244

 

 

44,315

 

 

40,498

Income tax expense

 

 

32,754

 

 

23,060

 

 

18,078

 

 

15,528

 

 

15,075

Net income

 

 

45,632

 

 

45,903

 

 

35,166

 

 

28,787

 

 

25,423

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data - Core Bank(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

179,986

 

$

156,252

 

$

139,155

 

$

132,014

 

$

134,419

Total interest expense

 

 

19,284

 

 

17,831

 

 

18,424

 

 

19,571

 

 

21,392

Net interest income

 

 

160,702

 

 

138,421

 

 

120,731

 

 

112,443

 

 

113,027

Provision for loan and lease losses

 

 

3,773

 

 

3,945

 

 

3,065

 

 

3,392

 

 

3,828

Total noninterest income

 

 

32,410

 

 

33,350

 

 

28,441

 

 

24,607

 

 

31,471

Total noninterest expense

 

 

132,794

 

 

116,190

 

 

101,184

 

 

96,451

 

 

99,743

Income before income tax expense

 

 

56,545

 

 

51,636

 

 

44,923

 

 

37,207

 

 

40,927

Income tax expense

 

 

23,097

 

 

16,777

 

 

15,066

 

 

12,875

 

 

14,112

Net income

 

 

33,448

 

 

34,859

 

 

29,857

 

 

24,332

 

 

26,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44


 

Item 6.  Selected Financial Data. (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Years Ended December 31, 

 

(in thousands, except per share data, FTEs and # of banking centers)

    

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

20,921

 

 

20,942

 

 

20,861

 

 

20,804

 

 

20,807

 

Diluted weighted average shares outstanding

 

 

21,007

 

 

20,954

 

 

20,942

 

 

20,899

 

 

20,904

 

Period-end shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

18,607

 

 

18,615

 

 

18,652

 

 

18,603

 

 

18,541

 

Class B Common Stock

 

 

2,243

 

 

2,245

 

 

2,245

 

 

2,245

 

 

2,260

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

2.21

 

$

2.22

 

$

1.70

 

$

1.39

 

$

1.23

 

Class B Common Stock

 

 

2.01

 

 

2.02

 

 

1.55

 

 

1.32

 

 

1.17

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

2.20

 

$

2.22

 

$

1.70

 

$

1.38

 

$

1.22

 

Class B Common Stock

 

 

2.00

 

 

2.01

 

 

1.54

 

 

1.32

 

 

1.16

 

Cash dividends declared per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

$

0.869

 

$

0.825

 

$

0.781

 

$

0.737

 

$

0.693

 

Class B Common Stock

 

 

0.790

 

 

0.750

 

 

0.710

 

 

0.670

 

 

0.630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market value per share at December 31,

 

$

38.02

 

$

39.54

 

$

26.41

 

$

24.72

 

$

24.54

 

Book value per share at December 31,(2)

 

 

30.33

 

 

28.97

 

 

27.59

 

 

26.80

 

 

26.09

 

Tangible book value per share at December 31,(2)

 

 

29.27

 

 

27.89

 

 

26.87

 

 

26.08

 

 

25.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (ROA)

 

 

0.95

%  

 

1.02

%  

 

0.88

%  

 

0.81

%  

 

0.75

%  

Return on average equity (ROE)

 

 

7.26

 

 

7.68

 

 

6.12

 

 

5.16

 

 

4.65

 

Efficiency ratio(3)

 

 

59

 

 

61

 

 

66

 

 

70

 

 

73

 

Yield on average interest-earning assets

 

 

4.76

 

 

4.07

 

 

3.76

 

 

3.91

 

 

4.14

 

Cost of average interest-bearing liabilities

 

 

0.66

 

 

0.60

 

 

0.68

 

 

0.81

 

 

0.93

 

Cost of average deposits(4)

 

 

0.29

 

 

0.21

 

 

0.19

 

 

0.19

 

 

0.20

 

Net interest spread

 

 

4.10

 

 

3.47

 

 

3.08

 

 

3.10

 

 

3.21

 

Net interest margin - Total Company

 

 

4.32

 

 

3.65

 

 

3.27

 

 

3.33

 

 

3.48

 

Net interest margin - Core Bank

 

 

3.55

 

 

3.30

 

 

3.24

 

 

3.35

 

 

3.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average stockholders’ equity to average total assets

 

 

13.02

%  

 

13.32

%  

 

14.43

%  

 

15.66

%  

 

16.15

%  

Total risk based capital

 

 

16.04

 

 

16.37

 

 

20.58

 

 

22.17

 

 

26.71

 

Common equity tier 1 capital

 

 

14.15

 

 

14.59

 

 

18.39

 

 

NA

 

 

NA

 

Tier 1 risk based capital

 

 

15.06

 

 

15.55

 

 

19.69

 

 

21.28

 

 

25.67

 

Tier 1 leverage capital

 

 

13.21

 

 

13.54

 

 

14.82

 

 

15.92

 

 

16.81

 

Dividend payout ratio

 

 

39

 

 

37

 

 

46

 

 

53

 

 

56

 

Dividend yield

 

 

2.29

 

 

2.09

 

 

2.96

 

 

2.98

 

 

2.82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end FTEs(5) - Total Company

 

 

997

 

 

938

 

 

785

 

 

723

 

 

736

 

Period-end FTEs(5) - Core Bank

 

 

915

 

 

869

 

 

726

 

 

672

 

 

675

 

Number of banking centers

 

 

45

 

 

44

 

 

40

 

 

41

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45


 

Item 6.  Selected Financial Data. (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Years Ended December 31, 

 

(dollars in thousands)

    

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Data and Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Asset Balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming Assets - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans on nonaccrual status

 

$

14,118

 

$

15,892

 

$

21,712

 

$

23,337

 

$

19,104

 

Loans past due 90-days-or-more and still on accrual

 

 

956

 

 

167

 

 

224

 

 

322

 

 

1,974

 

Total nonperforming loans

 

 

15,074

 

 

16,059

 

 

21,936

 

 

23,659

 

 

21,078

 

Other real estate owned

 

 

115

 

 

1,391

 

 

1,220

 

 

11,243

 

 

17,102

 

Total nonperforming assets

 

$

15,189

 

$

17,450

 

$

23,156

 

$

34,902

 

$

38,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming Assets - Core Bank(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans on nonaccrual status

 

$

14,118

 

$

15,892

 

$

21,712

 

$

23,337

 

$

19,104

 

Loans past due 90-days-or-more and still on accrual

 

 

19

 

 

85

 

 

224

 

 

322

 

 

1,974

 

Total nonperforming loans

 

 

14,137

 

 

15,977

 

 

21,936

 

 

23,659

 

 

21,078

 

Other real estate owned

 

 

115

 

 

1,391

 

 

1,220

 

 

11,243

 

 

17,102

 

Total nonperforming assets

 

$

14,252

 

$

17,368

 

$

23,156

 

$

34,902

 

$

38,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delinquent loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delinquent loans - Core Bank

 

$

8,460

 

$

6,821

 

$

11,485

 

$

15,710

 

$

16,223

 

Delinquent loans - RPG(6)

 

 

5,641

 

 

2,137

 

 

246

 

 

141

 

 

 —

 

    Total delinquent loans - Total Company

 

$

14,101

 

$

8,958

 

$

11,731

 

$

15,851

 

$

16,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Total Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.38

%  

 

0.42

%  

 

0.66

%  

 

0.78

%  

 

0.81

%  

Nonperforming assets to total loans (including OREO)

 

 

0.38

 

 

0.46

 

 

0.70

 

 

1.14

 

 

1.46

 

Nonperforming assets to total assets

 

 

0.30

 

 

0.36

 

 

0.55

 

 

0.93

 

 

1.13

 

Allowance to total loans

 

 

1.07

 

 

0.86

 

 

0.83

 

 

0.80

 

 

0.89

 

Allowance to nonperforming loans

 

 

284

 

 

205

 

 

125

 

 

103

 

 

109

 

Delinquent loans to total loans(7)

 

 

0.35

 

 

0.24

 

 

0.35

 

 

0.52

 

 

0.63

 

Net loan charge-offs to average loans

 

 

0.47

 

 

0.25

 

 

0.07

 

 

0.05

 

 

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Ratios - Core Bank:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.36

%  

 

0.42

%  

 

0.66

%  

 

0.78

%  

 

0.81

%  

Nonperforming assets to total loans (including OREO)

 

 

0.36

 

 

0.46

 

 

0.70

 

 

1.15

 

 

1.46

 

Nonperforming assets to total assets

 

 

0.28

 

 

0.36

 

 

0.55

 

 

0.93

 

 

1.13

 

Allowance to total loans

 

 

0.77

 

 

0.74

 

 

0.78

 

 

0.80

 

 

0.89

 

Allowance to nonperforming loans

 

 

213

 

 

175

 

 

118

 

 

103

 

 

109

 

Delinquent loans to total loans

 

 

0.21

 

 

0.18

 

 

0.35

 

 

0.52

 

 

0.63

 

Net charge-offs to average loans

 

 

0.04

 

 

0.05

 

 

0.05

 

 

0.08

 

 

0.18

 

 

 

 

 

46


 

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 U.S. generally accepted accounting principles (“GAAP”) to tangible stockholders’ equity in accordance with applicable regulatory requirements, a non-GAAP measure. The Company provides the tangible book value 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)

    

2017

    

2016

    

2015

    

2014

    

2013

 

Total stockholders' equity - GAAP (a)

 

$

632,424

 

$

604,406

 

$

576,547

 

$

558,731

 

$

542,793

 

Less: Goodwill

 

 

16,300

 

 

16,300

 

 

10,168

 

 

10,168

 

 

10,168

 

Less: Mortgage servicing rights

 

 

5,044

 

 

5,180

 

 

4,912

 

 

4,813

 

 

5,409

 

Less: Core deposit intangible

 

 

858

 

 

1,070

 

 

 —

 

 

 —

 

 

 —

 

Tangible stockholders' equity - Non-GAAP (c)

 

$

610,222

 

$

581,856

 

$

561,467

 

$

543,750

 

$

527,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets - GAAP (b)

 

$

5,085,362

 

$

4,816,309

 

$

4,230,289

 

$

3,747,013

 

$

3,371,904

 

Less: Goodwill

 

 

16,300

 

 

16,300

 

 

10,168

 

 

10,168

 

 

10,168

 

Less: Mortgage servicing rights

 

 

5,044

 

 

5,180

 

 

4,912

 

 

4,813

 

 

5,409

 

Less: Core deposit intangible

 

 

858

 

 

1,070

 

 

 —

 

 

 —

 

 

 —

 

Tangible assets - Non-GAAP (d)

 

$

5,063,160

 

$

4,793,759

 

$

4,215,209

 

$

3,732,032

 

$

3,356,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity to total assets - GAAP (a/b)

 

 

12.44

%  

 

12.55

%  

 

13.63

%  

 

14.91

%  

 

16.10

%  

Tangible stockholders' equity to tangible assets - Non-GAAP (c/d)

 

 

12.05

%  

 

12.14

%  

 

13.32

%  

 

14.57

%  

 

15.71

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares outstanding (e)

 

 

20,850

 

 

20,860

 

 

20,897

 

 

20,848

 

 

20,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share - GAAP (a/e)

 

$

30.33

 

$

28.97

 

$

27.59

 

$

26.80

 

$

26.09

 

Tangible book value per share - Non-GAAP (c/e)

 

 

29.27

 

 

27.89

 

 

26.87

 

 

26.08

 

 

25.35

 

 

 

(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)

Republic Processing Group (“RPG”) operations consist of the Tax Refund Solutions and Republic Credit Solutions 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.

47


 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Republic Bank & Trust Company (“RB&T” or the “Bank”) and Republic Insurance Services, Inc. (the “Captive”). As used in this filing, the terms “Republic,” the “Company,” “we,” “our” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries; and the term the “Bank” refers to the Company’s subsidiary bank, RB&T. 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 Bancorp, Inc. 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. 

 

Republic Bancorp Capital Trust (“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 Tax Cuts and Jobs Act (“TCJA”);

·

the  magnitude and frequency of changes to the Federal Funds Target Rate (“FFTR”) implemented by the Federal Open Market Committee (“FOMC”) of the Federal Reserve Bank (“FRB”);

·

long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;

·

competitive product and pricing pressures in each of the Company’s five reportable segments;

·

equity and fixed income market fluctuations;

·

client bankruptcies and loan defaults;

·

inflation;

48


 

·

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;

·

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 Securities and Exchange Commission (“SEC”), including Part 1 Item 1A “Risk Factors.”

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

 

Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.

 

Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.

 

Republic believes its critical accounting policies and estimates relate to the following:

 

·

Allowance for Loan and Lease Losses (“Allowance”) and Provisions for Loan and Lease losses (“Provision”)

·

Accounting for Business Acquisitions

·

Goodwill and Other Intangible Assets

·

Mortgage Servicing Rights (“MSRs”)

·

Income Tax Accounting

·

Investment Securities

·

Other Real Estate Owned (“OREO”)

 

Allowance for Loan and Leases Losses and Provision for Loan and Lease Losses — The Bank maintains an allowance for probable incurred credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly basis.

 

49


 

The Allowance consists of both specific and general components. The specific component relates to loans that are individually classified as impaired. The general component relates to pooled loans collectively evaluated on historical loss experience adjusted for qualitative factors.

 

Specific Component – Loans Individually Classified as Impaired

 

The Bank defines impaired loans as follows:

 

·

All loans internally rated as “Substandard,” “Doubtful” or “Loss”;

·

All loans on nonaccrual status;

·

All Troubled Debt Restructurings (“TDRs”);  

·

All loans internally rated in a purchased credit impaired (“PCI”) category with cash flows that have deteriorated from management’s initial acquisition day estimate; and

·

Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.

 

Generally, loans are designated as “Classified” or “Special Mention” to ensure more frequent monitoring. These loans are reviewed to ensure proper accrual status and management strategy. If it is determined that there is serious doubt as to performance in accordance with original or modified contractual terms, then the loan is generally downgraded and may be charged down to its estimated value and placed on nonaccrual status.

 

Under GAAP, the Bank uses the following methods to measure specific loan impairment, including:

 

·

Cash Flow Method — The recorded investment in the loan is measured against the present value of expected future cash flows discounted at the loan’s effective interest rate. The Bank employs this method for a significant portion of its TDRs. Impairment amounts under this method are reflected in the Bank’s Allowance as specific reserves on the respective impaired loan. These specific reserves are adjusted quarterly based upon reevaluation of the expected future cash flows and changes in the recorded investment.

 

·

Collateral Method — The recorded investment in the loan is measured against the fair value of the collateral less 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 broker price opinions (“BPOs”) for loans with potential impairment. Updated valuations for commercial-related credits exhibiting an increased risk of loss are typically obtained within one year of the previous valuation. Collateral values for delinquent residential mortgage loans and home equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When measuring impairment, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons, the Bank discounts such stale valuations primarily based on age of valuation and market conditions of the underlying collateral.

 

50


 

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

·

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

 

In order to take account of periods of economic growth and economic downturn, management generally uses the highest of the evaluated averages above for each loan class when determining its historical loss factors.

 

Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each class. Management assigns risk multiples to certain classes to account for qualitative factors such as:

 

·

Changes in nature, volume and seasoning of the portfolio;

·

Changes in experience, ability and depth of lending management and other relevant staff;

·

Changes in the quality of the Bank’s credit review system;

·

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

·

Changes in the volume and severity of past due, nonperforming and classified loans;

·

Changes in the value of underlying collateral for collateral-dependent loans;

·

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of portfolios, including the condition of various market segments;

·

The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

·

The effect of other external factors, such as competition and legal and regulatory requirements on the level of estimated credit losses in the Bank’s existing portfolio.

 

As this analysis, or any similar analysis, is an imprecise measure of loss, the Allowance is subject to ongoing adjustments. Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.

 

51


 

Management’s Evaluation of the Allowance

 

Management evaluates the Allowance for its more traditional Core Banking operations differently than its non-traditional Republic Processing Group (“RPG”) operations.  Core Banking operations consist of the Company’s Traditional Banking, Warehouse Lending and Mortgage Banking segments. RPG operations consist of the Company’s Tax Refund Solutions (“TRS”) and Republic Credit Solutions (“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 6% at December 31, 2017 compared to 7% at December 31, 2016. The Core Bank’s five-year annual average for this ratio was 9% as of December 31, 2017. Management believes the Core Bank’s net charge-off ratio to beginning Allowance was within a reasonable range at December 31, 2017 and 2016.

 

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, 2017 and 2016 were 10.0 years and 7.6 years compared to the five-year annual average of 6.2 years as of December 31, 2017. Management believes the Core Bank’s Allowance exhaustion rates were within a reasonable range at December 31, 2017 and 2016.

 

Based on management’s calculation, a Core Bank Allowance of $30 million, or 0.77% of total loans and leases, was an adequate estimate of probable incurred losses within the loan portfolio as of December 31, 2017 compared to $28 million, or 0.74%, at December 31, 2016. This estimate resulted in Core Banking Provision of $3.8 million during 2017 compared to $3.9 million in 2016. 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, 2017 and 2016 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 42% and 60% of the RCS held-for-investment loan portfolio at December 31, 2017 and 2016.   For this product, management conducts an analysis of historical losses and delinquencies by month of loan origination when determining the Allowance. For RCS’s other products, the Allowance is estimated using a method similar to that employed for pooled loans collectively evaluated, as described above.

 

RPG maintained an Allowance for three loan products offered through its RCS segment at December 31, 2017, including its line-of-credit product, its credit card product and its healthcare-receivables product.  At December 31, 2017, 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 38% for its line-of-credit portfolio.  A lower reserve percentage was provided for RCS’s healthcare receivables at December 31, 2017, 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 16%, of total RPG loans was an adequate estimate of probable incurred losses within the RPG portfolio as of December 31, 2017 compared to an Allowance of $5 million, or 13%, at December 31, 2016. 

 

RPG’s TRS segment first offered its Easy Advance (“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, 2017 and 2016, as all EAs originated during the first two months of each year had either been paid off or charged-off within 81 days of origination.  The majority of EA charge-offs are recorded during the second quarter of each year.

52


 

 

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.  For the first quarter 2018 tax season, the Company modified the EA product offering to increase the maximum advance amount, which is expected to increase overall EA loan volume, absent any other changes.  Any increase in the frequency and/or magnitude of EA losses in 2018 would be heightened by an increase in overall EA loan volume.

 

See additional discussion regarding the EA product under the sections titled:

 

·

Part I Item 1A “Risk Factors”

·

Part II Item 8 “Financial Statements and Supplementary Data,” Footnote 5 “Loans and Allowance for Loan and Lease Losses”

 

RPG recorded a net charge of $23.9 million and $10.5 million to the Provision during 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 amount of future charge-offs on EAs and RCS loans differ significantly from assumptions used by management in making its determination, an adjustment to the RPG Allowance and the resulting effect on the income statement could be material.

 

Accounting for Business Acquisitions — The Bank accounts for its business acquisitions in accordance with the acquisition method as outlined in Account Standards Codification (“ASC”) Topic 805, Business Combinations. The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any noncontrolling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.

 

Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their acquisition date (“day-one”) fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these recast adjustments for loans and other real estate owned may be made, as market value data, such as valuations, are received by the Bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.

 

Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.

 

Loans purchased in a business acquisition are accounted for using one of the following accounting standards:

 

·

ASC Topic 310-20, Non Refundable Fees and Other Costs, is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the borrower. For these loans, the difference between the loan’s day-one fair value and amortized cost would be amortized or accreted into income using the interest method.

 

·

ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, is used to value PCI loans. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan, or fair value, represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. Additionally, the difference between contractual cash flows and expected cash flows of PCI loans is referred to as the “non-accretable discount.”

53


 

 

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 utilized the following criteria in determining which loans were classified as PCI loans for its May 17, 2016 acquisition of Cornerstone Bancorp, Inc. (“Cornerstone”):

 

·

Loans for which the Bank assigned a non-accretable discount

·

Loans classified as nonaccrual when acquired

·

Loans past due 90+ days when acquired

 

See additional detail regarding the Company’s Cornerstone acquisition under Footnote 2 “2016 Acquisition of Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received.  The Bank typically accounts for PCI loans individually, as opposed to aggregating the loans into pools based on common risk characteristics such as loan type.

 

Management separately monitors the PCI portfolio and on a quarterly basis reviews the loans contained within this portfolio against the factors and assumptions used in determining the day-one fair values. In addition to its quarterly evaluation, a loan is typically reviewed when it is modified or extended, or when material information becomes available to the Bank that provides additional insight regarding the loan’s performance, estimated life, the status of the borrower, or the quality or value of the underlying collateral.

To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable discount established as part of its initial day-one evaluation, such loan would be classified in the Purchased Credit Impaired - Group 1 (“PCI-1”) category, whose credit risk is considered by management equivalent to a non-PCI Special Mention loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial acquisition day estimate. Provisions are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

 

If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable discount established as part of its initial day-one evaluation, such loan would be classified PCI-Substandard (“PCI-Sub”) within the Bank’s credit risk matrix.  Management deems the risk of default and overall credit risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI Substandard loan. PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable discount, which would have a positive impact on interest income.

 

PCI loans are placed on nonaccrual if management cannot reasonably estimate future cash flows on such loans.

 

If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting standards and transferred out of the PCI population. The loan may require an additional Provision if its restructured cash flows are less than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are generally not considered TDRs and remain in the PCI population.

 

Goodwill and Other Intangible Assets — Goodwill resulting from business acquisitions prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business acquisitions after January 1, 2009 represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a business acquisition and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.

 

54


 

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, 2017 and 2016 was not impaired and is properly recorded in the consolidated financial.  Related to the Company’s May 17, 2016 Cornerstone acquisition, the Company recorded $6 million of goodwill. 

 

Other intangible assets consist of core deposit intangible (“CDI”) assets arising from business acquisitions. CDI assets are initially measured at fair value and then amortized on an accelerated method over their estimated useful lives.

 

Related to the Company’s May 17, 2016 Cornerstone acquisition, the Company maintained $858,000 and $1 million of CDI assets as of December 31, 2017 and 2016.  The Cornerstone related CDI is scheduled to amortize through 2022.

 

See additional detail regarding the Company’s Cornerstone acquisition under Footnote 2 “2016 Acquisition of Cornerstone Bancorp, Inc.” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

Mortgage Servicing Rights — Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value, with the income statement effect recorded as a component of net servicing income within Mortgage Banking income. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage Banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a quarterly basis based on the weighted average remaining life of the underlying loans.

 

MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance is recorded as an increase to income. Changes in valuation allowances are reported within Mortgage Banking income on the income statement. The fair value of the MSR portfolio is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates.

 

A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs is expected to increase, as prepayment speeds on the underlying loans would be anticipated to decline. Based on the estimated fair value at December 31, 2017 and 2016, 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, 2017 and 2016.

 

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 (“DTLs”) and assets (“DTAs”) 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.

 

 

 

 

55


 

On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (“TCJA”). The TCJA, among other things, reduces the federal corporate tax rate from 35% to 21%, effective January 1, 2018.  As a result of the reduced tax rate, 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.  With the exception of deferred taxes related to depreciation on a portion of its property and equipment, the Company has materially completed its accounting for the tax effects upon enactment of the TCJA. Regarding its deferred taxes related to depreciation, the Company awaits the completion of a cost segregation study.  For the year ended December 31, 2017, the Company did not have the necessary information available, analyzed or prepared to make a reasonable estimate of the impact of the cost segregation study on its deferred taxes related to depreciation. The cost segregation study is scheduled to be completed in the latter half of 2018, prior to the Company’s filing of its 2017 income tax returns.  The cost segregation study is expected to provide the Company with the necessary information to complete the accounting for the deferred taxes related to depreciation. 

 

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, 2017 and 2016.

 

Investment Securities — Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment securities are evaluated for other-than-temporary impairment (“OTTI”) on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in value below amortized cost is other-than-temporary. In conducting this assessment, the Bank evaluates a number of factors including, but not limited to the following:

 

·

The length of time and the extent to which fair value has been less than the amortized cost basis;

·

The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

·

An analysis of whether it is more-likely-than-not that the Bank will be required to sell the debt security before its anticipated recovery;

·

Adverse conditions specifically related to the security, an industry, or a geographic area;

·

The historical and implied volatility of the fair value of the security;

·

The payment structure of the security and the likelihood of the issuer being able to make payments;

·

Failure of the issuer to make scheduled interest or principal payments;

·

Any rating changes by a rating agency; and

·

Recoveries or additional decline in fair value subsequent to the balance sheet date.

 

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.

 

The Bank held one security at December 31, 2017 and 2016 with a total carrying value of $4 million and $5 million for which it recorded OTTI charges in previous years.

 

Other Real Estate Owned — Assets acquired through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. The Bank’s selling costs for OREO typically range from 10-13% of each property’s fair value, depending on property class. Fair value is commonly based on recent real estate appraisals or BPO. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Operating costs after acquisition are expensed.

 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Once the appraisal is received, a member of the Bank’s Credit Administration Department

56


 

(“CAD”) typically reviews the assumptions and approaches utilized in the appraisal, as well as the fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral. Back tests are performed for each collateral class and may lead to additional adjustments to the value of unliquidated collateral of similar class.

 

The Bank’s total OREO recorded was $115,000 and $1 million at December 31, 2017 and 2016.

 

OVERVIEW

 

While the Company’s pre-tax earnings increased 14% to $78.4 million during 2017, net income and diluted earnings per Class A Common Share both decreased 1% to $45.6 million and $2.20. The directional inconsistency between the increase in pre-tax earnings and decreases in net income and earnings per share (“EPS”) was driven by a $6.3 million charge to income tax expense during the fourth quarter of 2017 resulting from the enactment of the TCJA on December 22, 2017. 

 

The TCJA, among other things, reduces the federal corporate tax rate from 35% to 21%, effective January 1, 2018.  As a result of the reduced tax rate, 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. 

 

See additional detail regarding the TCJA’s impact on the Company’s income tax expense under Footnote 19 “Income Taxes” of Part II Item 8 “Financial Statements and Supplementary Data.”

 

The following table presents Republic’s financial performance in accordance with GAAP for the years ended December 31, 2017, 2016 and 2015, along with adjusted non-GAAP performance and a reconciliation to GAAP for the impact of the previously mentioned charge to income tax expense during the fourth quarter of 2017. The non-GAAP presentation and the reconciliation to GAAP are presented to allow appropriate comparability between the reported periods and to illustrate the impact of the TCJA-driven charge to income tax expense on the Company’s financial performance.

 

Table 1 — Summary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent Increase/(Decrease)

 

Years Ended December 31, (dollars in thousands, except per share data)

    

2017

    

2016

    

2015

 

2017/2016

    

2016/2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense - GAAP

 

$

78,386

 

$

68,963

 

$

53,244

 

14

%  

30

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - GAAP

 

$

45,632

 

$

45,903

 

$

35,166

 

(1)

%  

31

%  

Impact of TCJA

 

 

6,326

 

 

 —

 

 

 —

 

NM

 

NM

 

Adjusted net income - Non-GAAP

 

$

51,958

 

$

45,903

 

$

35,166

 

13

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share ("EPS") of Class A Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS of Class A Common Stock - GAAP

 

$

2.20

 

$

2.22

 

$

1.70

 

(1)

%  

31

%  

Impact of TCJA

 

 

0.30

 

 

 —

 

 

 —

 

NM

 

NM

 

Adjusted diluted EPS of Class A Common Stock - Non-GAAP

 

$

2.50

 

$

2.22

 

$

1.70

 

13

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets ("ROA"):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ROA - GAAP

 

 

0.95

%  

 

1.02

%  

 

0.88

%  

(7)

%  

16

%  

Impact of TCJA

 

 

0.13

 

 

 —

 

 

 —

 

NM

 

NM

 

Adjusted ROA - Non-GAAP

 

 

1.08

 

 

1.02

 

 

0.88

 

 6

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity ("ROE"):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ROE - GAAP

 

 

7.26

%  

 

7.68

%  

 

6.12

%  

(5)

%  

25

%  

Impact of TCJA

 

 

1.01

 

 

 —

 

 

 —

 

NM

 

NM

 

Adjusted ROE - Non-GAAP

 

 

8.27

 

 

7.68

 

 

6.12

 

 8

 

25