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Republic Bancorp, Inc. (RBCAA)

Document and Entity Information

Document and Entity Information - USD ($)12 Months Ended
Dec. 31, 2018Feb. 15, 2019Jun. 30, 2018
Entity Registrant NameREPUBLIC BANCORP INC /KY/
Entity Central Index Key0000921557
Document Type10-K
Document Period End DateDec. 31,
2018
Amendment Flagfalse
Current Fiscal Year End Date--12-31
Entity Well-known Seasoned IssuerNo
Entity Voluntary FilersNo
Entity Current Reporting StatusYes
Entity Filer CategoryAccelerated Filer
Entity Public Float $ 445,663,266
Entity Small Businessfalse
Entity Emerging Growth Companyfalse
Entity Shell Companyfalse
Document Fiscal Year Focus2018
Document Fiscal Period FocusFY
Class A Common Stock
Entity Common Stock, Shares Outstanding18,680,709
Class B Common Stock
Entity Common Stock, Shares Outstanding2,212,487

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS - USD ($) $ in ThousandsDec. 31, 2018Dec. 31, 2017
ASSETS
Cash and cash equivalents $ 351,474 $ 299,351
Available-for-sale debt securities475,738 524,303
Held-to-maturity debt securities (fair value of $64,858 in 2018 and $65,133 in 2017)65,227 64,227
Equity securities with readily determinable fair value2,806 2,928
Mortgage loans held for sale, at fair value8,971 5,761
Consumer loans held for sale, at fair value2,677
Consumer loans held for sale, at the lower of cost or fair value12,838 8,551
Loans (includes $1,922 of loans carried at fair value in 2018)4,148,227 4,014,034
Allowance for loan and lease losses(44,675)(42,769)
Loans, net4,103,552 3,971,265
Federal Home Loan Bank stock, at cost32,067 32,067
Premises and equipment, net43,126 42,588
Premises, held for sale1,694 3,017
Goodwill16,300 16,300
Other real estate owned160 115
Bank owned life insurance64,883 63,356
Other assets and accrued interest receivable61,568 48,856
TOTAL ASSETS5,240,404 5,085,362
Deposits:
Noninterest-bearing1,003,969 1,022,042
Interest-bearing2,452,176 2,411,116
Total deposits3,456,145 3,433,158
Securities sold under agreements to repurchase and other short-term borrowings182,990 204,021
Federal Home Loan Bank advances810,000 737,500
Subordinated note41,240 41,240
Other liabilities and accrued interest payable60,095 37,019
Total liabilities4,550,470 4,452,938
Commitments and contingent liabilities (Footnote 12)
STOCKHOLDERS’ EQUITY
Preferred stock, no par value
Class A Common Stock and Class B Common Stock, no par value4,900 4,902
Additional paid in capital141,018 139,406
Retained earnings545,013 487,700
Accumulated other comprehensive (loss) income(997)416
Total stockholders’ equity689,934 632,424
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 5,240,404 $ 5,085,362

CONSOLIDATED BALANCE SHEETS (Pa

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in ThousandsDec. 31, 2018Dec. 31, 2017
Held-to-maturity debt securities, fair value (in dollars) $ 64,858 $ 65,133
Loans carried fair value $ 1,922
Preferred stock, no par value $ 0 $ 0
Class A Common Stock
Common Stock, no par value $ 0 $ 0
Common Stock, shares authorized30,000,000 30,000,000
Common Stock, issued18,675,262 18,606,338
Common Stock, outstanding18,675,262 18,606,338
Class B Common Stock
Common Stock, no par value $ 0 $ 0
Common Stock, shares authorized5,000,000 5,000,000
Common Stock, issued2,212,487 2,242,624
Common Stock, outstanding2,212,487 2,242,624

CONSOLIDATED STATEMENTS OF INCO

CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands12 Months Ended
Dec. 31, 2018Dec. 31, 2017Dec. 31, 2016
INTEREST INCOME:
Loans, including fees $ 237,621 $ 205,582 $ 164,232
Taxable investment securities11,830 9,404 7,876
Federal Home Loan Bank stock and other6,730 3,792 1,884
Total interest income256,181 218,778 173,992
INTEREST EXPENSE:
Deposits17,017 9,802 6,058
Securities sold under agreements to repurchase and other short-term borrowings1,125 502 65
Federal Home Loan Bank advances10,473 8,860 10,900
Subordinated note1,508 1,094 915
Total interest expense30,123 20,258 17,938
NET INTEREST INCOME226,058 198,520 156,054
Provision for loan and lease losses31,368 27,704 14,493
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES194,690 170,816 141,561
NONINTEREST INCOME:
Service charges on deposit accounts14,273 13,357 13,176
Net refund transfer fees20,029 18,500 19,240
Mortgage banking income4,825 4,642 6,882
Interchange fee income11,159 9,881 9,009
Program fees6,225 5,824 3,044
Increase in cash surrender value of bank owned life insurance1,527 1,562 1,516
Net losses on debt securities(136)
Net gains on other real estate owned729 676 244
Other4,658 4,108 4,398
Total noninterest income63,425 58,414 57,509
NONINTEREST EXPENSE:
Salaries and employee benefits91,189 82,233 69,882
Occupancy and equipment, net24,883 24,019 21,586
Communication and transportation4,785 4,711 4,256
Marketing and development4,432 5,188 3,778
FDIC insurance expense1,494 1,378 1,780
Bank franchise tax expense4,951 4,626 4,757
Data processing9,613 7,748 6,121
Interchange related expense4,480 3,988 4,140
Supplies1,444 1,594 1,406
Other real estate owned expense94 388 503
Legal and professional fees3,459 2,410 2,556
FHLB advance prepayment penalty0 0 846
Impairment of premises held for sale482 1,175 191
Other12,546 11,386 8,305
Total noninterest expense163,852 150,844 130,107
INCOME BEFORE INCOME TAX EXPENSE94,263 78,386 68,963
INCOME TAX EXPENSE16,411 32,754 23,060
NET INCOME $ 77,852 $ 45,632 $ 45,903
Class A Common Stock
BASIC EARNINGS PER SHARE:
Basic earnings per share (in dollars per share) $ 3.76 $ 2.21 $ 2.22
DILUTED EARNINGS PER SHARE:
Diluted earnings per share (in dollars per share)3.742.202.22
Class B Common Stock
BASIC EARNINGS PER SHARE:
Basic earnings per share (in dollars per share)3.412.012.02
DILUTED EARNINGS PER SHARE:
Diluted earnings per share (in dollars per share) $ 3.40 $ 2 $ 2.01

CONSOLIDATED STATEMENTS OF COMP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands12 Months Ended
Dec. 31, 2018Dec. 31, 2017Dec. 31, 2016
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income $ 77,852 $ 45,632 $ 45,903
OTHER COMPREHENSIVE INCOME
Change in fair value of derivatives used for cash flow hedges178 83 (125)
Reclassification amount for net derivative losses realized in income28 219 332
Change in unrealized (loss) gain on available-for-sale debt securities (2018), debt and equity securities (2017)(1,548)(1,265)(2,294)
Adjustment for adoption of ASU 2016-01(428)
Reclassification adjustment for net (gain) loss on AFS debt securities recognized in earnings136
Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings(20)298 (9)
Total other comprehensive (loss) income before income tax(1,790)(529)(2,096)
Tax effect377 258 734
Total other comprehensive (loss) income, net of tax(1,413)(271)(1,362)
COMPREHENSIVE INCOME $ 76,439 $ 45,361 $ 44,541

CONSOLIDATED STATEMENT OF STOCK

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - USD ($) shares in Thousands, $ in ThousandsCommon StockClass A Common StockCommon StockClass B Common StockCommon StockAdditional Paid In Capital.Retained EarningsClass A Common StockRetained EarningsClass B Common StockRetained EarningsAccumulated Other Comprehensive IncomeClass A Common StockClass B Common StockTotal
Balance at beginning of period at Dec. 31, 2015 $ 4,915 $ 136,910 $ 432,673 $ 2,049 $ 576,547
Balance (in shares) at Dec. 31, 201518,652 2,245
Increase (Decrease) in Stockholders' Equity
Net income45,903 45,903
Net change in accumulated other comprehensive income(1,362)(1,362)
Dividends declared Common Stock:
Dividends declared on Common Stock $ (15,359) $ (1,685) $ (15,359) $ (1,685)
Stock options exercised, net of shares redeemed80 80
Stock options exercised, net of shares redeemed (in shares)4
Repurchase of Class A Common Stock(9)(287)(911)(1,207)
Repurchase of Class A Common Stock (in shares)(43)
Net change in notes receivable on Class A Common Stock289 289
Deferred director compensation expense - Class A Common Stock170 170
Deferred director compensation expense - Class A Common Stock (in shares)4
Stock-based compensation expense - performance stock units524 524
Stock-based compensation - restricted stock258 258
Stock-based compensation - restricted stock (in shares)(2)
Stock-based compensation - stock options248 248
Balance at end of period at Dec. 31, 20164,906 138,192 460,621 687 604,406
Balance (in shares) at Dec. 31, 201618,615 2,245
Increase (Decrease) in Stockholders' Equity
Net income45,632 45,632
Net change in accumulated other comprehensive income(271)(271)
Dividends declared Common Stock:
Dividends declared on Common Stock(16,158)(1,773)(16,158)(1,773)
Stock options exercised, net of shares redeemed68 68
Stock options exercised, net of shares redeemed (in shares)4
Conversion of Class B Common Stock to Class A Common Stock (in shares)2 (2)
Repurchase of Class A Common Stock(4)(422)(622)(1,048)
Repurchase of Class A Common Stock (in shares)(26)
Net change in notes receivable on Class A Common Stock235 235
Deferred director compensation expense - Class A Common Stock191 191
Deferred director compensation expense - Class A Common Stock (in shares)5
Stock-based compensation expense - performance stock units491 491
Stock-based compensation - restricted stock424 424
Stock-based compensation - restricted stock (in shares)7
Stock-based compensation - stock options227 227
Balance at end of period at Dec. 31, 20174,902 139,406 487,700 416 632,424
Balance (in shares) at Dec. 31, 201718,607 2,243
Increase (Decrease) in Stockholders' Equity
Net income77,852 77,852
Net change in accumulated other comprehensive income(1,075)(1,075)
Dividends declared Common Stock:
Dividends declared on Common Stock $ (18,076) $ (1,955) $ (18,076) $ (1,955)
Stock options exercised, net of shares redeemed83 83
Stock options exercised, net of shares redeemed (in shares)3
Conversion of Class B Common Stock to Class A Common Stock (in shares)30 (30)
Repurchase of Class A Common Stock(5)(349)(473)(827)
Repurchase of Class A Common Stock (in shares)(14)
Net change in notes receivable on Class A Common Stock5 5
Deferred director compensation expense - Class A Common Stock1 214 215
Deferred director compensation expense - Class A Common Stock (in shares)5
Deferred designed key employee compensation expense - Class A Common Stock430 430
Employee stock purchase plan - Class A Common Stock2 228 230
Employee stock purchase plan - Class A Common Stock (in shares)6
Stock-based compensation expense - performance stock units106 106
Stock-based compensation - restricted stock630 630
Stock-based compensation - restricted stock (in shares)38
Stock-based compensation - stock options265 265
Balance at end of period at Dec. 31, 2018 $ 4,900 $ 141,018 545,013 (997)689,934
Balance (in shares) at Dec. 31, 201818,675 2,213
Increase (Decrease) in Stockholders' Equity
Adjustment for adoption of ASU 2016-01 $ (35) $ (338) $ (373)

CONSOLIDATED STATEMENT OF STO_2

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares3 Months Ended12 Months Ended
Dec. 31, 2018Sep. 30, 2018Jun. 30, 2018Mar. 31, 2018Dec. 31, 2017Sep. 30, 2017Jun. 30, 2017Mar. 31, 2017Dec. 31, 2018Dec. 31, 2017Dec. 31, 2016
Class A Common Stock
Dividend declared common stock, per share (in dollars per share) $ 0.242 $ 0.242 $ 0.242 $ 0.242 $ 0.220 $ 0.220 $ 0.220 $ 0.209 $ 0.968 $ 0.869 $ 0.825
Class B Common Stock
Dividend declared common stock, per share (in dollars per share) $ 0.220 $ 0.220 $ 0.220 $ 0.220 $ 0.200 $ 0.200 $ 0.200 $ 0.190 $ 0.88 $ 0.79 $ 0.75

CONSOLIDATED STATEMENTS OF CASH

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands12 Months Ended
Dec. 31, 2018Dec. 31, 2017Dec. 31, 2016
OPERATING ACTIVITIES:
Net income $ 77,852 $ 45,632 $ 45,903
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization on investment securities97 245 503
Net accretion on loans and amortization of core deposit intangible(3,540)(6,373)(2,573)
Unrealized losses on equity securities with readily determinable fair value122
Depreciation of premises and equipment9,347 8,472 7,304
Amortization of mortgage servicing rights1,432 1,504 1,757
Provision for loan and lease losses31,368 27,704 14,493
Net gain on sale of mortgage loans held for sale(3,839)(3,977)(6,656)
Origination of mortgage loans held for sale(176,916)(160,091)(216,812)
Proceeds from sale of mortgage loans held for sale177,545 169,969 214,760
Net gain on sale of consumer loans held for sale(5,930)(5,647)(2,835)
Origination of consumer loans held for sale(778,476)(663,171)(380,066)
Proceeds from sale of consumer loans held for sale781,951 661,098 379,907
Net realized losses on debt securities136
Net gain realized on sale of other real estate owned(729)(831)(514)
Writedowns of other real estate owned155 270
Impairment of premises held for sale482 1,175 191
Deferred compensation expense - Class A Common Stock645 191 170
Stock-based awards expense - Class A Common Stock1,001 1,142 1,030
Increase in cash surrender value of bank owned life insurance(1,527)(1,562)(1,516)
Net change in other assets and liabilities:
Accrued interest receivable(1,860)(1,726)(659)
Accrued interest payable(16)152 (298)
Other assets2,822 730 (7,227)
Other liabilities7,368 2,850 540
Net cash provided by operating activities119,199 77,777 47,672
INVESTING ACTIVITIES:
Net change in cash for acquisition of Cornerstone Bancorp, Inc.(9,088)
Purchases of available-for-sale debt securities(173,875)(225,212)(419,254)
Purchases of held-to-maturity debt securities(4,934)(15,595)(19,935)
Proceeds from calls, maturities and paydowns of available-for-sale debt securities220,798 158,056 452,247
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities3,911 4,207 6,112
Proceeds from sales of available-for-sale debt securities0 20,012 0
Net change in outstanding warehouse lines of credit56,877 59,867 (198,710)
Purchase of non-business-acquisition loans, including premiums paid(6,160)(51,868)
Net change in other loans(216,600)(268,839)(125,756)
Proceeds from sale of mortgage loans transferred to held for sale72,330
Proceeds from redemption of Federal Home Loan Bank stock224
Purchase of Federal Home Loan Bank stock(3,859)
Proceeds from sales of other real estate owned1,346 2,793 4,595
Net purchases of premises and equipment(9,044)(12,383)(7,031)
Net cash used in investing activities(121,521)(287,113)(296,134)
FINANCING ACTIVITIES:
Net change in deposits22,987 272,466 468,544
Net change in securities sold under agreements to repurchase and other short-term borrowings(21,031)30,548 (221,960)
Payments of Federal Home Loan Bank advances(457,500)(490,000)(292,000)
Proceeds from Federal Home Loan Bank advances530,000 425,000 395,000
Payoff of subordinated note, net of common security interest(4,000)
Repurchase of Class A Common Stock(827)(1,048)(1,207)
Net proceeds from Class A Common Stock purchased through employee stock purchase plan230
Net proceeds from Class A Common Stock options exercised83 68 80
Cash dividends paid(19,497)(17,656)(16,768)
Net cash provided by (used in) financing activities54,445 219,378 327,689
NET CHANGE IN CASH AND CASH EQUIVALENTS52,123 10,042 79,227
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD299,351 289,309 210,082
CASH AND CASH EQUIVALENTS AT END OF PERIOD351,474 299,351 289,309
Cash paid during the period for:
Interest30,139 20,106 18,219
Income taxes11,119 28,779 26,069
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to real estate acquired in settlement of loans662 841 4,778
Transfers from loans held for sale to held for investment2,237 71,201
Loans provided for sales of other real estate owned $ 256
Transfers from loans held for investment to held for sale1,392
Unfunded commitments in low-income-housing investments $ 14,029 $ 9,736

SUMMARY OF SIGNIFICANT ACCOUNTI

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES12 Months Ended
Dec. 31, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES1.
Nature of Operations and Principles of Consolidation — The consolidated financial statements include the accounts of Republic (the “Parent Company”) and its wholly-owned subsidiaries, the Bank and the Captive. All significant intercompany balances and transactions are eliminated in consolidation. All companies are collectively referred to as Republic or the Company. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc.
The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the United States.
The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.
RBCT is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
As of December 31, 2018, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank ® , are considered part of the Traditional Banking segment.
Core Bank
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of December 31, 2018, Republic had 45 full-service banking centers and one LPO with locations as follows:
 Kentucky — 32
 Metropolitan Louisville — 18
 Central Kentucky — 9
 Elizabethtown — 1
 Frankfort — 1
 Georgetown — 1
 Lexington — 5
 Shelbyville — 1
 Western Kentucky — 2
 Owensboro — 2
 Northern Kentucky — 3
 Covington — 1
 Crestview Hills — 1
 Florence — 1
 Southern Indiana — 3
 Floyds Knobs — 1
 Jeffersonville — 1
 New Albany — 1
 Metropolitan Tampa, Florida — 7
 Metropolitan Cincinnati, Ohio — 1
 Metropolitan Nashville, Tennessee — 3*
*Includes one LPO
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
Traditional Banking results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Traditional Banking assets represent investment securities and commercial and consumer loans primarily secured by real estate and/or personal property. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources. FHLB advances have traditionally been a significant borrowing source for the Bank.
Other sources of Traditional Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, fees charged to clients for trust services, and increases in the cash surrender value of BOLI.
Traditional Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, interchange related expenses, marketing and development expenses, FDIC insurance expense, franchise tax expense and various other general and administrative costs. Traditional Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.
The Traditional Bank has acquired for investment single family, first lien mortgage loans that meet the Traditional Bank’s specifications through its Correspondent Lending channel. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium.
Warehouse Lending segment — Through its Warehouse Lending segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single family, first lien residential real estate loans. The credit facility enables the mortgage banking clients to close single family, first lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
Mortgage Banking segment — Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
Republic Processing Group
Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the United States, as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. First offered by TRS in 2016, the EA had the following features during its 2018, 2017, and 2016 offering periods:
·
Offered only during the first two months of each year;
·
No EA fee was charged to the taxpayer customer;
·
All fees for the EA were paid by the Tax Providers with a restriction prohibiting the Tax Providers from passing along the fees to the taxpayer customer;
·
No requirement that the taxpayer customer pays for another bank product, such as an RT;
·
Multiple funds disbursement methods, including direct deposit, prepaid card, check, or Walmart Direct2Cash ® , based on the taxpayer-customer’s election;
·
Repayment of the EA to the Bank was deducted from the taxpayer customer’s tax refund proceeds; and
·
If an insufficient refund to repay the EA occurred:
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.
The Company reports fees paid by the Tax Providers for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with provisions for all probable EA losses made in the first quarter of each year. Unpaid EAs are charged-off within 111 days after the taxpayer customer’s tax return is submitted to the applicable taxing authority, with the majority of charge-offs typically recorded during the second quarter of the year.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund funding patterns. Because much of the EA volume occurs each year before that year’s tax refund funding patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund funding patterns change materially between years.
Republic Payment Solutions — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees. Additionally, the Company’s portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “Interchange fee income.”
Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors including the consumer’s ability to repay. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. Additional information regarding consumer loan products offered through RCS follows:
·
RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United States through Elevate Credit, Inc., its third-party servicer provider. RCS sells 90% of the balances generated within two business days of loan origination to a special purpose entity related to Elevate Credit, Inc. and retains the remaining 10% interest. The line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale are carried at the lower of cost or fair value.
·
RCS credit-card product – From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted a credit-card product to generally subprime borrowers across the United States through one third-party marketer/servicer. For outstanding cards, RCS sold 90% of the balances generated within two business days of each transaction occurrence to a special purpose entity related to its third-party marketer/servicer and retained the remaining 10% interest. During the fourth quarter of 2018, the Bank and its third-party marketer/servicer finalized an agreement to sell 100% of the existing portfolio to an unrelated third party. The sale of the RCS credit-card portfolio receivables was settled in January 2019.
·
RCS healthcare receivables product – The Bank originates a healthcare-receivables product across the United States through two different third-party service providers. For one third-party service provider, the Bank retains 100% of the receivables originated. For the other third-party service provider, the Bank retains 100% of the receivables originated in some instances, and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale are carried at the lower of cost or fair value.
·
RCS installment loan product – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold 100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after origination. The Bank carried all unsold loans under the program as “held for sale” on its balance sheet. At the initiation of this program in 2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter marked to market monthly.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any new loans, and the subsequent sale of all recently originated loans under this program, while the two parties evaluated the future offering of this product due to changes in the applicable state law impacting the product. Concurrent with the suspension of this program, the Bank reclassified approximately $2.2 million of these loans from held for sale on the balance sheet into the held-for-investment category and revalued these loans accordingly.
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
Use of Estimates — Financial statements prepared in conformity with GAAP require management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates and assumptions impact the amounts reported in the financial statements and the disclosures provided. Actual amounts could differ from these estimates.
Concentration of Credit Risk — With the exception of loans originated through its Correspondent Lending channel, most of the Company’s Traditional Banking business activity is with clients located in Kentucky, Indiana, Florida, and Tennessee. The Company’s Traditional Banking exposure to credit risk is significantly affected by changes in the economy in these specific areas.
Loans originated through the Traditional Bank’s Correspondent Lending channel are primarily secured by single family, first lien residences located outside the Company’s market footprint, with 74% of such loans secured by collateral located in the state of California as of December 31, 2018. Furthermore, warehouse lines of credit are secured by single family, first lien residential real estate loans originated by the Bank’s mortgage clients across the United States. As of December 31, 2018, 32% of collateral securing warehouse lines were located in California.
Earnings Concentration — For 2018, 2017 and 2016, approximately 27%, 25% and 19% of total Company net revenues (net interest income plus noninterest income) were derived from the RPG operations. Within RPG, the TRS segment accounted for 14%, 13% and 12%, while the RCS segment accounting for 13%, 12% and 7% of total Company net revenues.
For 2018, 2017 and 2016, approximately 5%, 7% and 8% of total Company net revenues (net interest income plus noninterest income) were derived from the Company’s Warehouse segment.
Cash Flows — Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days and federal funds sold. Net cash flows are reported for client loan and deposit transactions, interest-bearing deposits in other financial institutions, repurchase agreements and income taxes.
Interest-Bearing Deposits in Other Financial Institutions — Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Debt Securities — Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Available-for-sale debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on callable securities are amortized to the earliest call date. Other premiums and discounts on securities are amortized and accreted on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more-likely-than-not that it would be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in OCI. OTTI related to credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Bank compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
Equity Securities — On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments . Among other things, ASU 2016-01 requires the Company recognize changes in the fair value of equity investments with a readily determinable fair value in net income unless those investments are accounted for under the equity method of accounting.
Accounting for Business Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its internal growth strategies.
The Bank accounts for acquisitions in accordance with the acquisition method as outlined in ASC Topic 805, Business Combinations . The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any noncontrolling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.
Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their acquisition-date (“day-one”) fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these recast adjustments for loans and other real estate owned may be made, as market value data, such as valuations, are received by the Bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.
Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.
Mortgage Banking Activities — Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Net gains on mortgage loans held for sale are recorded as a component of Mortgage Banking income and represent the difference between the selling price and the carrying value of the loans sold. Substantially all of the gains or losses on the sale of loans are reported in earnings when the interest rates on loans are locked.
Commitments to fund mortgage loans (“interest rate lock commitments”) to be sold into the secondary market and non-exchange traded mandatory forward sales contracts (“forward contracts”) for the future delivery of these mortgage loans are accounted for as free-standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the Bank enters into the derivative. Generally, the Bank enters into forward contracts for the future delivery of mortgage loans when interest rate lock commitments are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these mortgage derivatives are included in net gains on sales of loans, which is a component of Mortgage Banking income on the income statement.
Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded as a component of net servicing income within Mortgage Banking income. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage Banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a quarterly basis based on the weighted average remaining life of the underlying loans.
MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance is recorded as an increase to income. Changes in valuation allowances are reported within Mortgage Banking income on the income statement. The fair value of the MSR portfolios is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates.
A primary factor influencing the fair value is the estimated life of the underlying serviced loans. The estimated life of the serviced loans is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs generally will decline due to higher expected prepayments within the portfolio. Alternatively, during a period of rising interest rates the fair value of MSRs generally will increase, as prepayments on the underlying loans would be expected to decline. Based on the estimated fair value at December 31, 2018 and 2017, management determined there was no impairment within the MSR portfolio.
Loan servicing income is reported on the income statement as a component of Mortgage Banking income. Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. Loan servicing income totaled $2.4 million, $2.2 million and $2.0 million for the years ended December 31, 2018, 2017 and 2016. Late fees and ancillary fees related to loan servicing are considered nominal.
Loans — The Bank’s financing receivables consist primarily of loans and lease financing receivables (together referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, inclusive of purchase premiums or discounts, deferred loan fees and costs and the Allowance. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method. Premiums on loans held for investment acquired though the Correspondent Lending channel are amortized into interest income on the level-yield method over the expected life of the loan.
Lease financing receivables, all of which are direct financing leases, are reported at their principal balance outstanding net of any unearned income, deferred fees and costs and applicable Allowance. Leasing income is recognized on a basis that achieves a constant periodic rate of return on the outstanding lease financing balances over the lease terms.
Interest income on mortgage and commercial loans is typically discontinued at the time the loan is 80 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan, which may define past due status by the number of days or the number of payments past due. In most cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 80 days still on accrual include both smaller balance, homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
Interest accrued but not received for all classes of loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, typically a minimum of six months of performance. Consumer and credit card loans, are not placed on nonaccrual status, but are reviewed periodically and charged off when the loan is deemed uncollectible, generally no more than 120 days.
Loans purchased in a business acquisition are accounted for using one of the following accounting standards:
·
ASC Topic 310-20, Non Refundable Fees and Other Costs , is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the borrower. For these loans, the difference between the loan’s day-one fair value and amortized cost would be amortized or accreted into income using the interest method.
·
ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality , is used to value PCI loans. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan, or fair value, represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. Additionally, the difference between contractual cash flows and expected cash flows of PCI loans is referred to as the “non-accretable discount.”
Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.
In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received. The Bank typically accounts for PCI loans individually, as opposed to aggregating the loans into pools based on common risk characteristics such as loan type.
Management separately monitors the PCI portfolio and on a quarterly basis reviews the loans contained within this portfolio against the factors and assumptions used in determining the day-one fair values. In addition to its quarterly evaluation, a loan is typically reviewed when it is modified or extended, or when material information becomes available to the Bank that provides additional insight regarding the loan’s performance, estimated life, the status of the borrower, or the quality or value of the underlying collateral.
To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the PCI-1 category, whose credit risk is considered by management equivalent to a non-PCI Special Mention loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial acquisition day estimate. Provisions for loan losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.
If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable discount established as part of its initial day-one evaluation, such loan would be classified PCI-Sub within the Bank’s credit risk matrix. Management deems

INVESTMENT SECURITIES

INVESTMENT SECURITIES12 Months Ended
Dec. 31, 2018
INVESTMENT SECURITIES
INVESTMENT SECURITIES2.
Available-for-Sale Debt Securities
The gross amortized cost and fair value of AFS debt securities and the related gross unrealized gains and losses recognized in AOCI were as follows:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2018 (in thousands)
Cost
Gains
Losses
Value
U.S. Treasury securities and U.S. Government agencies
$
218,502
$
25
$
(1,654)
$
216,873
Private label mortgage backed security
2,348
1,364

3,712
Mortgage backed securities - residential
168,992
1,470
(1,253)
169,209
Collateralized mortgage obligations
73,740
222
(1,151)
72,811
Corporate bonds
10,000

(942)
9,058
Trust preferred security
3,533
542

4,075
Total available-for-sale debt securities
$
477,115
$
3,623
$
(5,000)
$
475,738
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2017 (in thousands)
Cost
Gains
Losses
Value
U.S. Treasury securities and U.S. Government agencies
$
309,042
$
1
$
(1,451)
$
307,592
Private label mortgage backed security
3,065
1,384

4,449
Mortgage backed securities - residential
105,644
1,603
(873)
106,374
Collateralized mortgage obligations
87,867
371
(1,075)
87,163
Corporate bonds
15,001
124

15,125
Trust preferred security
3,493
107

3,600
Total available-for-sale debt securities
$
524,112
$
3,590
$
(3,399)
$
524,303
Held-to-Maturity Debt Securities
The carrying value, gross unrecognized gains and losses, and fair value of HTM debt securities were as follows:
Gross
Gross
Carrying
Unrecognized
Unrecognized
Fair
December 31, 2018 (in thousands)
Value
Gains
Losses
Value
Mortgage backed securities - residential
$
132
$
8
$

$
140
Collateralized mortgage obligations
19,544
178
(46)
19,676
Corporate bonds
45,088
16
(514)
44,590
Obligations of state and political subdivisions
463

(11)
452
Total held-to-maturity debt securities
$
65,227
$
202
$
(571)
$
64,858
Gross
Gross
Carrying
Unrecognized
Unrecognized
Fair
December 31, 2017 (in thousands)
Value
Gains
Losses
Value
Mortgage backed securities - residential
$
151
$
10
$

$
161
Collateralized mortgage obligations
23,437
236
(17)
23,656
Corporate bonds
40,175
686
(3)
40,858
Obligations of state and political subdivisions
464

(6)
458
Total held-to-maturity debt securities
$
64,227
$
932
$
(26)
$
65,133
At December 31, 2018 and 2017, there were no holdings of debt securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
Sales of Available-for-Sale Debt Securities
During 2017, the Bank recognized a gross loss of $136,000 on the sale of two AFS debt securities. The tax benefit related to the Bank’s realized losses totaled $48,000 for the year ended December 31, 2017.
During 2018 and 2016, there were no sales of AFS debt securities.
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2018 follows. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.
Available-for-Sale
Held-to-Maturity
Debt Securities
Debt Securities
Amortized
Fair
Carrying
Fair
December 31, 2018 (in thousands)
Cost
Value
Value
Value
Due in one year or less
$
74,692
$
74,083
$
75
$
75
Due from one year to five years
153,810
151,848
40,536
40,266
Due from five years to ten years


4,940
4,701
Due beyond ten years
3,533
4,075


Private label mortgage backed security
2,348
3,712


Mortgage backed securities - residential
168,992
169,209
132
140
Collateralized mortgage obligations
73,740
72,811
19,544
19,676
Total debt securities
$
477,115
$
475,738
$
65,227
$
64,858
Market Loss Analysis
Securities with unrealized losses at December 31, 2018 and 2017, aggregated by investment category and length of time that individual debt securities have been in a continuous unrealized loss position, are as follows:
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2018 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$
71,627
$
(598)
$
106,136
$
(1,056)
$
177,763
$
(1,654)
Mortgage backed securities - residential
43,691
(484)
32,003
(769)
75,694
(1,253)
Collateralized mortgage obligations
16,487
(473)
31,071
(678)
47,558
(1,151)
Corporate bonds
9,058
(942)


9,058
(942)
Total available-for-sale debt securities
$
140,863
$
(2,497)
$
169,210
$
(2,503)
$
310,073
$
(5,000)
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2017 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$
209,165
$
(499)
$
88,415
$
(952)
$
297,580
$
(1,451)
Mortgage backed securities - residential
61,348
(617)
10,192
(256)
71,540
(873)
Collateralized mortgage obligations
30,963
(642)
18,603
(433)
49,566
(1,075)
Total available-for-sale debt securities
$
301,476
$
(1,758)
$
117,210
$
(1,641)
$
418,686
$
(3,399)
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2018 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Held-to-maturity debt securities:
Collateralized mortgage obligations
$

$

$
5,539
$
(46)
$
5,539
$
(46)
Corporate bonds
39,499
(514)


39,499
(514)
Obligations of state and political subdivisions
105
(1)
347
(10)
452
(11)
Total held-to-maturity debt securities:
$
39,604
$
(515)
$
5,886
$
(56)
$
45,490
$
(571)
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2017 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Held-to-maturity debt securities:
Collateralized mortgage obligations
$

$

$
6,390
$
(17)
$
6,390
$
(17)
Corporate bonds
4,997
(3)


4,997
(3)
Obligations of state and political subdivisions
458
(6)


458
(6)
Total held-to-maturity debt securities:
$
5,455
$
(9)
$
6,390
$
(17)
$
11,845
$
(26)
At December 31, 2018, the Bank’s portfolio consisted of 182 securities, 65 of which were in an unrealized loss position.
At December 31, 2017, the Bank’s portfolio consisted of 185 securities, 58 of which were in an unrealized loss position.
Corporate Bonds
From 2013 to 2018, the Bank purchased various floating-rate corporate bonds. These bonds were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 10% and 9% of the Bank’s investment portfolio as of December 31, 2018 and 2017. During 2018, one of these bonds was downgraded to BBB+ (S&P/Fitch), driving a significant decrease in the bond’s market value. As of December 31, 2018, this bond reflected an unrealized loss of $942,000. The Bank does not intend to sell this bond, and it is likely that it will not be required to sell this bond before the bond’s anticipated recovery, therefore, management does not consider this bond to have OTTI.
Mortgage Backed Securities and Collateralized Mortgage Obligations
At December 31, 2018, with the exception of the $3.7 million private label mortgage backed security, all other mortgage backed securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FNMA. At December 31, 2018 and December 31, 2017, there were gross unrealized losses of $2.4 million and $1.9 million related to available for sale mortgage backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to have OTTI.
Trust Preferred Security
During the fourth quarter of 2015, the Parent Company purchased a $3 million floating rate trust preferred security at a price of 68% of par. The coupon on this security is based on the 3-month LIBOR rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.
Other-Than-Temporary Impairment
Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in value below amortized cost is other-than-temporary. In conducting this assessment, the Bank evaluates a number of factors including, but not limited to the following:
·
The length of time and the extent to which fair value has been less than the amortized cost basis;
·
The Bank’s intent to hold until maturity or sell the debt security prior to maturity;
·
An analysis of whether it is more-likely-than-not that the Bank will be required to sell the debt security before its anticipated recovery;
·
Adverse conditions specifically related to the security, an industry, or a geographic area;
·
The historical and implied volatility of the fair value of the security;
·
The payment structure of the security and the likelihood of the issuer being able to make payments;
·
Failure of the issuer to make scheduled interest or principal payments;
·
Any rating changes by a rating agency; and
·
Recoveries or additional decline in fair value subsequent to the balance sheet date.
The term “other-than-temporary” is not intended to indicate that the decline is permanent but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.
The Bank owns one private label mortgage backed security with a total carrying value of $3.7 million at December 31, 2018. This security is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.
See additional discussion regarding the Bank’s private label mortgage backed security in this section of the filing under Footnote 14 “Fair Value.”
The following table presents a rollforward of the Bank’s private label mortgage backed security credit losses recognized in earnings:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
1,765
$
1,765
$
1,765
Recovery of losses previously recorded
(152)


Balance, end of period
$
1,613
$
1,765
$
1,765
Further deterioration in economic conditions could cause the Bank to record an additional impairment charge related to credit losses of up to $2.3 million, which is the current gross amortized cost of the Bank’s remaining private label mortgage backed security.
Pledged Debt Securities
Debt securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes, as required or permitted by law are as follows:
December 31, (in thousands)
2018
2017
Carrying amount
$
240,590
$
262,679
Fair value
240,700
262,902
Equity Securities
The following tables present the carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2018 (in thousands)
Cost
Gains
Losses
Value
Freddie Mac preferred stock
$

$
410
$

$
410
Community Reinvestment Act mutual fund
2,500

(104)
2,396
Total equity securities with readily determinable fair values
$
2,500
$
410
$
(104)
$
2,806
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2017 (in thousands)
Cost
Gains
Losses
Value
Freddie Mac preferred stock
$

$
473
$

$
473
Community Reinvestment Act mutual fund
2,500

(45)
2,455
Total equity securities with readily determinable fair values
$
2,500
$
473
$
(45)
$
2,928
For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:
Year Ended December 31, 2018
Gains (Losses) Recognized on Equity Securities
(in thousands)
Realized
Unrealized
Total
Freddie Mac preferred stock
$

$
(63)
$
(63)
Community Reinvestment Act mutual fund

(59)
(59)
Total equity securities with readily determinable fair value
$

$
(122)
$
(122)
Freddie Mac Preferred Stock
During 2008, the U.S. Treasury, the FRB, and the FHFA announced that the FHFA was placing Freddie Mac under conservatorship and giving management control to the FHFA. The Bank contemporaneously determined that its 40,000 shares of Freddie Mac preferred stock were fully impaired and recorded an OTTI charge of $2.1 million in 2008. The OTTI charge brought the carrying value of the stock to $0. During 2014, based on active trading volume of Freddie Mac preferred stock, the Company determined it appropriate to record an unrealized gain to OCI related to its Freddie Mac preferred stock holdings. Based on the stock’s market closing price as of December 31, 2018, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $410,000.

LOANS HELD FOR SALE

LOANS HELD FOR SALE12 Months Ended
Dec. 31, 2018
LOANS HELD FOR SALE.
LOANS HELD FOR SALE3.
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 15 “Mortgage Banking Activities” of this section of the filing.
Consumer Loans Held for Sale, at Fair Value
From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold 100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after origination. The Bank carried all unsold loans under the program as “held for sale” on the its balance sheet. At the initiation of this program in 2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter marked to market monthly.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any new loans, and the subsequent sale of all recently-originated loans under this program, while the two parties evaluated the future offering of this product due to changes in the applicable state law impacting the product. Concurrent with the suspension of this program, the Bank reclassified approximately $2.2 million of these loans from held for sale on the balance sheet into the held-for-investment category and revalued these loans accordingly.
Activity for consumer loans held for sale and carried at fair value was as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
2,677
$
2,198
$

Origination of consumer loans held for sale
16,985
59,467
45,274
Loans transferred to held for investment
(2,237)


Proceeds from the sale of consumer loans held for sale
(17,022)
(59,380)
(43,410)
Net gain (loss) recognized on consumer loans held for sale
(403)
392
334
Balance, end of period
$

$
2,677
$
2,198
Consumer Loans Held for Sale, at Lower of Cost or Fair Value
RCS originates balances for a line-of-credit product and, through December 31, 2018, originated balances on a credit-card product. The Bank has sold 90% of the balances maintained through these products within two days of transactional activity and retained a 10% interest. The line-of-credit product represents the substantial majority of balances retained as consumer loans held for sale that are carried at the lower of cost or fair value. During the third quarter of 2018, the Bank and its third-party marketer/servicer agreed to sell 100% of the existing credit-card portfolio to an unrelated third party. As a result, the Bank reclassified its 10% interest into a held-for-sale category and charged the entire RCS credit-card portfolio down to its estimated net realizable value. The Bank and its third-party marketer/servicer closed the sale of the credit-card portfolio in January 2019. Gains or losses on the sale of RCS products are reported as a component of “Program fees.”
Activity for consumer loans held for sale and carried at the lower of cost or market value was as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
8,551
$
1,310
$
514
Origination of consumer loans held for sale
761,491
603,704
334,792
Loans transferred from held for investment
1,392


Proceeds from the sale of consumer loans held for sale
(764,929)
(601,718)
(336,497)
Net gain on sale of consumer loans held for sale
6,333
5,255
2,501
Balance, end of period
$
12,838
$
8,551
$
1,310

LOANS AND ALLOWANCE FOR LOAN AN

LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES12 Months Ended
Dec. 31, 2018
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES4.
Ending loan balances at December 31, 2018 and 2017 were as follows:
December 31, (in thousands)
2018
2017
Traditional Banking:
Residential real estate:
Owner occupied
$
907,005
$
921,565
Owner occupied - correspondent*
94,827
116,792
Nonowner occupied
242,846
205,081
Commercial real estate
1,248,940
1,207,293
Construction & land development
175,178
150,065
Commercial & industrial
430,355
341,692
Lease financing receivables
15,031
16,580
Home equity
332,548
347,655
Consumer:
Credit cards
19,095
16,078
Overdrafts
1,102
974
Automobile loans
63,475
65,650
Other consumer
46,642
20,501
Total Traditional Banking
3,577,044
3,409,926
Warehouse lines of credit*
468,695
525,572
Total Core Banking
4,045,739
3,935,498
Republic Processing Group*:
Tax Refund Solutions:
Easy Advances


Other TRS loans
13,744
11,648
Republic Credit Solutions
88,744
66,888
Total Republic Processing Group
102,488
78,536
Total loans**
4,148,227
4,014,034
Allowance for loan and lease losses
(44,675)
(42,769)
Total loans, net
$
4,103,552
$
3,971,265
* Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
** Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.
The following table reconciles the contractually receivable and carrying amounts of loans at December 31, 2018 and 2017:
December 31, (in thousands)
2018
2017
Contractually receivable
$
4,147,249
$
4,014,673
Unearned income(1)
(1,038)
(1,157)
Unamortized premiums(2)
588
1,069
Unaccreted discounts(3)
(3,174)
(4,643)
Net unamortized deferred origination fees and costs(4)
4,602
4,092
Carrying value of loans
$
4,148,227
$
4,014,034
(1)
Unearned income relates to lease financing receivables.
(2)
Unamortized premiums predominately relate to loans acquired through the Bank’s Correspondent Lending channel.
(3)
Unaccreted discounts include accretable and non-accretable discounts and relate to loans acquired in the Bank’s 2016 Cornerstone acquisition and its 2012 FDIC-assisted transactions.
(4)
Primarily attributable to the Traditional Banking segment.
Purchased-Credit-Impaired Loans
The following table reconciles the contractually required and carrying amounts of all PCI loans at December 31, 2018 and 2017:
December 31, (in thousands)
2018
2017
Contractually required principal
$
4,251
$
5,435
Non-accretable amount
(1,521)
(1,691)
Accretable amount
(50)
(140)
Carrying value of loans
$
2,680
$
3,604
The following table presents a rollforward of the accretable amount on all PCI loans for years ended December 31, 2018, 2017 and 2016:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
(140)
$
(3,600)
$
(4,125)
Transfers between non-accretable and accretable*
(573)
(28)
(206)
Net accretion into interest income on loans, including loan fees
663
3,488
1,120
Generated from acquisition of Cornerstone Bancorp, Inc. (recasted)


(389)
Balance, end of period
$
(50)
$
(140)
$
(3,600)
* Transfers are primarily attributable to changes in estimated cash flows of the underlying loans.
Credit Quality Indicators
Bank procedures for assessing and maintaining credit gradings differs slightly depending on whether a new or renewed loan is being underwritten, or whether an existing loan is being re-evaluated for potential credit quality concerns. The latter usually occurs upon receipt of updated financial information, or other pertinent data, that would potentially cause a change in the loan grade. Specific Bank procedures follow:
·
For new and renewed C&I, CRE and C&D loans, the Bank’s CCAD assigns the credit quality grade to the loan.
·
Commercial loan officers are responsible for monitoring their respective loan portfolios and reporting any adverse material changes to senior management. When circumstances warrant a review and possible change in the credit quality grade, loan officers are required to notify the Bank’s CCAD.
·
A senior officer meets monthly with commercial loan officers to discuss the status of past due loans and possible classified loans. These meetings are designed to give loan officers an opportunity to identify existing loans that should be downgraded.
·
Monthly, members of senior management along with managers of Commercial Lending, CCAD, Accounting, Special Assets and Retail Collections attend a Special Asset Committee meeting. The SAC reviews all C&I and CRE, classified, and impaired loans and discusses the relative trends and current status of these assets. In addition, the SAC reviews all classified and impaired retail residential real estate loans and all classified and impaired home equity loans. SAC also reviews the actions taken by management regarding credit-quality grades, foreclosure mitigation, loan extensions, troubled debt restructurings and collateral repossessions. Based on the information reviewed in this meeting, the SAC approves all specific loan loss allocations to be recognized by the Bank within the Allowance analysis.
·
All new and renewed warehouse lines of credit are approved by the Executive Loan Committee. The CCAD assigns the initial credit quality grade to warehouse facilities. Monthly, members of senior management review warehouse lending activity including data associated with the underlying collateral to the warehouse facilities, i.e., the mortgage loans associated with the balances drawn. Key performance indicators monitored include average days outstanding for each draw, average FICO credit report score for the underlying collateral, average LTV for the underlying collateral and other factors deemed relevant.
On at least an annual basis, the Bank’s internal loan review department analyzes all aggregate lending relationships with outstanding balances greater than $1 million that are internally classified as “Special Mention,” “Substandard,” “Doubtful” or “Loss.” In addition, on an annual basis, the Bank analyzes a sample of “Pass” rated loans.
The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, public information, and current economic trends. The Bank also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). The Bank analyzes loans individually, and based on this analysis, establishes a credit risk rating. The Bank uses the following definitions for risk ratings:
Risk Grade 1 — Excellent (Pass): Loans fully secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans fully secured by publicly traded marketable securities where there is no impediment to liquidation; or loans to any publicly held company with a current long-term debt rating of A or better.
Risk Grade 2 — Good (Pass): Loans to businesses that have strong financial statements containing an unqualified opinion from a Certified Public Accounting firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans that are guaranteed or otherwise backed by the full faith and credit of the U.S. government or an agency thereof, such as the Small Business Administration; or loans to publicly held companies with current long-term debt ratings of Baa or better.
Risk Grade 3 — Satisfactory (Pass): Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.
Risk Grade 4 — Satisfactory/Monitored (Pass): Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.
Risk Grade 5 — Special Mention: Loans that possess some credit deficiency or potential weakness that deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) credit weaknesses are considered potential and are not defined impairments to the primary source of repayment.
Purchased Credit Impaired Loans — Group 1: To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the PCI-1 category, whose credit risk is considered by management equivalent to a non-PCI “Special Mention” loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial acquisition day estimate. Provisions are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.
Purchased Credit Impaired Loans — Substandard: If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified PCI-Sub within the Bank’s credit risk matrix. Management deems the risk of default and overall credit risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI “Substandard” loan within the Bank’s credit rating matrix. PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.
Risk Grade 6 — Substandard: One or more of the following characteristics may be exhibited in loans classified as Substandard:
·
Loans that possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.
·
Loans are inadequately protected by the current net worth and paying capacity of the obligor.
·
The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.
·
Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.
·
Unusual courses of action are needed to maintain a high probability of repayment.
·
The borrower is not generating enough cash flow to repay loan principal, however, it continues to make interest payments.
·
The Bank is forced into a subordinated or unsecured position due to flaws in documentation.
·
The Bank is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.
·
There is significant deterioration in market conditions to which the borrower is highly vulnerable.
Risk Grade 7 — Doubtful: One or more of the following characteristics may be present in loans classified as Doubtful:
·
Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.
·
The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.
·
The possibility of loss is high but because of certain important pending factors, which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.
Risk Grade 8 — Loss: Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified “Loss” when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
For all real estate and consumer loans, including small-dollar RPG loans, which do not meet the scope above, the Bank uses a grading system based on delinquency and nonaccrual status. Loans that are 90 days or more past due or on nonaccrual are graded Substandard. Occasionally, a real estate loan below scope may be graded as “Special Mention” or “Substandard” if the loan is cross-collateralized with a classified C&I or CRE loan.
Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.
Management separately monitors PCI loans and no less than quarterly reviews them against the factors and assumptions used in determining day-one fair values. In addition to its quarterly evaluation, a PCI loan is typically reviewed when it is modified or extended, or when information becomes available to the Bank that provides additional insight regarding the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral.
If a troubled debt restructuring is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting standards and transferred out of the PCI population. The loan may require an additional Provision if its restructured cash flows are less than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are generally not considered TDRs and remain in the PCI population.
The following tables include loans by risk category based on the Bank’s internal analysis performed:
December 31, 2018
Special
Doubtful /
PCI Loans -
PCI Loans -
Total Rated
(in thousands)
Pass
Mention
Substandard
Loss
Group 1
Substandard
Loans*
Traditional Banking:
Residential real estate:
Owner occupied
$

$
14,536
$
11,690
$

$
170
$
1,476
$
27,872
Owner occupied - correspondent


382



382
Nonowner occupied

575
1,889



2,464
Commercial real estate
1,239,576
5,281
3,162

921

1,248,940
Construction & land development
175,113

65



175,178
Commercial & industrial
428,897
813
620

25

430,355
Lease financing receivables
15,031





15,031
Home equity


1,361

5
81
1,447
Consumer:
Credit cards







Overdrafts







Automobile loans


91



91
Other consumer


462


2
464
Total Traditional Banking
1,858,617
21,205
19,722

1,121
1,559
1,902,224
Warehouse lines of credit
468,695





468,695
Total Core Banking
2,327,312
21,205
19,722

1,121
1,559
2,370,919
Republic Processing Group:
Tax Refund Solutions:
Easy Advances







Other TRS loans







Republic Credit Solutions


138



138
Total Republic Processing Group


138



138
Total rated loans
$
2,327,312
$
21,205
$
19,860
$

$
1,121
$
1,559
$
2,371,057
December 31, 2017
Special
Doubtful /
PCI Loans -
PCI Loans -
Total Rated
(in thousands)
Pass
Mention
Substandard
Loss
Group 1
Substandard
Loans*
Traditional Banking:
Residential real estate:
Owner occupied
$

$
18,054
$
12,056
$

$
180
$
1,658
$
31,948
Owner occupied - correspondent







Nonowner occupied

635
1,240

248

2,123
Commercial real estate
1,197,299
4,824
3,798

1,372

1,207,293
Construction & land development
149,332

733



150,065
Commercial & industrial
341,377
267
21

27

341,692
Lease financing receivables
16,580





16,580
Home equity

33
1,609

6
110
1,758
Consumer:
Credit cards







Overdrafts







Automobile loans


108



108
Other consumer


571


3
574
Total Traditional Banking
1,704,588
23,813
20,136

1,833
1,771
1,752,141
Warehouse lines of credit
525,572





525,572
Total Core Banking
2,230,160
23,813
20,136

1,833
1,771
2,277,713
Republic Processing Group:
Tax Refund Solutions:
Easy Advances







Other TRS loans
11,648





11,648
Republic Credit Solutions


1,066



1,066
Total Republic Processing Group
11,648

1,066



12,714
Total rated loans
$
2,241,808
$
23,813
$
21,202
$

$
1,833
$
1,771
$
2,290,427
* The above tables exclude all non-classified or non-rated residential real estate, home equity and consumer loans at the respective period ends.
Subprime Lending
Both the Traditional Banking segment and the RCS segment of the Company have certain classes of loans that are considered to be “subprime” strictly due to the credit score of the borrower at the time of origination.
Traditional Bank loans considered subprime totaled approximately $49 million and $47 million at December 31, 2018 and 2017. Approximately $18 million and $12 million of the outstanding Traditional Bank subprime loan portfolio at December 31, 2018 and 2017 were originated for CRA purposes. Management does not consider these loans to possess significantly higher credit risk due to other underwriting qualifications.
The RCS segment originates a short-term line-of-credit product and, through December 31, 2018, originated a credit card product. The Bank has traditionally sold 90% of the balances maintained through these two products within two days of loan origination and retained a 10% interest. Both of these RCS products are unsecured and made to borrowers with subprime or near prime credit scores. The aggregate outstanding balance held-for-investment for these two portfolios totaled $32 million and $33 million at December 31, 2018 and 2017. The balance held as of December 31, 2018 includes only the Bank’s line-of-credit product because the Bank settled the sale of 100% of its interest in its RCS credit-card product in January 2019.
Allowance for Loan and Lease Losses
The following tables present the activity in the Allowance by portfolio class for the years ended December 31, 2018, 2017 and 2016:
Allowance Rollforward
Years Ended December 31,
2018
2017
Beginning
Charge-
Ending
Beginning
Charge-
Ending
(in thousands)
Balance
Provision
offs
Recoveries
Balance
Balance
Provision
offs
Recoveries
Balance
Traditional Banking:
Residential real estate:
Owner occupied
$
6,182
$
225
$
(855)
$
246
$
5,798
$
7,158
$
(933)
$
(300)
$
257
$
6,182
Owner occupied - correspondent
292
(55)


237
373
(81)


292
Nonowner occupied
1,396
559
(332)
39
1,662
1,139
272
(30)
15
1,396
Commercial real estate
9,043
863
(7)
131
10,030
8,078
826

139
9,043
Construction & land development
2,364
161

30
2,555
1,850
508

6
2,364
Commercial & industrial
2,198
824
(200)
51
2,873
1,511
842
(189)
34
2,198
Lease financing receivables
174
(16)


158
136
38


174
Home equity
3,754
(473)
(115)
311
3,477
3,757
37
(222)
182
3,754
Consumer:
Credit cards
607
906
(416)
43
1,140
490
247
(168)
38
607
Overdrafts
974
1,082
(1,215)
261
1,102
675
1,031
(960)
228
974
Automobile loans
687
57
(24)
4
724
526
188
(30)
3
687
Other consumer
1,162
(423)
(444)
296
591
771
948
(884)
327
1,162
Total Traditional Banking
28,833
3,710
(3,608)
1,412
30,347
26,464
3,923
(2,783)
1,229
28,833
Warehouse lines of credit
1,314
(142)


1,172
1,464
(150)


1,314
Total Core Banking
30,147
3,568
(3,608)
1,412
31,519
27,928
3,773
(2,783)
1,229
30,147
Republic Processing Group:
Tax Refund Solutions:
Easy Advances

10,760
(12,478)
1,718


6,789
(8,121)
1,332

Other TRS loans
12
159
(74)
10
107
25
(254)

241
12
Republic Credit Solutions
12,610
16,881
(17,692)
1,250
13,049
4,967
17,396
(10,659)
906
12,610
Total Republic Processing Group
12,622
27,800
(30,244)
2,978
13,156
4,992
23,931
(18,780)
2,479
12,622
Total
$
42,769
$
31,368
$
(33,852)
$
4,390
$
44,675
$
32,920
$
27,704
$
(21,563)
$
3,708
$
42,769
Allowance Rollforward
Year Ended December 31, 2016
Beginning
Charge-
Ending
(in thousands)
Balance
Provision
offs
Recoveries
Balance
Traditional Banking:
Residential real estate:
Owner occupied
$
8,301
$
(1,148)
$
(416)
$
421
$
7,158
Owner occupied - correspondent
623
(250)


373
Nonowner occupied
1,052
79

8
1,139
Commercial real estate
7,672
768
(514)
152
8,078
Construction & land development
1,303
513
(44)
78
1,850
Commercial & industrial
1,455
259
(330)
127
1,511
Lease financing receivables
89
47


136
Home equity
2,996
961
(351)
151
3,757
Consumer:
Credit cards
448
154
(164)
52
490
Overdrafts
351
898
(816)
242
675
Automobile loans
56
481
(12)
1
526
Other consumer
479
686
(735)
341
771
Total Traditional Banking
24,825
3,448
(3,382)
1,573
26,464
Warehouse lines of credit
967
497


1,464
Total Core Banking
25,792
3,945
(3,382)
1,573
27,928
Republic Processing Group:
Tax Refund Solutions:
Easy Advances

3,048
(3,474)
426

Refund Anticipation Loans

(301)

301

Commercial & industrial

25


25
Republic Credit Solutions
1,699
7,776
(5,000)
492
4,967
Total Republic Processing Group
1,699
10,548
(8,474)
1,219
4,992
Total
$
27,491
$
14,493
$
(11,856)
$
2,792
$
32,920
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans and nonperforming assets and select credit quality ratios follows:
December 31, (dollars in thousands)
2018
2017
Loans on nonaccrual status*
$
15,993
$
14,118
Loans past due 90-days-or-more and still on accrual**
145
956
Total nonperforming loans
16,138
15,074
Other real estate owned
160
115
Total nonperforming assets
$
16,298
$
15,189
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans
0.39
%
0.38
%
Nonperforming assets to total loans (including OREO)
0.39
0.38
Nonperforming assets to total assets
0.31
0.30
Credit Quality Ratios - Core Bank:
Nonperforming loans to total loans
0.40
%
0.36
%
Nonperforming assets to total loans (including OREO)
0.40
0.36
Nonperforming assets to total assets
0.32
0.28
*Loans on nonaccrual status include impaired loans.
**Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
The following table presents the recorded investment in nonaccrual loans and loans past due 90-days-or-more and still on accrual by class of loans:
Past Due 90-Days-or-More
Nonaccrual
and Still Accruing Interest*
December 31, (in thousands)
2018
2017
2018
2017
Traditional Banking:
Residential real estate:
Owner occupied
$
10,800
$
9,230
$

$

Owner occupied - correspondent
382



Nonowner occupied
669
257


Commercial real estate
2,318
3,247


Construction & land development

67


Commercial & industrial
630



Lease financing receivables




Home equity
1,095
1,217


Consumer:
Credit cards




Overdrafts




Automobile loans
75
68


Other consumer
24
32
13
19
Total Traditional Banking
15,993
14,118
13
19
Warehouse lines of credit




Total Core Banking
15,993
14,118
13
19
Republic Processing Group:
Tax Refund Solutions:
Easy Advances




Other TRS loans


4

Republic Credit Solutions


128
937
Total Republic Processing Group


132
937
Total
$
15,993
$
14,118
$
145
$
956
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both smaller balance, primarily retail, homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Nonaccrual loans are typically returned to accrual status when all the principal and interest amounts contractually due are brought current and held current for six consecutive months and future contractual payments are reasonably assured. TDRs on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.
The Bank considers the performance of the loan portfolio and its impact on the Allowance. For residential and consumer loan classes, the Bank also evaluates credit quality based on the aging status of the loan and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of December 31, 2018 and 2017:
Residential Real Estate
Consumer
Owner
Republic
December 31, 2018
Owner
Occupied -
Nonowner
Home
Credit
Automobile
Other
Credit
(in thousands)
Occupied
Correspondent
Occupied
Equity
Cards
Overdrafts
Loans
Consumer
Solutions
Performing
$
896,205
$
94,445
$
242,177
$
331,453
$
19,095
$
1,102
$
63,400
$
46,605
$
88,616
Nonperforming
10,800
382
669
1,095


75
37
128
Total
$
907,005
$
94,827
$
242,846
$
332,548
$
19,095
$
1,102
$
63,475
$
46,642
$
88,744
Residential Real Estate
Consumer
Owner
Republic
December 31, 2017
Owner
Occupied -
Nonowner
Home
Credit
Automobile
Other
Credit
(in thousands)
Occupied
Correspondent
Occupied
Equity
Cards
Overdrafts
Loans
Consumer
Solutions
Performing
$
912,335
$
116,792
$
204,824
$
346,438
$
16,078
$
974
$
65,582
$
20,450
$
65,951
Nonperforming
9,230

257
1,217


68
51
937
Total
$
921,565
$
116,792
$
205,081
$
347,655
$
16,078
$
974
$
65,650
$
20,501
$
66,888
Delinquent Loans
The following tables present the aging of the recorded investment in loans by class of loans:
30 - 59
60 - 89
90 or More
December 31, 2018
Days
Days
Days
Total
Total
(dollars in thousands)
Delinquent
Delinquent
Delinquent*
Delinquent**
Current
Total
Traditional Banking:
Residential real estate:
Owner occupied
$
1,137
$
748
$
3,640
$
5,525
$
901,480
$
907,005
Owner occupied - correspondent




94,827
94,827
Nonowner occupied
349

659
1,008
241,838
242,846
Commercial real estate
511

588
1,099
1,247,841
1,248,940
Construction & land development




175,178
175,178
Commercial & industrial


25
25
430,330
430,355
Lease financing receivables




15,031
15,031
Home equity
558

226
784
331,764
332,548
Consumer:
Credit cards
82
46
1
129
18,966
19,095
Overdrafts
223
5
2
230
872
1,102
Automobile loans

28

28
63,447
63,475
Other consumer
27
7
13
47
46,595
46,642
Total Traditional Banking
2,887
834
5,154
8,875
3,568,169
3,577,044
Warehouse lines of credit




468,695
468,695
Total Core Banking
2,887
834
5,154
8,875
4,036,864
4,045,739
Republic Processing Group:
Tax Refund Solutions:
Easy Advances






Other TRS loans
2
4
4
10
13,734
13,744
Republic Credit Solutions
5,734
1,215
128
7,077
81,667
88,744
Total Republic Processing Group
5,736
1,219
132
7,087
95,401
102,488
Total
$
8,623
$
2,053
$
5,286
$
15,962
$
4,132,265
$
4,148,227
Delinquency ratio***
0.21
%
0.05
%
0.13
%
0.38
%
* All loans past due 90-days-or-more, excluding small balance consumer loans, were on nonaccrual status.
** Delinquent status may be determined by either the number of days past due or number of payments past due.
*** Represents total loans 30-days-or-more past due by aging category divided by total loans.
30 - 59
60 - 89
90 or More
December 31, 2017
Days
Days
Days
Total
Total
(dollars in thousands)
Delinquent
Delinquent
Delinquent*
Delinquent**
Current
Total
Traditional Banking:
Residential real estate:
Owner occupied
$
2,559
$
1,166
$
1,057
$
4,782
$
916,783
$
921,565
Owner occupied - correspondent




116,792
116,792
Nonowner occupied
47

99
146
204,935
205,081
Commercial real estate
398

1,329
1,727
1,205,566
1,207,293
Construction & land development
67


67
149,998
150,065
Commercial & industrial
15


15
341,677
341,692
Lease financing receivables




16,580
16,580
Home equity
723
50
448
1,221
346,434
347,655
Consumer:
Credit cards
34
40

74
16,004
16,078
Overdrafts
230
3

233
741
974
Automobile loans
36

24
60
65,590
65,650
Other consumer
93
21
21
135
20,366
20,501
Total Traditional Banking
4,202
1,280
2,978
8,460
3,401,466
3,409,926
Warehouse lines of credit




525,572
525,572
Total Core Banking
4,202
1,280
2,978
8,460
3,927,038
3,935,498
Republic Processing Group:
Tax Refund Solutions:
Easy Advances






Other TRS loans




11,648
11,648
Republic Credit Solutions
3,631
1,073
937
5,641
61,247
66,888
Total Republic Processing Group
3,631
1,073
937
5,641
72,895
78,536
Total
$
7,833
$
2,353
$
3,915
$
14,101
$
3,999,933
$
4,014,034
Delinquency ratio***
0.20
%
0.06
%
0.10
%
0.35
%
*All loans past due 90 days-or-more, excluding small-dollar consumer loans, were on nonaccrual status.
**Delinquent status may be determined by either the number of days past due or number of payments past due.
***Represents total loans 30-days-or-more past due divided by total loans.
Impaired Loans
Information regarding the Bank’s impaired loans follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Loans with no allocated Allowance
$
19,555
$
18,540
$
21,416
Loans with allocated Allowance
21,880
27,076
31,268
Total recorded investment in impaired loans
$
41,435
$
45,616
$
52,684
Amount of the allocated Allowance
$
3,764
$
4,685
$
4,925
Average of individually impaired loans during the year
45,620
47,361
56,981
Interest income recognized during impairment
1,245
1,392
1,466
Cash basis interest income recognized



Approximately $3 million and $4 million of impaired loans at December 31, 2018 and 2017 were PCI loans. Approximately $2 million and $2 million of impaired loans at December 31, 2018 and 2017 were formerly PCI loans which became classified as “impaired” through a post-acquisition troubled debt restructuring.
The following tables present the balance in the Allowance and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2018 and 2017:
Allowance for Loan and Lease Losses
Loans
Individually
PCI with
Individually
PCI with
PCI without
December 31, 2018
Evaluated
Collectively
Post-Acquisition
Total
Evaluated
Collectively
Post-Acquisition
Post-Acquisition
Total
Allowance to
(dollars in thousands)
Excluding PCI
Evaluated
Impairment
Allowance
Excluding PCI
Evaluated
Impairment
Impairment
Loans
Total Loans
Traditional Banking:
Residential real estate:
Owner occupied
$
2,052
$
3,365
$
381
$
5,798
$
24,860
$
880,500
$
1,645
$

$
907,005
0.64
%
Owner occupied - correspondent

237

237
382
94,445


94,827
0.25
Nonowner occupied
4
1,658

1,662
2,406
240,440


242,846
0.68
Commercial real estate
294
9,727
9
10,030
8,104
1,239,915
919
2
1,248,940
0.80
Construction & land development
4
2,551

2,555
65
175,113


175,178
1.46
Commercial & industrial
130
2,743

2,873
1,020
429,310

25
430,355
0.67
Lease financing receivables

158

158

15,031


15,031
1.05
Home equity
286
3,117
74
3,477
1,361
331,101
86

332,548
1.05
Consumer:
Credit cards

1,140

1,140

19,095


19,095
5.97
Overdrafts

1,102

1,102

1,102


1,102
100.00
Automobile loans
91
633

724
91
63,384


63,475
1.14
Other consumer
421
170

591
449
46,190
3

46,642
1.27
Total Traditional Banking
3,282
26,601
464
30,347
38,738
3,535,626
2,653
27
3,577,044
0.85
Warehouse lines of credit

1,172

1,172

468,695


468,695
0.25
Total Core Banking
3,282
27,773
464
31,519
38,738
4,004,321
2,653
27
4,045,739
0.78
Republic Processing Group:
Tax Refund Solutions:
Easy Advances










Other TRS loans

107

107

13,744


13,744
0.78
Republic Credit Solutions
18
13,031

13,049
44
88,700


88,744
14.70
Total Republic Processing Group
18
13,138

13,156
44
102,444


102,488
12.84
Total
$
3,300
$
40,911
$
464
$
44,675
$
38,782
$
4,106,765
$
2,653
$
27
$
4,148,227
1.08
%
Allowance for Loan and Lease Losses
Loans
Individually
PCI with
Individually
PCI with
PCI without
December 31, 2017
Evaluated
Collectively
Post-Acquisition
Total
Evaluated
Collectively
Post-Acquisition
Post-Acquisition
Total
Allowance to
(dollars in thousands)
Excluding PCI
Evaluated
Impairment
Allowance
Excluding PCI
Evaluated
Impairment
Impairment
Loans
Total L

PREMISES AND EQUIPMENT

PREMISES AND EQUIPMENT12 Months Ended
Dec. 31, 2018
PREMISES AND EQUIPMENT
PREMISES AND EQUIPMENT5.
A summary of the cost and accumulated depreciation of premises and equipment follows:
December 31, (in thousands)
2018
2017
Land
$
4,185
$
4,185
Buildings and improvements
35,264
34,513
Furniture, fixtures and equipment
43,245
40,550
Leasehold improvements
19,638
18,760
Total premises and equipment
102,332
98,008
Less: Accumulated depreciation and amortization
59,206
55,420
Premises and equipment, net
$
43,126
$
42,588
The Company held three former banking centers for sale as of December 31, 2018. The Company closed its Hudson, Florida banking center in January 2015 and has held the property for sale since closing. Additionally, the Company obtained two Florida-based, former banking centers in its May 17, 2016 Cornerstone acquisition. The Company carried all three former banking centers at a value of $2 million, inclusive of accumulated depreciation, at December 31, 2018.
In 2018, the Company sold its banking center in Port Richey, Florida and recognized a $14,000 loss on the transaction. The premises of the banking center were carried at approximately $778,000, which equated to the total cost of the premises less accumulated depreciation.
Depreciation expense related to premises and equipment follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Depreciation expense
$
9,347
$
8,472
$
7,304

GOODWILL AND CORE DEPOSIT INTAN

GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS12 Months Ended
Dec. 31, 2018
GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS6.
A progression of the balance for goodwill follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Beginning of period
$
16,300
$
16,300
$
10,168
Acquired goodwill


6,132
Impairment



End of period
$
16,300
$
16,300
$
16,300
The goodwill balance relates entirely to the Company’s Traditional Banking operations.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2018 and 2017, the Company’s Core Banking reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value. Therefore, the Company did not complete the two-step impairment test as of December 31, 2018, 2017 and 2016.
The Company recorded a $1 million core deposit intangible asset in association with its May 17, 2016 Cornerstone acquisition. For the years ending December 31, 2018, 2017 and 2016, aggregate CDI amortization expense was immaterial to the Company’s financial statements.

INTEREST RATE SWAPS

INTEREST RATE SWAPS12 Months Ended
Dec. 31, 2018
INTEREST RATE SWAPS
INTEREST RATE SWAPS7.
Interest rate swap derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a cash flow hedging relationship. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss is recorded as a component of OCI. For derivatives not designated as hedges, the gain or loss is recognized in current period earnings.
Interest Rate Swaps Used as Cash Flow Hedges
The Bank entered into two interest rate swap agreements (“swaps”) during 2013 as part of its interest rate risk management strategy. The Bank designated the swaps as cash flow hedges intended to reduce the variability in cash flows attributable to either FHLB advances tied to the 3-month LIBOR or the overall changes in cash flows on certain money market deposit accounts tied to 1-month LIBOR. The counterparty for both swaps met the Bank’s credit standards and the Bank believes that the credit risk inherent in the swap contracts is not significant.
The swaps were determined to be fully effective during all periods presented; therefore, no amount of ineffectiveness was included in net income. The aggregate fair value of the swaps is recorded in other liabilities with changes in fair value recorded in OCI. The amount included in AOCI would be reclassified to current earnings should the hedge no longer be considered effective. The Bank expects the hedges to remain fully effective during the remaining term of the swaps.
The following table reflects information about swaps designated as cash flow hedges as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Unrealized
Unrealized
Notional
Pay
Receive
Assets /
Gain (Loss)
Assets /
Gain (Loss)
(dollars in thousands)
Amount
Rate
Rate
Term
(Liabilities)
AOCI
(Liabilities)
in AOCI
Interest rate swap on money market deposits
$
10,000
2.17
%
1M LIBOR
12/2013 - 12/2020
$
58
$
45
$
(60)
$
(25)
Interest rate swap on FHLB advance
10,000
2.33
%
3M LIBOR
12/2013 - 12/2020
57
45
(31)
(48)
Total
$
20,000
$
115
$
90
$
(91)
$
(73)
The following table reflects the total interest expense recorded on these swap transactions in the consolidated statements of income during the years ended December 31, 2018, 2017 and 2016:
December 31, (in thousands)
2018
2017
2016
Interest rate swap on money market deposits
$
18
$
109
$
168
Interest rate swap on FHLB advance
10
110
164
Total interest expense on swap transactions
$
28
$
219
$
332
The following table presents the net gains (losses) recorded in accumulated OCI and the consolidated statements of income relating to the swaps for the years ended December 31, 2018, 2017 and 2016:
December 31, (in thousands)
2018
2017
2016
Gains (losses) recognized in OCI on derivative (effective portion)
$
178
$
83
$
(125)
Losses reclassified from OCI on derivative (effective portion)
(28)
(219)
(332)
Gains (losses) recognized in income on derivative (ineffective portion)



The estimated net amount of the existing losses reported in AOCI at December 31, 2018 expected to be reclassified into earnings within the next 12 months is considered immaterial .
Non-hedge Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or client owes the Bank, and results in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty, and therefore, has no credit risk.
A summary of the Bank’s interest rate swaps related to clients as of December 31, 2018 and 2017 is included in the following table:
2018
2017
Notional
Notional
December 31, (in thousands)
Bank Position
Amount
Fair Value
Amount
Fair Value
Interest rate swaps with Bank clients - Assets
Pay variable/receive fixed
$
26,398
$
1,264
$
48,942
$
312
Interest rate swaps with Bank clients - Liabilities
Pay variable/receive fixed
54,718
(908)
12,477
(228)
Interest rate swaps with Bank clients - Total
Pay variable/receive fixed
$
81,116
$
356
$
61,419
$
84
Offsetting interest rate swaps with institutional swap dealer
Pay fixed/receive variable
81,116
(356)
61,419
(84)
Total
$
162,232
$

$
122,838
$

The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with dealer counterparties when such net loss positions exceed $250,000. The fair value of cash or investment securities pledged as collateral by the Bank to cover such net loss positions totaled $0 and $1.5 million at December 31, 2018 and 2017.

DEPOSITS

DEPOSITS12 Months Ended
Dec. 31, 2018
DEPOSITS
DEPOSITS8.
Ending deposit balances at December 31, 2018 and 2017 were as follows:
December 31, (in thousands)
2018
2017
Core Bank:
Demand
$
937,402
$
944,812
Money market accounts
717,954
546,998
Savings
187,868
182,800
Individual retirement accounts(1)
53,524
47,982
Time deposits, $250 and over(1)
84,104
77,891
Other certificates of deposit(1)
239,324
189,661
Reciprocal money market and time deposits(1)(2)
217,153
346,613
Brokered deposits(1)
9,394
72,718
Total Core Bank interest-bearing deposits
2,446,723
2,409,475
Total Core Bank noninterest-bearing deposits
971,422
988,537
Total Core Bank deposits
3,418,145
3,398,012
Republic Processing Group:
Money market accounts
5,453
1,641
Total RPG interest-bearing deposits
5,453
1,641
Brokered prepaid card deposits
4,350
1,509
Other noninterest-bearing deposits
28,197
31,996
Total RPG noninterest-bearing deposits
32,547
33,505
Total RPG deposits
38,000
35,146
Total deposits
$
3,456,145
$
3,433,158
(1)
Represents a time deposit.
(2)
Prior to June 2018, reciprocal deposits were classified as “brokered deposits.” The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018, provides that most reciprocal deposits are no longer classified as brokered deposits if the Bank meets certain regulatory criteria.
Time deposits at or above the FDIC insured limit of $250,000 are presented in the table below:
December 31, (in thousands)
2018
2017
Time deposits of $250 or more
$
84,104
$
77,891
At December 31, 2018, the scheduled maturities and weighted average rate of all time deposits, including brokered and reciprocal certificates of deposit, were as follows:
Weighted
Average
Year (dollars in thousands)
Principal
Rate
2019
$
177,702
1.42
%
2020
91,045
1.86
2021
53,494
2.17
2022
34,014
2.12
2023
60,220
2.93
Thereafter


Total
$
416,475
1.89

SECURITIES SOLD UNDER AGREEMENT

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE12 Months Ended
Dec. 31, 2018
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE9.
Securities sold under agreements to repurchase consist of short-term excess funds from correspondent banks, repurchase agreements and overnight liabilities to deposit clients arising from the Bank’s treasury management program. While comparable to deposits in their transactional nature, these overnight liabilities to clients are in the form of repurchase agreements. Repurchase agreements collateralized by securities are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. Should the fair value of currently pledged securities fall below the associated repurchase agreements, the Bank would be required to pledge additional securities. To mitigate the risk of under collateralization, the Bank typically pledges at least two percent more in securities than the associated repurchase agreements. All such securities are under the Bank’s control.
At December 31, 2018 and 2017, all securities sold under agreements to repurchase had overnight maturities. Additional information regarding securities sold under agreements to repurchase follows:
December 31, (dollars in thousands)
2018
2017
Outstanding balance at end of period
$
182,990
$
204,021
Weighted average interest rate at end of period
0.83
%
0.31
%
Fair value of securities pledged:
U.S. Treasury securities and U.S. Government agencies
$
110,854
$
71,824
Mortgage backed securities - residential
84,657
83,452
Collateralized mortgage obligations
10,136
84,693
Total securities pledged
$
205,647
$
239,969
Additional information regarding securities sold under agreements to repurchase for the years ended December 31, 2018, 2017 and 2016 follows:
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Average outstanding balance during the period
$
225,145
$
219,515
$
280,296
Average interest rate during the period
%
0.23
%
0.02
%
Maximum outstanding at any month end during the period
$
260,147
$
293,944
$
367,373

FEDERAL HOME LOAN BANK ADVANCES

FEDERAL HOME LOAN BANK ADVANCES12 Months Ended
Dec. 31, 2018
FEDERAL HOME LOAN BANK ADVANCES
FEDERAL HOME LOAN BANK ADVANCES10.
At December 31, 2018 and 2017, FHLB advances were as follows:
December 31, (dollars in thousands)
2018
2017
Overnight advances
$
510,000
$
330,000
Variable interest rate advance indexed to 3-Month LIBOR plus 0.14%
10,000
10,000
Fixed interest rate advances
290,000
397,500
Total FHLB advances
$
810,000
$
737,500
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity. The Company incurred an $846,000 prepayment penalty on the payoff of $50 million in FHLB advances during 2016, with no similar penalty incurred in 2018 or 2017.
FHLB advances are collateralized by a blanket pledge of eligible real estate loans. At December 31, 2018 and 2017, Republic had available borrowing capacity of $254 million and $347 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million and $125 million available through various other financial institutions as of December 31, 2018 and 2017.
Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such advances are detailed below:
Weighted
Average
Year (dollars in thousands)
Principal
Rate
2019 (Overnight)
$
510,000
2.45
%
2019 (Term)
110,000
1.91
2020
120,000
1.81
2021
30,000
1.93
2022
20,000
2.12
2023
20,000
2.56
2024


Thereafter


Total
$
810,000
2.26
%
Due to their nature, the Bank considers average balance information more meaningful than period-end balances for its overnight borrowings from the FHLB. Information regarding overnight FHLB advances follows:
December 31, (dollars in thousands)
2018
2017
Outstanding balance at end of period
$
510,000
$
330,000
Weighted average interest rate at end of period
2.45
%
1.42
%
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Average outstanding balance during the period
$
202,830
$
141,918
$
91,087
Average interest rate during the period
1.98
%
1.09
%
0.43
%
Maximum outstanding at any month end during the period
$
560,000
$
625,000
$
495,000
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
December 31, (in thousands)
2018
2017
First lien, single family residential real estate
$
1,129,588
$
1,123,402
Home equity lines of credit
311,419
320,649

SUBORDINATED NOTE

SUBORDINATED NOTE12 Months Ended
Dec. 31, 2018
SUBORDINATED NOTE
SUBORDINATED NOTE11.
In 2005, RBCT, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TRS. The sole asset of RBCT represents the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. The TPS are treated as part of Republic’s Tier I Capital.
The subordinated note and related interest expense are included in Republic’s consolidated financial statements. The subordinated note paid a fixed interest rate of 6.015% through September 30, 2015 and adjusted to 3-month LIBOR + 1.42% thereafter. The subordinated note matures on December 31, 2035 and is now redeemable at the Company’s option on a quarterly basis. The Company chose not to redeem the subordinated note on January 1, 2019, and carried the note at a cost of 3-month LIBOR + 1.42%, or 4.22%, at December 31, 2018.
As a result of its acquisition of Cornerstone Bancorp, Inc. on May 17, 2016, Republic became the 100% successor owner of Cornerstone Capital Trust 1 (“CCT1”), an unconsolidated finance subsidiary. In 2006, CCT1 issued $4 million of adjustable-rate TPS due December 15, 2036. As permitted under the terms of CCT1’s governing documents, Republic redeemed these securities at the par amount of approximately $4 million, without penalty, on September 15, 2016.

OFF BALANCE SHEET RISKS, COMMIT

OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES12 Months Ended
Dec. 31, 2018
OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES12.
The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. These financial instruments primarily include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.
The Company also extends binding commitments to clients and prospective clients. Such commitments assure a borrower of financing for a specified period of time at a specified rate. Additionally, the Company makes binding purchase commitments to third party loan correspondent originators. These commitments assure that the Company will purchase a loan from such correspondent originators at a specific price for a specific period of time. The risk to the Company under such loan commitments is limited by the terms of the contracts. For example, the Company may not be obligated to advance funds if the client’s financial condition deteriorates or if the client fails to meet specific covenants.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding.
The following table presents the Company’s commitments, exclusive of Mortgage Banking loan commitments for each year ended:
December 31, (in thousands)
2018
2017
Unused warehouse lines of credit
$
591,305
$
525,328
Unused home equity lines of credit
377,277
367,887
Unused loan commitments - other
720,645
598,002
Standby letters of credit
10,642
12,643
FHLB letter of credit
10,000
10,000
Total commitments
$
1,709,869
$
1,513,860
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material.

STOCKHOLDERS' EQUITY AND REGULA

STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL MATTERS12 Months Ended
Dec. 31, 2018
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL MATTERS
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL MATTERS13.
Common Stock — The Company’s Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.
Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At December 31, 2018, the Bank could, without prior approval, declare dividends of approximately $111 million.
Regulatory Capital Requirements — The Parent Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2018 and 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
Effective January 1, 2015 the Company and the Bank became subject to the capital regulations in accordance with Basel III. These regulations established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 Risk-Based Capital ratio and a new capital conservation buffer. The regulations included revisions to the definition of capital and changes in the risk weighting of certain assets. For prompt corrective action, the new regulations establish definitions of “well capitalized” as a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio and a 5.0% Tier 1 Leverage ratio.
Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, the Company and Bank must hold a capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above their minimum Risk-Based Capital requirements. The capital conservation buffer phased in from 2016 to 2019 based on the following schedule: a capital conservation buffer of 0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and a fully phased in capital conservation buffer of 2.5% on January 1, 2019. The capital ratios for capital adequacy and “well capitalized” do not include considerations of the capital conservation buffer.
is
Minimum Requirement
to be Well Capitalized
Minimum Requirement
Under Prompt
for Capital Adequacy
Corrective Action
Actual
Purposes
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2018
Total capital to risk-weighted assets
Republic Bancorp, Inc.
$
757,726
16.80
%
$
360,911
8.00
%
NA
NA
Republic Bank & Trust Company
654,258
14.52
360,359
8.00
$
450,449
10.00
%
Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.
673,051
14.92
203,012
4.50
NA
NA
Republic Bank & Trust Company
609,583
13.53
202,702
4.50
292,792
6.50
Tier 1 (core) capital to risk-weighted assets
Republic Bancorp, Inc.
713,051
15.81
270,683
6.00
NA
NA
Republic Bank & Trust Company
609,583
13.53
270,269
6.00
360,359
8.00
Tier 1 leverage capital to average assets
Republic Bancorp, Inc.
713,051
14.11
202,119
4.00
NA
NA
Republic Bank & Trust Company
609,583
12.06
202,126
4.00
252,658
5.00
Minimum Requirement
to be Well Capitalized
Minimum Requirement
Under Prompt
for Capital Adequacy
Corrective Action
Actual
Purposes
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2017
Total capital to risk-weighted assets
Republic Bancorp, Inc.
$
694,369
16.04
%
$
346,215
8.00
%
NA
NA
Republic Bank & Trust Company
591,592
13.69
345,589
8.00
$
431,987
10.00
%
Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.
612,315
14.15
194,746
4.50
NA
NA
Republic Bank & Trust Company
548,823
12.70
194,394
4.50
280,791
6.50
Tier 1 (core) capital to risk-weighted assets
Republic Bancorp, Inc.
651,600
15.06
259,662
6.00
NA
NA
Republic Bank & Trust Company
548,823
12.70
259,192
6.00
345,589
8.00
Tier 1 leverage capital to average assets
Republic Bancorp, Inc.
651,600
13.21
197,309
4.00
NA
NA
Republic Bank & Trust Company
548,823
11.15
196,961
4.00
246,201
5.00

FAIR VALUE

FAIR VALUE12 Months Ended
Dec. 31, 2018
FAIR VALUE
FAIR VALUE14.
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Available-for-sale debt securities: Except for the Bank’s private label mortgage backed security and its TRUP investment, the fair value of available-for-sale debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
The Bank’s private label mortgage backed security remains illiquid, and as such, the Bank classifies this security as a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement . Based on this determination, the Bank utilized an income valuation model (present value model) approach in determining the fair value of this security.
See in this section of the filing under Footnote 2 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage backed security.
The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value at December 31, 2018. The Company’s TRUP investment is considered highly illiquid and also valued using Level 3 inputs, as the most recent bid price for this instrument is not always considered generally observable.
Equity securities with readily determinable fair value: Quoted market prices in an active market are available for the Bank’s CRA mutual fund investment and fall within Level 1 of the fair value hierarchy.
The fair value of the Company’s Freddie Mac preferred stock is determined by matrix pricing, as described above (Level 2 inputs).
Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.
Consumer loans held for sale, at fair value: From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold 100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after origination. The Bank carried all unsold loans under the program as “held for sale” on the its balance sheet. At the initiation of this program in 2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter marked to market on a monthly basis.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any new loans, and the subsequent sale of all recently-originated loans under this program, while the two parties evaluate the future offering of this product due to changes in the applicable state law impacting the product. Concurrent with the suspension of this program, the Bank reclassified approximately $2.2 million of these loans from held for sale on the balance sheet into the held for investment category and revalued these loans accordingly.
Through the first quarter of 2018, the fair value for these loans was based on contractual sales terms, which are classified as Level 3 inputs. As of December 31, 2018, the fair value of these loans was based on the discounted cash flows of the underlying loans, which are also classified as Level 3 inputs.
From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted a credit-card product to generally subprime borrowers across the United States through one third-party marketer/servicer. For outstanding cards, RCS sold 90% of the balances generated within two business days of each transaction occurrence to its third-party marketer/servicer and retained the remaining 10% interest. During the second quarter of 2018, the Bank and its third-party marketer/servicer discontinued the marketing of the product to potential new clients, as the two parties deliberated the future direction of the program. During the third quarter of 2018, the Bank and its third-party marketer/servicer reached an agreement in concept to sell 100% of the existing portfolio to an unrelated third party. As a result, the Bank reclassified its 10% interest with a book value of $3.5 million into a held-for-sale category and charged the entire RCS credit-card portfolio down to its estimated net realizable value of $1.5 million. The sale of this portfolio was settled in January 2019.
Mortgage Banking derivatives : Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts (“forward contracts”) and interest rate lock loan commitments. The fair value of the Bank’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. Forward contracts and rate-lock loan commitments are classified as Level 2 in the fair value hierarchy.
Interest rate swap agreements: Interest rate swaps are recorded at fair value on a recurring basis. The Company values its interest rate swaps using a third-party valuation service and classifies such valuations as Level 2. Valuations of these interest rate swaps are also received from the relevant dealer counterparty and validated against the Company’s calculations. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.
Impaired loans: Collateral-dependent impaired loans generally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Collateral-dependent loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Premises carried at fair value: Premises and equipment are accounted for at the lower of cost less accumulated depreciation or fair value less estimated costs to sell. The fair value of Bank premises is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other real estate owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals or BPOs. These appraisals or BPOs may utilize a single approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the process by the independent experts to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for collateral-dependent impaired loans, impaired premises and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Once the appraisal is received, a member of the Bank’s CCAD reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral. Back tests are performed for each collateral class, e.g., residential real estate or commercial real estate, and may lead to additional adjustments to the value of unliquidated collateral of similar class.
Mortgage servicing rights: On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded, and the respective individual tranche is carried at fair value. If the carrying amount of an individual tranche does not exceed fair value, impairment is reversed if previously recognized and the carrying value of the individual tranche is based on the amortization method. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and can generally be validated against available market data (Level 2). There were no MSR tranches carried at fair value at December 31, 2018 and 2017.
Assets and liabilities measured at fair value on a recurring basis , including financial assets and liabilities for which the Bank has elected the fair value option, are summarized below:
Fair Value Measurements at
December 31, 2018 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$

$
216,873
$

$
216,873
Private label mortgage backed security


3,712
3,712
Mortgage backed securities - residential

169,209

169,209
Collateralized mortgage obligations

72,811

72,811
Corporate bonds

9,058

9,058
Trust preferred security


4,075
4,075
Total available-for-sale debt securities
$

$
467,951
$
7,787
$
475,738
Equity securities with readily determinable fair value:
Freddie Mac preferred stock
$

$
410
$

$
410
Community Reinvestment Act mutual fund
2,396


2,396
Total equity securities with readily determinable fair value
$
2,396
$
410
$

$
2,806
Mortgage loans held for sale
$

$
8,971
$

$
8,971
Consumer loans held for investment


1,922
1,922
Rate lock loan commitments

356

356
Interest rate swap agreements

1,264

1,264
Financial liabilities:
Mandatory forward contracts
$

$
262
$

$
262
Interest rate swap agreements

1,149

1,149
Fair Value Measurements at
December 31, 2017 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$

$
307,592
$

$
307,592
Private label mortgage backed security


4,449
4,449
Mortgage backed securities - residential

106,374

106,374
Collateralized mortgage obligations

87,163

87,163
Corporate bonds

15,125

15,125
Trust preferred security


3,600
3,600
Total available-for-sale debt securities
$

$
516,254
$
8,049
$
524,303
Equity securities with readily determinable fair value:
Freddie Mac preferred stock
$

$
473
$

$
473
Community Reinvestment Act mutual fund
2,455


2,455
Total equity securities with readily determinable fair value
$
2,455
$
473
$

$
2,928
Mortgage loans held for sale
$

$
5,761
$

$
5,761
Consumer loans held for sale


2,677
2,677
Rate lock loan commitments

310

310
Interest rate swap agreements

312

312
Financial liabilities:
Mandatory forward contracts
$

$
9
$

$
9
Interest rate swap agreements

403

403
All transfers between levels are generally recognized at the end of each quarter. There were no transfers into or out of Level 1, 2 or 3 assets during the years ended December 31, 2018 and 2017.
The following table presents a reconciliation of the Bank’s Private Label Mortgage Backed Security measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended December 31, 2018, 2017 and 2016:
Private Label Mortgage Backed Security
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
4,449
$
4,777
$
5,132
Total gains or losses included in earnings:
Net change in unrealized gain
(20)
298
(9)
Recovery of actual losses previously recorded
152


Principal paydowns
(869)
(626)
(346)
Balance, end of period
$
3,712
$
4,449
$
4,777
The fair value of the Bank’s single private label mortgage backed security is supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involved several steps: 1) detailed collateral analysis of the underlying mortgages, including consideration of geographic location, original loan-to-value and the weighted average FICO score of the borrowers; 2) collateral performance projections for each pool of mortgages underlying the security (probability of default, severity of default, and prepayment probabilities) and 3) discounted cash flow modeling.
The significant unobservable inputs in the fair value measurement of the Bank’s single private label mortgage backed security are prepayment rates, probability of default and loss severity in the event of default. Significant fluctuations in any of those inputs in isolation would result in a significantly different fair value measurement.
The following tables present quantitative information about recurring Level 3 fair value measurements at December 31, 2018 and 2017:
Fair
Valuation
December 31, 2018 (dollars in thousands)
Value
Technique
Unobservable Inputs
Range
Private label mortgage backed security
$
3,712
Discounted cash flow
(1) Constant prepayment rate
6.5% - 8.9%
(2) Probability of default
1.8% - 4.7%
(3) Loss severity
50% - 75%
Fair
Valuation
December 31, 2017 (dollars in thousands)
Value
Technique
Unobservable Inputs
Range
Private label mortgage backed security
$
4,449
Discounted cash flow
(1) Constant prepayment rate
3.5% - 6.5%
(2) Probability of default
1.8% - 8.0%
(3) Loss severity
60% - 85%
Trust Preferred Security
The Company invested in its TRUP in November 2015. The following table presents a reconciliation of the Company’s TRUP measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ending December 31, 2018, 2017 and 2016:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
3,600
$
3,200
$
3,405
Total gains or losses included in earnings:
Discount accretion
40
44
44
Net change in unrealized gain
435
356
(249)
Balance, end of period
$
4,075
$
3,600
$
3,200
The fair value of the Company’s TRUP investment is based on the most recent bid price for this instrument, as provided by a third-party broker.
Mortgage Loans Held for Sale
The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more nor on nonaccrual as of December 31, 2018 and 2017.
As of December 31, 2018 and 2017, the aggregate fair value, contractual balance (including accrued interest), and unrealized gain was as follows:
December 31, (in thousands)
2018
2017
Aggregate fair value
$
8,971
$
5,761
Contractual balance
8,676
5,668
Unrealized gain
295
93
The total amount of gains and losses from changes in fair value of mortgage loans held for sale included in earnings for 2018, 2017 and 2016 are presented in the following table:
Years Ended December 31, (in thousands)
2018
2017
2016
Interest income
$
402
$
346
$
200
Change in fair value
203
(1)
4
Total included in earnings
$
605
$
345
$
204
Consumer Loans Held for Investment/Sale
Prior to the second quarter of 2018, all consumer installment loans originated through RCS were originated with the intent to sale and carried at fair value. During the second quarter of 2018, approximately $2 million of these loans were transferred from the held for sale category into the held for investment category and recorded at their fair market value as of the date of transfer. Interest income for these loans is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of December 31, 2018 and 2017.
A reconciliation of the Company’s consumer loans measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 30, 2018 and 2017 is included in Footnote 3 of this section of the filing.
Prior to the second quarter of 2018, the significant unobservable inputs in the fair value measurement of the Bank’s consumer loans were the net contractual premiums and level of loans sold at a discount price. As of December 31, 2018, the significant unobservable inputs in the fair value measurement of the Bank’s consumer loans were the constant prepayment rate, probability of default, and loss severity for these loans under a discounted-cash-flow model. Significant fluctuations in any of these inputs in isolation would result in a significantly lower/higher fair value measurement.
The following table presents quantitative information about recurring Level 3 fair value measurement inputs for short-term installment loans as of December 31, 2018 and 2017:
Fair
Valuation
December 31, 2018 (dollars in thousands)
Value
Technique
Unobservable Inputs
Rate
Consumer loans held for investment
$
1,922
Discounted Cash Flows
(1) Constant prepayment rate
15.0%
(2) Probability of default
45.0%
(3) Loss severity
20.0%
Fair
Valuation
December 31, 2017 (dollars in thousands)
Value
Technique
Unobservable Inputs
Rate
Consumer loans held for sale
$
2,677
Contractual Sales Terms
(1) Net Premium
0.9%
(2) Discounted Sales
5.0%
As of December 31, 2018 and 2017, the aggregate fair value, contractual balance, and unrealized gain (loss) on consumer loans held for sale, at fair value, was as follows:
December 31, (in thousands)
2018
2017
Aggregate fair value
$
1,922
$
2,677
Contractual balance
2,170
2,535
Unrealized (loss) gain
(248)
142
The total amount of net gains from changes in fair value included in earnings for the years ended December 31, 2018, 2017, and 2016 for consumer loans held for sale, at fair value, are presented in the following table:
Years Ended December 31, (in thousands)
2018
2017
2016
Interest income
$
602
$
962
$
700
Change in fair value
(390)
29
114
Total included in earnings
$
212
$
991
$
814
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at
December 31, 2018 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Consumer loans held for sale
$

$

$
1,249
$
1,249
Impaired loans:
Residential real estate:
Owner occupied
$

$

$
4,708
$
4,708
Nonowner occupied


1,007
1,007
Commercial real estate


1,255
1,255
Commercial & industrial


609
609
Home equity


356
356
Total impaired loans*
$

$

$
7,935
$
7,935
Premises
$

$

$
1,694
$
1,694
Fair Value Measurements at
December 31, 2017 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Impaired loans:
Residential real estate:
Owner occupied
$

$

$
4,107
$
4,107
Nonowner occupied


237
237
Commercial real estate


1,366
1,366
Home equity


393
393
Total impaired loans*
$

$

$
6,103
$
6,103
Other real estate owned:
Residential real estate
$

$

$
83
$
83
Total other real estate owned
$

$

$
83
$
83
Premises
$

$

$
3,017
$
3,017
* The difference between the carrying value and the fair value of impaired loans measured at fair value is reconciled in a subsequent table of this Footnote.
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2018 and 2017:
Range
Fair
Valuation
Unobservable
(Weighted
December 31, 2018 (dollars in thousands)
Value
Technique
Inputs
Average)
Consumer loans held for sale
$
1,249
Sales comparison approach
Adjustments determined for differences between comparable sales
6% (6%)
Impaired loans - residential real estate owner occupied
$
4,708
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 67% (9%)
Impaired loans - residential real estate nonowner occupied
$
1,007
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 27% (15%)
Impaired loans - commercial real estate
$
123
Sales comparison approach
Adjustments determined for differences between comparable sales
21% (21%)
Impaired loans - commercial real estate
$
1,132
Income approach
Adjustments for differences between net operating income expectations
17% (17%)
Impaired loans - commercial & industrial
$
609
Sales comparison approach
Adjustments determined for differences between comparable sales
3% (3%)
Impaired loans - home equity
$
356
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 22% (8%)
Premises
$
1,694
Sales comparison approach
Adjustments determined for differences between comparable sales
27% - 72% (40%)
Range
Fair
Valuation
Unobservable
(Weighted
December 31, 2017 (dollars in thousands)
Value
Technique
Inputs
Average)
Impaired loans - residential real estate owner occupied
$
4,107
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 54% (10%)
Impaired loans - residential real estate nonowner occupied
$
237
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 8% (5%)
Impaired loans - commercial real estate
$
79
Sales comparison approach
Adjustments determined for differences between comparable sales
21% (21%)
Impaired loans - commercial real estate
$
1,287
Income approach
Adjustments for differences between net operating income expectations
17% (17%)
Impaired loans - home equity
$
393
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 23% (15%)
Other real estate owned - residential real estate
$
83
Sales comparison approach
Adjustments determined for differences between comparable sales
86% (86%)
Premises
$
3,017
Sales comparison approach
Adjustments determined for differences between comparable sales
4% - 67% (21%)
Consumer Loans Held for Sale
Details of consumer loans held for sale follow:
December 31, (in thousands)
December 31, 2018
Carrying amount of loans measured at fair value
$
2,867
Estimated discount for loan losses
(1,618)
Total fair value
$
1,249
Impaired Loans
Collateral-dependent impaired loans are generally measured for impairment using the fair value for reasonable disposition of the underlying collateral. The Bank’s practice is to obtain new or updated appraisals or BPOs on the loans subject to the initial impairment review and then to evaluate the need for an update to this value on an as-necessary or possibly annual basis thereafter (depending on the market conditions impacting the value of the collateral). The Bank may discount the valuation amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal or BPO is not available at the time of a loan’s impairment review, the Bank may apply a discount to the existing value of an old valuation to reflect the property’s current estimated value if it is believed to have deteriorated in either: (i) the physical or economic aspects of the subject property or (ii) material changes in market conditions. The impairment review generally results in a partial charge-off of the loan if fair value less selling costs are below the loan’s carrying value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Impaired collateral-dependent loans are as follows:
December 31, (in thousands)
2018
2017
Carrying amount of loans measured at fair value
$
7,380
$
5,358
Estimated selling costs considered in carrying amount
913
752
Valuation allowance
(358)
(7)
Total fair value
$
7,935
$
6,103
Years Ended December 31, (in thousands)
2018
2017
2016
Provisions on collateral-dependent, impaired loans
$
1,629
$
169
$
552
Other Real Estate Owned
Other real estate owned, which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is determined from external appraisals or BPOs using judgments and estimates of external professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3.
Details of other real estate owned carrying value and write downs follow:
December 31, (in thousands)
2018
2017
2016
Other real estate owned carried at fair value
$

$
83
$
400
Other real estate owned carried at cost
160
32
991
Total carrying value of other real estate owned
$
160
$
115
$
1,391
Other real estate owned write-downs during the years ended
$

$
155
$
270
Premises
The Company’s Traditional Banking segment classified three of its former banking centers as held for sale as of December 31, 2018, with one additional banking center classified as held for sale as of December 31, 2017 and sold during 2018. Impairment charges are recorded when the value of a piece of property is reappraised or reassessed below the property’s then-carrying value. Impairment charges related to these properties were as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Impairment charges on premises
$
482
$
1,175
$
191
The carrying amounts and estimated fair values of financial instruments, at December 31, 2018 and 2017 are as follows:
Fair Value Measurements at
December 31, 2018:
Total
Carrying
Fair
(in thousands)
Value
Level 1
Level 2
Level 3
Value
Assets:
Cash and cash equivalents
$
351,474
$
351,474
$

$

$
351,474
Available-for-sale debt securities
475,738

467,951
7,787
475,738
Held-to-maturity debt securities
65,227

64,858

64,858
Equity securities with readily determinable fair values
2,806
2,396
410

2,806
Mortgage loans held for sale, at fair value
8,971

8,971

8,971
Consumer loans held for sale, at the lower of cost or fair value
12,838

12,838

12,838
Loans, net
4,103,552


4,062,457
4,062,457
Federal Home Loan Bank stock
32,067



NA
Accrued interest receivable
13,942

13,942

13,942
Rate lock loan commitments
356

356

356
Interest rate swap agreements
1,264

1,264

1,264
Liabilities:
Noninterest-bearing deposits
$
1,003,969

$
1,003,969

$
1,003,969
Transaction deposits
2,035,701

2,035,701

2,035,701
Time deposits
416,475

412,477

412,477
Securities sold under agreements to repurchase and other short-term borrowings
182,990

182,990

182,990
Federal Home Loan Bank advances
810,000

804,251

804,251
Subordinated note
41,240

33,724

33,724
Accrued interest payable
1,084

1,084

1,084
Mandatory forward contracts
262

262

262
Interest rate swap agreements
1,149

1,149

1,149
NA - Not applicable
Fair Value Measurements at
December 31, 2017:
Total
Carrying
Fair
(in thousands)
Value
Level 1
Level 2
Level 3
Value
Assets:
Cash and cash equivalents
$
299,351
$
299,351
$

$

$
299,351
Available-for-sale debt securities
524,303

516,254
8,049
524,303
Held-to-maturity debt securities
64,227

65,133

65,133
Equity securities with readily determinable fair values
2,928
2,455
473

2,928
Mortgage loans held for sale, at fair value
5,761

5,761

5,761
Consumer loans held for sale, at fair value
2,677


2,677
2,677
Consumer loans held for sale, at the lower of cost or fair value
8,551

8,551

8,551
Loans, net
3,971,265


3,938,998
3,938,998
Federal Home Loan Bank stock
32,067



NA
Accrued interest receivable
12,082

12,082

12,082
Rate lock loan commitments
310

310

310
Interest rate swap agreements
312

312

312
Liabilities:
Noninterest-bearing deposits
$
1,022,042

$
1,022,042

$
1,022,042
Transaction deposits
2,049,493

2,049,493

2,049,493
Time deposits
361,623

358,627

358,627
Securities sold under agreements to repurchase and other short-term borrowings
204,021

204,021

204,021
Federal Home Loan Bank advances
737,500

730,712

730,712
Subordinated note
41,240

31,763

31,763
Accrued interest payable
1,100

1,100

1,100
Mandatory forward contracts
9

9

9
Interest rate swap agreements
403

403

403
NA - Not applicable

MORTGAGE BANKING ACTIVITIES

MORTGAGE BANKING ACTIVITIES12 Months Ended
Dec. 31, 2018
MORTGAGE BANKING ACTIVITIES
MORTGAGE BANKING ACTIVITIES15.
Mortgage Banking activities primarily include residential mortgage originations and servicing.
Activity for mortgage loans held for sale was as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
5,761
$
11,662
$
4,083
Origination of mortgage loans held for sale
176,916
160,091
216,812
Transferred from held for investment to held for sale


71,201
Proceeds from the sale of mortgage loans held for sale
(177,545)
(169,969)
(287,090)
Net gain on sale of mortgage loans held for sale
3,839
3,977
6,656
Balance, end of period
$
8,971
$
5,761
$
11,662
Mortgage loans serviced for others are not reported as assets. The Bank serviced loans for others, primarily FHLMC, totaling $972 million and $969 million at December 31, 2018 and 2017. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Custodial escrow account balances maintained in connection with serviced loans were approximately $10 million and $9 million at December 31, 2018 and 2017.
The following table presents the components of Mortgage Banking income:
Years Ended December 31, (in thousands)
2018
2017
2016
Net gain realized on sale of mortgage loans held for sale
$
3,843
$
4,180
$
5,478
Net gain realized on sale of mortgage loans transferred from held for investment to held for sale


1,129
Net change in fair value recognized on loans held for sale
203
(1)
4
Net change in fair value recognized on rate lock loan commitments
46
11
(8)
Net change in fair value recognized on forward contracts
(253)
(213)
53
Net gain recognized
3,839
3,977
6,656
Loan servicing income
2,418
2,169
1,983
Amortization of mortgage servicing rights
(1,432)
(1,504)
(1,757)
Net servicing income recognized
986
665
226
Total Mortgage Banking income
$
4,825
$
4,642
$
6,882
Activity for capitalized mortgage servicing rights was as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
5,044
$
5,180
$
4,912
Additions
1,307
1,368
2,025
Amortized to expense
(1,432)
(1,504)
(1,757)
Balance, end of period
$
4,919
$
5,044
$
5,180
There was no balance or activity in the valuation allowance for capitalized mortgage servicing rights for the years ended December 31, 2018, 2017 and 2016.
Other information relating to mortgage servicing rights follows:
December 31, (in thousands)
2018
2017
Fair value of mortgage servicing rights portfolio
$
9,357
$
7,984
Monthly weighted average prepayment rate of unpaid principal balance*
160
%
200
%
Discount rate
10.00
%
10.00
%
Weighted average default rate
%
3.75
%
Weighted average life in years
* Rates are applied to individual tranches with similar characteristics.
Estimated future amortization expense of the MSR portfolio (net of any applicable impairment charge) follows; however, actual amortization expense will be impacted by loan payoffs and changes in estimated lives that occur during each respective year:
Year
(in thousands)
2019
$
796
2020
778
2021
756
2022
721
2023
638
2024
523
2025
707
Total
$
4,919
Mortgage Banking derivatives used in the ordinary course of business primarily consist of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.
Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.
The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate loan lock commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.
The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives as of the period ends presented:
2018
2017
Notional
Notional
December 31, (in thousands)
Amount
Fair Value
Amount
Fair Value
Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value
$
8,676
$
8,971
$
5,668
$
5,761
Included in other assets:
Rate lock loan commitments
$
14,788
$
356
$
14,696
$
310
Included in other liabilities:
Mandatory forward contracts
$
20,063
$
262
$
17,159
$
9

STOCK PLANS AND STOCK BASED COM

STOCK PLANS AND STOCK BASED COMPENSATION12 Months Ended
Dec. 31, 2018
STOCK PLANS AND STOCK BASED COMPENSATION
STOCK PLANS AND STOCK BASED COMPENSATION16. STOCK PLANS AND STOCK BASED COMPENSATION
In January 2015, the Company’s Board of Directors adopted the Republic Bancorp, Inc. 2015 Stock Incentive Plan (the “2015 Plan”), which became effective April 23, 2015 when the Company’s shareholders approved the 2015 Plan. The 2015 Plan replaced the Company’s 2005 Stock Incentive Plan, which expired on March 15, 2015.
The number of authorized shares under the 2015 Plan is fixed at 3,000,000, with such number subject to adjustment in the event of certain events, such as stock dividends, stock splits, or the like. There is a minimum three-year vesting period for awards granted to employees under the 2015 Plan that vest based solely on the completion of a specified period of service, with options generally exercisable five to six years after the issue date. Stock options generally must be exercised within one year from the date the options become exercisable and have an exercise price that is at least equal to the fair market value of the Company’s stock on their grant date.
All shares issued under the above-mentioned plans were from authorized and reserved unissued shares. The Company has a sufficient number of authorized and reserved unissued shares to satisfy all anticipated option exercises. There are no Class B stock options outstanding or available for exercise under the Company’s plans.
Stock Options
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of Republic’s stock and other factors. Expected dividends are based on dividend trends and the market price of Republic’s stock price at grant. Republic uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.
All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values.
The fair value of stock options granted was determined using the following weighted average assumptions as of grant date:
Years Ended December 31,
2018
2017
2016
Risk-free interest rate
3.00
%
2.07
%
1.43
%
Expected dividend yield
2.01
%
2.41
%
3.16
%
Expected stock price volatility
18.59
%
20.36
%
20.17
%
Expected life of options (in years)
5
5
5
Estimated fair value per share
$
8.09
$
5.46
$
3.27
The following table summarizes stock option activity from January 1, 2017 through December 31, 2018:
Weighted
Weighted
Average
Options
Average
Remaining
Aggregate
Class A
Exercise
Contractual
Intrinsic
Shares
Price
Term
Value
Outstanding, January 1, 2017
312,600
$
24.49
Granted
4,500
35.54
Exercised
(3,500)
19.63
Forfeited or expired
(18,600)
24.99
Outstanding, December 31, 2017
295,000
$
24.68
2.86
$
3,935,010
Outstanding, January 1, 2018
295,000
$
24.68
Granted
165,000
48.08
Exercised
(3,500)
24.10
Forfeited or expired
(23,300)
26.51
Outstanding, December 31, 2018
433,200
$
33.50
3.15
$
3,786,820
Unvested
433,200
$
33.50
3.15
$
3,786,820
Exercisable (vested) at December 31, 2018

$


$

Information related to the stock options during each year follows:
Years Ended December 31, (in thousands, except per share data)
2018
2017
2016
Intrinsic value of options exercised
$
79
$
71
$
18
Cash received from options exercised, net of shares redeemed
83
68
80
Loan balances of non-executive officer employees that were originated solely to fund stock option exercises were as follows:
December 31, (in thousands)
2018
2017
Outstanding loans
$
134
$
139
Restricted Stock Awards
Restricted stock awards generally vest within six years after issue, with accelerated vesting due to “change in control” or “death or disability of a participant” as defined and outlined in the 2015 Plan.
The following table summarizes restricted stock activity from January 1, 2017 through December 31, 2018:
Restricted
Stock Awards
Weighted-Average
Class A Shares
Grant Date Fair Value
Outstanding, January 1, 2017
77,000
$
20.02
Granted
7,413
35.77
Forfeited
(750)
19.85
Earned and issued
(42,053)
21.66
Outstanding, December 31, 2017
41,610
$
21.18
Outstanding, January 1, 2018
41,610
$
21.18
Granted
48,323
40.16
Forfeited
(1,500)
19.85
Earned and issued
(37,323)
21.33
Outstanding, December 31, 2018
51,110
$
39.06
Unvested
51,110
$
39.06
The fair value of the restricted stock awards is based on the closing stock price on the date of grant with the associated expense amortized to compensation expense over the vesting period, generally five to six years.
Performance Stock Units
The Company first granted PSUs under the 2015 Plan in January 2016. Shares of stock underlying the PSUs may be earned over a four-year performance period commencing on January 1, 2017 and ending on December 31, 2020 as follows:
·
If the Company achieves a ROA, as defined in the award agreement, of 1.25% for a calendar year in the performance period, then between March 1 st and March 15 th of the following year, provided that the recipient is still employed in good standing on the payment date, the Company will issue shares of fully vested stock to the participant equal to 50% of the number of the PSUs initially granted to the participant; and
·
If the ROA of 1.25% is met again at the end of another calendar year during the remaining term of the performance period, the Company will similarly issue fully vested stock in an amount equal to the remaining 50% of the initial PSUs granted to the participant.
·
The Compensation Committee (the “Committee”) makes all determinations regarding the achievement of ROA based on the Company’s audited financial statements and average assets as reported in the Company's Annual Report on Form 10- K with the Securities and Exchange Commission, and the determination of the Committee is final and binding on all parties. The Committee reserves the right, in its sole discretion, to adjust the calculation of ROA downward for income or expense items that it considers to be infrequent or nonrecurring in nature.
The following table summarizes PSU activity from January 1, 2017 through December 31, 2018:
Performance
Stock Units
Weighted-Average
Class A Shares
Grant Date Fair Value
Outstanding, January 1, 2017
55,000
$
23.13
Granted


Forfeited
(6,500)
23.48
Earned and issued


Outstanding, December 31, 2017
48,500
$
23.08
Outstanding, January 1, 2018
48,500
$
23.08
Granted


Forfeited
(2,500)
23.08
Earned and issued


Outstanding, December 31, 2018
46,000
$
23.08
Expected to vest
46,000
$
23.08
Expense Related to Stock Incentive Plans
The Company recorded expense related to stock incentive plans for the years ended December 31, 2018, 2017 and 2016 as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Stock option expense
$
265
$
227
$
248
Restricted stock award expense
630
424
258
Performance stock unit expense
106
491
524
Total expense
$
1,001
$
1,142
$
1,030
Unrecognized expenses related to unvested awards under stock incentive plans are estimated as follows:
Stock
Restricted
Year Ended (in thousands)
Options
Stock Awards
Total
2019
$
415
$
606
$
1,021
2020
320
261
581
2021
291
261
552
2022
249
237
486
2023
106
119
225
2024 and beyond
3
16
19
Total
$
1,384
$
1,500
$
2,884
Deferred Compensation
On April 19, 2018, the shareholders of Republic approved an amendment and restatement of the Non-Employee Director and Key Employee Deferred Compensation Plan (the “Plan”). Prior to the Plan’s 2018 amendment and restatement, only directors participated in the plan, with the 2018 amendment and restatement initiating key-employee participation. The Plan provides non-employee directors and designated key employees the ability to defer compensation and have those deferred amounts paid later in the form of Company Class A Common shares based on the shares that could have been acquired as the deferrals were made. The Company maintains a bookkeeping account for each director or key-employee participant, and at the end of each fiscal quarter, deferred compensation is converted to “stock units” equal to the amount of compensation deferred during the quarter divided by the quarter-end fair market value of the Company’s Class A Common stock. Stock units for each participant’s account are also credited with an amount equal to the cash dividends that would have been paid on the number of stock units in the account if the stock units were deemed to be outstanding shares of stock. Any dividends credited are converted into additional stock units at the end of the fiscal quarter in which the dividends were paid.
DIRECTORS
Members of the Board of Directors may defer board and committee fees from two to five years, with each director participant retaining a nonforfeitable interest in his or her deferred compensation account.
The following table presents information on director deferred compensation under the Plan for the periods presented:
Outstanding
Weighted-Average
Stock
Market Price
Units
at Date of Deferral
Outstanding, January 1, 2017
64,155
$
22.94
Deferred fees and dividend equivalents converted to stock units
5,199
36.81
Stock units converted to Class A Common Shares
(5,456)
22.84
Outstanding, December 31, 2017
63,898
$
24.08
Outstanding, January 1, 2018
63,898
$
24.08
Deferred fees and dividend equivalents converted to stock units
5,081
41.82
Stock units converted to Class A Common Shares
(2,835)
23.94
Outstanding, December 31, 2018
66,144
$
25.45
Vested
66,144
$
25.45
Director deferred compensation has been expensed as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Director deferred compensation expense
$
214
$
191
$
170
KEY EMPLOYEES
Designated key employees may defer a portion of their base salaries on a pre-tax basis under the Plan, with the Company matching employee deferrals up to a prescribed limit. With limited exception, the Company match amount remains unvested until December 31 st of the year that is five years from the beginning of the year that the Company match is made.
The following table presents information on key-employee deferred compensation under the Plan for the periods presented:
Outstanding
Weighted-Average
Stock
Market Price
Units
at Date of Deferral
Outstanding, January 1, 2018

$

Deferred base salaries and dividend equivalents converted to stock units
4,992
43.09
Matching stock units credited
4,992
43.09
Matching stock units forfeited
(362)
42.99
Stock units converted to Class A Common Shares


Outstanding, December 31, 2018
9,622
$
43.10
Vested
4,992
$
43.10
Unvested
4,630
$
43.10
The following presents key-employee deferred compensation expense for the period presented:
Year Ended December 31, (in thousands)
2018
Key-employee deferred compensation expense - base salary
$
215
Key-employee deferred compensation expense - employer match
215
Total
$
430
Employee Stock Purchase Plan
On April 19, 2018, the shareholders of Republic approved the ESPP. Under the ESPP, participating employees may purchase shares of the Company Class A Common Stock through payroll withholdings at a purchase price that cannot be less than 85% of the lower of the fair market value of the Company’s Class A Common Stock on the first trading day of each offering period or on the last trading day of each offering period. For 2018, participating employees were able purchase the Company’s Class A Common Stock through the ESPP at 90% of its fair market value on the last day of each three-month offering period ended September 30, 2018 and December 31, 2018.
The following presents expense under the ESPP for the period presented:
Year Ended December 31, (in thousands)
2018
ESPP expense
$
23

BENEFIT PLANS

BENEFIT PLANS12 Months Ended
Dec. 31, 2018
BENEFIT PLANS
BENEFIT PLANS17.
401 (k) Plan
Republic maintains a 401(k) plan for eligible employees. All eligible employees are automatically enrolled at 6% of their eligible compensation within 30-days of their date of hire, unless the eligible employee elects to enroll sooner. Participants in the plan have the option to contribute from 1% to 75% of their annual eligible compensation, up to the maximum allowed by the IRS. The Company matches 100% of participant contributions up to 1% and an additional 75% for participant contributions between 2% and 5% of each participant’s annual eligible compensation. Participants are fully vested after two years of employment.
Republic may also contribute discretionary matching contributions in addition to the matching contributions if the Company achieves certain operating goals. Normal and discretionary contributions for each of the periods ended were as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Employer matching contributions
$
2,890
$
2,190
$
1,789
Discretionary employer bonus matching contributions
392
335
583
Supplemental Executive Retirement Plan
In association with its May 17, 2016 Cornerstone acquisition, the Company inherited a SERP. The SERP requires the Company to pay monthly benefits following retirement of the SERP’s four participants. The Company accrues the present value of such benefits monthly. The SERP liability was approximately $2 million and $2 million at December 31, 2018 and 2017. Expense under the SERP was $102,000, $93,000 and $81,000 for the years ended December 31, 2018, 2017 and 2016.

INCOME TAXES

INCOME TAXES12 Months Ended
Dec. 31, 2018
INCOME TAXES
INCOME TAXES18.
Allocation of federal income tax between current and deferred portion is as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Current expense:
Federal
$
10,638
$
26,983
$
24,295
State
1,532
486
465
Deferred expense:
SAB 118 related discrete items
(2,762)


Deferred tax asset devaluation upon enactment of TCJA

6,326

Federal
6,815
(965)
(1,753)
State
188
(76)
53
Total
$
16,411
$
32,754
$
23,060
Effective tax rates differ from federal statutory rate applied to income before income taxes due to the following:
Years Ended December 31,
2018
2017
2016
Federal rate times financial statement income
21.00
%
35.00
%
35.00
%
Effect of:
SAB 118 related discrete items
(2.93)


Deferred tax asset devaluation upon enactment of TCJA

8.07

State taxes, net of federal benefit
1.44
0.34
0.49
General business tax credits
(1.44)

(0.33)
Nontaxable income
(0.99)
(1.90)
(2.12)
Other, net
0.33
0.28
0.39
Effective tax rate
17.41
41.79
33.43
*Discrete items include the impact of a cost-segregation study, a research and development tax-credit study, and a tax-accounting-method change related to the immediate recognition of loan origination costs.
The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The Company incurred a charge of $6.3 million to income tax expense during 2017 representing the decrease in value of its net DTA upon enactment of the TCJA. At December 31, 2017, except for a planned cost-segregation study, based on facts and circumstances known at that time, the Company believed it had substantially completed its accounting for the tax effects of the TCJA.
In addition to the income tax benefit received during 2018 from the TCJA, Republic also recognized additional federal income tax benefits of approximately $3.4 million as part of preparing its fiscal-year 2017 federal tax return due October 15, 2018. Approximately $3.2 million of the $3.4 million in federal income tax benefits represented cumulative benefits for years prior to 2018. The $3.4 million of additional tax benefits recognized during 2018 was primarily driven by three distinct items, which were comprised of (1) a cost-segregation study, (2) an automatic change in tax-accounting method, and (3) R&D federal tax credits.
During 2018, the Company began and completed a cost-segregation study. The Company’s cost-segregation study assigned revised tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. The Company also made the decision to adopt an automatic tax-accounting-method change related to loan origination costs during 2018, as it was preparing its 2017 federal tax return. The Company’s tax-accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The cost-segregation study and the change in tax-accounting method did result in a further impact from the TCJA, as they affected the Company’s 2017 federal tax return due October 15, 2018.
In addition to the completed cost-segregation study and the change in the tax-accounting method related to loan origination costs, the Company also completed an R&D tax-credit study during 2018, which resulted in the recognition of R&D credits dating back to 2014.
Year-end DTAs and DTLs were due to the following:
December 31, (in thousands)
2018
2017
Deferred tax assets:
Allowance for loan and lease losses
$
9,746
$
9,057
Accrued expenses
3,802
3,009
Net operating loss carryforward(1)
3,514
3,934
Other-than-temporary impairment
478
462
Partnership losses

156
OREO writedowns

17
Fair value of cash flow hedges

19
Acquisition fair value adjustments
580
748
Unrealized investment security losses
289

Other
1,644
1,620
Total deferred tax assets
20,053
19,022
Deferred tax liabilities:
Depreciation and amortization
(3,970)
(783)
Federal Home Loan Bank dividends
(2,676)
(2,659)
Deferred loan fees
(1,921)
(7)
Leases
(1,839)
(1,633)
Mortgage servicing rights
(1,106)
(1,127)
Bargain purchase gain
(553)
(599)
Unrealized investment securities gains

(130)
Fair value of cash flow hedges
(24)

Partnership losses
(11)

Other

(23)
Total deferred tax liabilities
(12,100)
(6,961)
Less: Valuation allowance
(1,475)
(1,718)
Net deferred tax asset
$
6,478
$
10,343
(1)
The Company has federal and state net operating loss carryforwards (acquired in its 2016 Cornerstone acquisition) of $8.7 million (federal) and $5.7 million (state). These carryforwards begin to expire in 2030 for both federal and state purposes. The use of these federal and state carryforwards is each limited under IRC Section 382 to $722,000 annually for federal and $709,000 annually for state. The Company also has a Kentucky net operating loss carryforward of $28.6 million which began expiring in 2013. The company maintains a valuation allowance as it does not anticipate generating taxable income in Kentucky to utilize this carryforward prior to expiration. Finally, the Company has AMT credit carryforwards of $87,000 with no expiration date.
Unrecognized Tax Benefits
The following table shows a reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
912
$
1,495
$
1,800
Additions based on tax related to the current period
306
259
268
Additions for tax positions of prior periods
339


Reductions for tax positions of prior periods
(34)
(42)
(90)
Reductions due to the statute of limitations
(196)
(800)
(340)
Settlements


(143)
Balance, end of period
$
1,327
$
912
$
1,495
Of the 2018 total, $1.1 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.
It is the Company’s policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax benefits. Amounts related to interest and penalties recorded in the income statements for the years ended December 31, 2018, 2017 and 2016 and accrued on the balance sheets as of December 31, 2018, 2017 and 2016 are presented below:
Years Ended December 31, (in thousands)
2018
2017
2016
Interest and penalties recorded in the income statement as a component of income tax expense
$
42
$
(258)
$
(290)
Interest and penalties accrued on balance sheet
341
299
557
The Company files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by taxing authorities for all years prior to and including 2013.
Low Income Housing Tax Credits
The Company is a limited partner in several low-income housing partnerships whose purpose is to invest in qualified affordable housing. The Company expects to recover its remaining investments in these partnerships through the use of tax credits that are generated by the investments.
The following table summarizes information related to the Company’s qualified low-income housing investments and commitments:
December 31, (in thousands)
2018
2017
Unfunded
Unfunded
Investment
Accounting Method
Investment
Commitment
Investment
Commitment
Low income housing tax credit investments
Proportional amortization
$
3,971
$
14,029
$
1,264
$
9,736

EARNINGS PER SHARE

EARNINGS PER SHARE12 Months Ended
Dec. 31, 2018
EARNINGS PER SHARE
EARNINGS PER SHARE19.
The Company calculates earnings per share under the two-class method. Under the two-class method, earnings available to common shareholders for the period are allocated between Class A Common Stock and Class B Common Stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. The difference in earnings per share between the two classes of common stock results from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on Class B Common Stock. See Footnote 13, “Stockholders’ Equity and Regulatory Capital Matters” of this section of the filing.
A reconciliation of the combined Class A and Class B Common Stock numerators and denominators of the earnings per share and diluted earnings per share computations is presented below:
Years Ended December 31, (in thousands, except per share data)
2018
2017
2016
Net income
$
77,852
$
45,632
$
45,903
Dividends declared on Common Stock:
Class A Shares
(18,076)
(16,158)
(15,359)
Class B Shares
(1,955)
(1,773)
(1,685)
Undistributed net income for basic earnings per share
57,821
27,701
28,859
Weighted average potential dividends on Class A shares upon exercise of dilutive options
(102)
(75)
(10)
Undistributed net income for diluted earnings per share
$
57,719
$
27,626
$
28,849
Weighted average shares outstanding:
Class A Shares
18,736
18,678
18,697
Class B Shares
2,224
2,243
2,245
Effect of dilutive securities on Class A Shares outstanding
105
86
12
Weighted average shares outstanding including dilutive securities
21,065
21,007
20,954
Basic earnings per share:
Class A Common Stock:
Per share dividends distributed
$
0.97
$
0.87
$
0.83
Undistributed earnings per share*
2.79
1.34
1.39
Total basic earnings per share - Class A Common Stock
$
3.76
$
2.21
$
2.22
Class B Common Stock
Per share dividends distributed
$
0.88
$
0.79
$
0.75
Undistributed earnings per share*
2.53
1.22
1.27
Total basic earnings per share - Class B Common Stock
$
3.41
$
2.01
$
2.02
Diluted earnings per share:
Class A Common Stock:
Per share dividends distributed
$
0.97
$
0.87
$
0.83
Undistributed earnings per share*
2.77
1.33
1.39
Total diluted earnings per share - Class A Common Stock
$
3.74
$
2.20
$
2.22
Class B Common Stock:
Per share dividends distributed
$
0.88
$
0.79
$
0.75
Undistributed earnings per share*
2.52
1.21
1.26
Total diluted earnings per share - Class B Common Stock
$
3.40
$
2.00
$
2.01
*To arrive at undistributed earnings per share, undistributed net income is first pro rated between Class A and Class B Common Shares, with Class A Common Shares receiving a 10% premium. The resulting pro-rated, undistributed net income for each class is then divided by the weighted average shares for each class.
Stock options excluded from the detailed earnings per share calculation because their impact was antidilutive are as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Antidilutive stock options
165,000
4,500
5,000
Average antidilutive stock options
47,712
2,375
3,125

TRANSACTIONS WITH RELATED PARTI

TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES12 Months Ended
Dec. 31, 2018
TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES
TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES20.
Republic leases office facilities under operating leases from limited liability companies in which Republic’s Chairman/Chief Executive Officer and Vice Chair are partners. Rent expense under these leases was as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Rent expense under leases from related parties
$
4,487
$
4,008
$
3,791
Total minimum lease commitments under non-cancelable operating leases are as follows:
Year (in thousands)
Affiliate
Other
Total
2019
$
4,632
2,661
7,293
2020
4,590
2,541
7,131
2021
4,175
2,311
6,486
2022
3,312
1,908
5,220
2023
3,312
1,377
4,689
Thereafter
15,914
2,572
18,486
Total
$
35,935
$
13,370
$
49,305
Loans made to executive officers and directors of Republic and their related interests during 2018 were as follows:
(in thousands)
Beginning balance
$
37,152
Effect of changes in composition of related parties
703
New loans
8,177
Repayments
(7,662)
Ending balance
$
38,370
Deposits from executive officers, directors, and their affiliates totaled $102 million and $86 million at December 31, 2018 and 2017.
By an agreement dated December 14, 1989, as amended August 8, 1994, the Company entered into a split-dollar insurance agreement with a trust established by the Company’s deceased former Chairman, Bernard M. Trager. Pursuant to the agreement, from 1989 through 2002 the Company paid $690,000 in total annual premiums on the insurance policies held in the trust. The policies are joint-life policies payable upon the death of Mrs. Jean Trager, as the survivor of her husband Bernard M. Trager. The cash surrender value of the policies was approximately $2 million and $2 million as of December 31, 2018 and 2017.
Pursuant to the terms of the trust, the beneficiaries of the trust will each receive the proceeds of the policies after the repayment of any unreimbursed portion of the $690,000 annual premiums paid by the Company. The unreimbursed portion constitutes indebtedness from the trust to the Company and is secured by a collateral assignment of the policies. As of December 31, 2018 and 17, the unreimbursed portion was $640,000 and $690,000, and the net death benefit under the policies was approximately $3 million. Upon the termination of the agreement, whether by the death of Mrs. Trager or earlier cancellation, the Company is entitled to be repaid by the trust the amount of indebtedness outstanding at that time.

OTHER COMPREHENSIVE INCOME

OTHER COMPREHENSIVE INCOME12 Months Ended
Dec. 31, 2018
OTHER COMPREHENSIVE INCOME
OTHER COMPREHENSIVE INCOME21.
OCI components and related tax effects were as follows:
Years Ended December 31, (in thousands)
2018
2017
2016
Available-for-Sale Debt Securities:
Change in unrealized (loss) gain on AFS debt securities (2018), debt and equity securities (2017 and 2016)
$
(1,548)
$
(1,265)
$
(2,294)
Adjustment for adoption of ASU 2016-01
(428)


Reclassification adjustment for net (gain) loss on AFS debt securities recognized in earnings

136

Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
(20)
298
(9)
Net unrealized (losses) gains
(1,996)
(831)
(2,303)
Tax effect
419
377
807
Net of tax
(1,577)
(454)
(1,496)
Cash Flow Hedges:
Change in fair value of derivatives used for cash flow hedges
178
83
(125)
Reclassification amount for net derivative losses realized in income
28
219
332
Net unrealized gains
206
302
207
Tax effect
(42)
(119)
(73)
Net of tax
164
183
134
Total other comprehensive (loss) income components, net of tax
$
(1,413)
$
(271)
$
(1,362)
Amounts reclassified out of each component of accumulated OCI for the years ended December 31, 2018, 2017 and 2016:
Amounts Reclassified From
Affected Line Items
Accumulated Other
in the Consolidated
Comprehensive Income
Years Ended December 31, (in thousands)
Statements of Income
2018
2017
2016
Available for Sale Debt Securities:
Net losses on debt securities
Noninterest income
$

$
(136)
$

Tax effect
Income tax expense (benefit)

48

Net of tax
Net income

(88)

Cash Flow Hedges:
Interest rate swap on money market deposits
Interest expense on deposits
(18)
(109)
(168)
Interest rate swap on FHLB advance
Interest expense on FHLB advances
(10)
(110)
(164)
Total derivative losses on cash flow hedges
Total interest expense
(28)
(219)
(332)
Tax effect
Income tax expense
6
77
116
Net of tax
Net income
(22)
(142)
(216)
Net of tax, total all reclassification amounts
Net income
$
(22)
$
(230)
$
(216)
The following is a summary of the accumulated OCI balances, net of tax:
2018
(in thousands)
December 31, 2017
Change
December 31, 2018
Unrealized loss on AFS debt securities and reclassification of equity securities
$
(604)
$
(1,561)
$
(2,165)
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings
1,093
(15)
1,078
Unrealized gain (loss) on cash flow hedges
(73)
163
90
Total unrealized gain (loss)
$
416
$
(1,413)
$
(997)
2017
(in thousands)
December 31, 2016
Change
December 31, 2017
Unrealized gain on AFS debt and equity securities
$
237
$
(841)
$
(604)
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
706
387
1,093
Unrealized gain (loss) on cash flow hedges
(256)
183
(73)
Total unrealized gain
$
687
$
(271)
$
416

PARENT COMPANY CONDENSED FINANC

PARENT COMPANY CONDENSED FINANCIAL INFORMATION12 Months Ended
Dec. 31, 2018
PARENT COMPANY CONDENSED FINANCIAL INFORMATION
PARENT COMPANY CONDENSED FINANCIAL INFORMATION22.
BALANCE SHEETS
December 31, (in thousands)
2018
2017
Assets:
Cash and cash equivalents
$
99,440
$
98,943
Available-for-sale debt security
4,075
3,600
Investment in bank subsidiary
625,814
569,162
Investment in non-bank subsidiaries
3,343
3,211
Other assets
4,854
5,512
Total assets
$
737,526
$
680,428
Liabilities and Stockholders’ Equity:
Subordinated note
$
41,240
$
41,240
Other liabilities
6,352
6,764
Stockholders’ equity
689,934
632,424
Total liabilities and stockholders’ equity
$
737,526
$
680,428
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, (in thousands)
2018
2017
2016
Income and expenses:
Dividends from subsidiary
$
22,385
$
20,063
$
19,114
Interest income
231
186
162
Other income
45
45
45
Less: Interest expense
1,508
1,094
915
Less: Other expenses
469
394
446
Income before income tax benefit
20,684
18,806
17,960
Income tax benefit
348
116
394
Income before equity in undistributed net income of subsidiaries
21,032
18,922
18,354
Equity in undistributed net income of subsidiaries
56,820
26,710
27,549
Net income
$
77,852
$
45,632
$
45,903
Comprehensive income
$
76,439
$
45,361
$
44,541
STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands)
2018
2017
2016
Operating activities:
Net income
$
77,852
$
45,632
$
45,903
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of investment security
(40)
(44)
(44)
Equity in undistributed net income of subsidiaries
(56,820)
(26,710)
(27,549)
Director deferred compensation - Parent Company
117
108
103
Change in other assets
605
1,215
(1,366)
Change in other liabilities
(976)
1,623
(313)
Net cash provided by operating activities
20,738
21,824
16,734
Investing activities:
Acquisition of Cornerstone Bancorp, Inc.


(31,795)
Investment in subsidiary bank
(230)


Net cash used in investing activities
(230)

(31,795)
Financing activities:
Payoff of subordinated note, net of common security interest


(4,000)
Common Stock repurchases
(827)
(1,048)
(1,207)
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
230


Net proceeds from Common Stock options exercised
83
68
80
Cash dividends paid
(19,497)
(17,656)
(16,768)
Net cash used in financing activities
(20,011)
(18,636)
(21,895)
Net change in cash and cash equivalents
497
3,188
(36,956)
Cash and cash equivalents at beginning of period
98,943
95,755
132,711
Cash and cash equivalents at end of period
$
99,440
$
98,943
$
95,755

REVENUE FROM CONTRACTS WITH CUS

REVENUE FROM CONTRACTS WITH CUSTOMERS12 Months Ended
Dec. 31, 2018
REVENUE FROM CONTRACTS WITH CUSTOMERS
REVENUE FROM CONTRACTS WITH CUSTOMERS23. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company’s net revenue by reportable segment for the year ended December 31, 2018:
Year Ended December 31, 2018
Core Banking
Republic Processing Group
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income(1)
$
160,398
$
15,726
$
402
$
176,526
$
19,203
$
30,329
$
49,532
$
226,058
Noninterest income:
Service charges on deposit accounts
14,233
40

14,273



14,273
Net refund transfer fees




20,029

20,029
20,029
Mortgage banking income(1)


4,825
4,825



4,825
Interchange fee income
10,868


10,868
226
65
291
11,159
Program fees(1)




295
5,930
6,225
6,225
Increase in cash surrender value of BOLI(1)
1,527


1,527



1,527
Net gains (losses) on OREO
729


729



729
Other
2,608

550
3,158
1,003
497
1,500
4,658
Total noninterest income
29,965
40
5,375
35,380
21,553
6,492
28,045
63,425
Total net revenue
$
190,363
$
15,766
$
5,777
$
211,906
$
40,756
$
36,821
$
77,577
$
289,483
Net-revenue concentration(2)
66
%
5
%
2
%
73
%
14
%
13
%
27
%
100
%
(1)
This revenue is not subject to ASU 2014-09, Revenue from Contracts with Customers.
(2)
Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.
The following represents information for significant revenue streams subject to ASC 606:
Service charges on deposits – The Company earns revenue for account-based and event-driven services on its retail and commercial deposit accounts. Contracts for these services are generally in the form of deposit agreements, which disclose fees for deposit services. Revenue for event-driven services is recognized in close proximity or simultaneously with service performance. Revenue for certain account-based services may be recognized at a point in time or over the period the service is rendered, typically no longer than a month. Examples of account-based and event-driven service charges on deposits include per item fees, paper-statement fees, check-cashing fees, and analysis fees.
Net refund transfer fees – An RT is a fee-based product offered by the Bank through third-party tax preparers located throughout the United States, as well as tax-preparation software providers (collectively, the “Tax Providers”), with the Bank acting as an independent contractor of the Tax Providers. An RT allows a taxpayer to pay any applicable tax preparation and filing related fees directly from his federal or state government tax refund, with the remainder of the tax refund disbursed directly to the taxpayer. RT fees and all applicable tax preparation, transmitter, audit, and any other taxpayer authorized amounts are deducted from the tax refund by either the Bank or the Bank’s service provider and automatically forwarded to the appropriate party as authorized by the taxpayer. RT fees generally receive first priority when applying fees against the taxpayer’s refund, with the Bank’s share of RT fees generally superior to the claims of other third-party service providers, including the Tax Providers. The remainder of the refund is disbursed to the taxpayer by a Bank check printed at a tax office, direct deposit to the taxpayer’s personal bank account, loaded to a Net Spend Visa® Prepaid Card or Walmart Direct2Cash.
The Company executes contracts with individual Tax Providers to offer RTs to their taxpayer customers. RT revenue is recognized by the Bank immediately after the taxpayer’s refund is disbursed in accordance with the RT contract with the taxpayer customer. The fee paid by the taxpayer for the RT is shared between the Bank and the Tax Providers based on contracts executed between the parties.
The Company presents RT revenue net of any amounts shared with the Tax Providers. The Bank’s share of RT revenue is generally based on the obligations undertaken by the Tax Provider for each individual RT program, with more obligations generally corresponding to higher RT revenue share. The significant majority of net RT revenue is recognized and obligations under RT contracts fulfilled by the Bank during the first half of each year. Incremental expenses associated with the fulfilment of RT contracts are generally expensed during the first half of the year.
Interchange fee income – As an “issuing bank” for card transactions, the Company earns interchange fee income on transactions executed by its cardholders with various third-party merchants. Through third-party intermediaries, merchants compensate the Company for each transaction for the ability to efficiently settle the transaction and for the Company’s willingness to accept certain risks inherent in the transaction. There is no written contract between the merchant and the Company, but a contract is implied between the two parties by customary business practices. Interchange fee income is recognized almost simultaneously by the Company upon the completion of a related card transaction.
The Company compensates its cardholders by way of cash or other “rewards” for generating card transactions. These rewards are disclosed in cardholder agreements between the Company and its cardholders. Reward costs are accrued over time based on card transactions generated by the cardholder. Interchange fee income is presented net of reward costs within noninterest income.
Net gains/(losses) on other real estate – The Company routinely sells OREO it has acquired through loan foreclosure. Net gains/(losses) on OREO reflect both 1) the gain or loss recognized upon an executed deed and 2) mark-to-market write-downs the Company takes on its OREO inventory.
The Company generally recognizes gains or losses on OREO at the time of an executed deed, although gains may be recognized over a financing period if the Company finances the sale. For financed OREO sales, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present.
Mark-to-market write-downs taken by the Company during the property’s holding period are generally at least 10% per year but may be higher based on updated real estate appraisals or BPOs. Incremental expenditures to bring OREO to salable condition are generally expensed as-incurred.
Capital commitment fee (within other income) – The Company received and recorded a $1.0 million nonrefundable capital commitment fee during the first quarter of 2018. The fee was paid by a third party upon the Company’s completion of its contractual obligations to build the infrastructure and disburse funds for a new collaborative credit product offered to the third party’s customers through the Bank. The completion of the infrastructure and the first disbursement of funds were made for this new credit product during the first quarter of 2018. Incremental expenses incurred by the Company to fulfil its obligation under this contract were expensed as-incurred.

SEGMENT INFORMATION

SEGMENT INFORMATION12 Months Ended
Dec. 31, 2018
SEGMENT INFORMATION
SEGMENT INFORMATION24.
Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.
As of December 31, 2018, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank, are considered part of the Traditional Banking segment.
The nature of segment operations and the primary drivers of net revenues by reportable segment are provided below:
Reportable Segment:
Nature of Operations:
Primary Drivers of Net Revenue:
Core Banking:
Traditional Banking
Provides traditional banking products to clients in its market footprint primarily via its network of banking centers and to clients outside of its market footprint primarily via its Digital and Correspondent Lending delivery channels.
Loans, investments, and deposits.
Warehouse Lending
Provides short-term, revolving credit facilities to mortgage bankers across the United States.
Mortgage warehouse lines of credit.
Mortgage Banking
Primarily originates, sells and services long-term, single family, first lien residential real estate loans primarily to clients in the Bank's market footprint.
Loan sales and servicing.
Republic Processing Group:
Tax Refund Solutions
TRS offers tax-related credit products and facilitates the receipt and payment of federal and state tax refund products. The RPS division of TRS offers general-purpose reloadable cards. TRS and RPS products are primarily provided to clients outside of the Bank’s market footprint.
Loans, refund transfers, and prepaid cards.
Republic Credit Solutions
Offers consumer credit products. RCS products are primarily provided to clients outside of the Bank’s market footprint, with a substantial portion of RCS clients considered subprime or near-prime borrowers.
Unsecured, consumer loans.
The accounting policies used for Republic’s reportable segments are the same as those described in the summary of significant accounting policies. Segment performance is evaluated using operating income. Goodwill is allocated to the Traditional Banking segment. Income taxes are generally allocated based on income before income tax expense unless specific segment allocations can be reasonably made. Transactions among reportable segments are made at carrying value.
Segment information for the years ended December 31, 2018, 2017 and 2016 is as follows:
Year Ended December 31, 2018
Core Banking
Republic Processing Group
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income
$
160,398
$
15,726
$
402
$
176,526
$
19,203
$
30,329
$
49,532
$
226,058
Provision for loan and lease losses
3,710
(142)

3,568
10,919
16,881
27,800
31,368
Net refund transfer fees




20,029

20,029
20,029
Mortgage banking income


4,825
4,825



4,825
Program fees




295
5,930
6,225
6,225
Other noninterest income
29,965
40
550
30,555
1,229
562
1,791
32,346
Total noninterest income
29,965
40
5,375
35,380
21,553
6,492
28,045
63,425
Total noninterest expense
136,439
3,367
4,356
144,162
14,686
5,004
19,690
163,852
Income before income tax expense
50,214
12,541
1,421
64,176
15,151
14,936
30,087
94,263
Income tax expense
6,819
2,869
298
9,986
3,033
3,392
6,425
16,411
Net income
$
43,395
$
9,672
$
1,123
$
54,190
$
12,118
$
11,544
$
23,662
$
77,852
Period-end assets
$
4,647,037
$
470,126
$
14,246
$
5,131,409
$
20,288
$
88,707
$
108,995
$
5,240,404
Net interest margin
3.76
%
3.17
%
NM
3.70
%
NM
NM
NM
4.62
%
Net-revenue concentration*
66
%
5
%
2
%
73
%
14
%
13
%
27
%
100
%
Year Ended December 31, 2017
Core Banking
Republic Processing Group
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income
$
142,823
$
17,533
$
346
$
160,702
$
15,197
$
22,621
$
37,818
$
198,520
Provision for loan and lease losses
3,923
(150)

3,773
6,535
17,396
23,931
27,704
Net refund transfer fees




18,500

18,500
18,500
Mortgage banking income


4,642
4,642



4,642
Program fees




176
5,648
5,824
5,824
Other noninterest income
27,452
37
279
27,768
164
1,516
1,680
29,448
Total noninterest income
27,452
37
4,921
32,410
18,840
7,164
26,004
58,414
Total noninterest expense
124,637
3,392
4,765
132,794
14,491
3,559
18,050
150,844
Income before income tax expense
41,715
14,328
502
56,545
13,011
8,830
21,841
78,386
Income tax expense (benefit)
18,202
5,421
(526)
23,097
4,721
4,936
9,657
32,754
Net income
$
23,513
$
8,907
$
1,028
$
33,448
$
8,290
$
3,894
$
12,184
$
45,632
Period-end 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
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income
$
121,692
$
16,529
$
200
$
138,421
$
6,607
$
11,026
$
17,633
$
156,054
Provision for loan and lease losses
3,448
497

3,945
2,772
7,776
10,548
14,493
Net refund transfer fees




19,240

19,240
19,240
Mortgage banking income


6,882
6,882



6,882
Program fees




210
2,834
3,044
3,044
Other noninterest income
26,090
18
360
26,468
189
1,686
1,875
28,343
Total noninterest income
26,090
18
7,242
33,350
19,639
4,520
24,159
57,509
Total noninterest expense
108,360
3,142
4,688
116,190
11,701
2,216
13,917
130,107
Income (loss) before income tax expense
35,974
12,908
2,754
51,636
11,773
5,554
17,327
68,963
Income tax expense (benefit)
11,015
4,798
964
16,777
4,270
2,013
6,283
23,060
Net income (loss)
$
24,959
$
8,110
$
1,790
$
34,859
$
7,503
$
3,541
$
11,044
$
45,903
Period-end 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*
70
%
8
%
3
%
81
%
12
%
7
%
19
%
100
%
*Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.
NM - Not Meaningful

SUMMARY OF QUARTERLY FINANCIAL

SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)12 Months Ended
Dec. 31, 2018
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)25.
Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2018 and 2017.
2018
Fourth
Third
Second
First
(dollars in thousands, except per share data)
Quarter
Quarter
Quarter
Quarter(1)
Interest income
$
62,902
$
61,090
$
58,356
$
73,833
Interest expense
8,626
8,057
7,272
6,168
Net interest income
54,276
53,033
51,084
67,665
Provision for loan and lease losses(2)
5,104
4,077
4,932
17,255
Net interest income after provision
49,172
48,956
46,152
50,410
Noninterest income
10,119
11,465
14,296
27,545
Noninterest expense(3)
38,963
41,212
40,632
43,045
Income before income taxes
20,328
19,209
19,816
34,910
Income tax expense(4)
3,022
1,798
4,150
7,441
Net income
$
17,306
$
17,411
$
15,666
$
27,469
Basic earnings per share:
Class A Common Stock
$
0.83
$
0.84
$
0.75
$
1.32
Class B Common Stock
0.76
0.76
0.68
1.21
Diluted earnings per share:
Class A Common Stock
$
0.83
$
0.83
$
0.74
$
1.32
Class B Common Stock
0.75
0.76
0.68
1.20
Dividends declared per common share:
Class A Common Stock
$
0.242
$
0.242
$
0.242
$
0.242
Class B Common Stock
0.220
0.220
0.220
0.220
2017
Fourth
Third
Second
First
(dollars in thousands, except per share data)
Quarter
Quarter
Quarter
Quarter(1)
Interest income
$
56,349
$
53,725
$
47,821
$
60,883
Interest expense
5,711
5,418
4,684
4,445
Net interest income
50,638
48,307
43,137
56,438
Provision for loan and lease losses(2)
6,071
4,221
5,061
12,351
Net interest income after provision
44,567
44,086
38,076
44,087
Noninterest income
10,190
10,374
12,927
24,923
Noninterest expense(43
38,145
38,026
35,734
38,939
Income before income taxes
16,612
16,434
15,269
30,071
Income tax expense(4)
11,774
5,728
5,198
10,054
Net income
$
4,838
$
10,706
$
10,071
$
20,017
Basic earnings per share:
Class A Common Stock
$
0.23
$
0.51
$
0.48
$
0.97
Class B Common Stock
0.21
0.47
0.44
0.88
Diluted earnings per share:
Class A Common Stock
$
0.23
$
0.51
$
0.48
$
0.96
Class B Common Stock
0.21
0.47
0.44
0.88
Dividends declared per common share:
Class A Common Stock
$
0.220
$
0.220
$
0.220
$
0.209
Class B Common Stock
0.200
0.200
0.200
0.190
(1)
The first quarters of 2018 and 2017 were significantly impacted by the TRS segment of RPG.
(2)
Provision expense:
The relatively higher levels of provision expense during the first quarters of 2018 and 2017 were driven by the TRS segment’s EA product. Provision expense for EAs during the first quarters of 2018 and 2017 was $13.2 million and $8.6 million.
(3)
Noninterest expense:
During the fourth quarters of 2018 and 2017, the Company reversed $2.8 million and $1.1 million of incentive compensation accruals based on revised payout estimates.
(4)
Income tax expense:
The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The Company’s quarters for the year ended December 31, 2018 reflect this reduction in the federal corporate tax rate.
During the second quarter of 2018, the Company began a cost-segregation study that was completed during the third quarter of 2018. The Company’s cost-segregation study assigned revised tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. The Company also made the decision to adopt an automatic tax-accounting-method change related to deferred loan costs during the third quarter of 2018, as it was preparing its 2017 federal tax return. The Company’s tax-accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The cost-segregation study and the change in tax-accounting-method did result in a further impact from the TCJA, as they affected the Company’s 2017 federal tax return due October 15, 2018.
In addition to the completed cost-segregation study and the change in the tax-accounting-method related to loan origination costs, the Company also completed a R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits dating back to 2014. In total, these three tax-related items provided $3.4 million in federal income tax benefits for 2018, of which $3.2 million was the cumulative benefit related to years prior to 2018.
Upon enactment of the TCJA on December 22, 2017, the Company recorded a charge to income tax expense of $6.3 million due to the remeasurement of its deferred tax assets and liabilities at a 21% corporate tax rate.

SUMMARY OF SIGNIFICANT ACCOUN_2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)12 Months Ended
Dec. 31, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of ConsolidationNature of Operations and Principles of Consolidation — The consolidated financial statements include the accounts of Republic (the “Parent Company”) and its wholly-owned subsidiaries, the Bank and the Captive. All significant intercompany balances and transactions are eliminated in consolidation. All companies are collectively referred to as Republic or the Company. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc.
The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the United States.
The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.
RBCT is a Delaware statutory business trust that is a wholly-owned unconsolidated finance subsidiary of Republic Bancorp, Inc.
As of December 31, 2018, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank ® , are considered part of the Traditional Banking segment.
Core Bank
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of December 31, 2018, Republic had 45 full-service banking centers and one LPO with locations as follows:
 Kentucky — 32
 Metropolitan Louisville — 18
 Central Kentucky — 9
 Elizabethtown — 1
 Frankfort — 1
 Georgetown — 1
 Lexington — 5
 Shelbyville — 1
 Western Kentucky — 2
 Owensboro — 2
 Northern Kentucky — 3
 Covington — 1
 Crestview Hills — 1
 Florence — 1
 Southern Indiana — 3
 Floyds Knobs — 1
 Jeffersonville — 1
 New Albany — 1
 Metropolitan Tampa, Florida — 7
 Metropolitan Cincinnati, Ohio — 1
 Metropolitan Nashville, Tennessee — 3*
*Includes one LPO
Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.
Traditional Banking results of operations are primarily dependent upon net interest income, which represents the difference between the interest income and fees on interest-earning assets and the interest expense on interest-bearing liabilities. Principal interest-earning Traditional Banking assets represent investment securities and commercial and consumer loans primarily secured by real estate and/or personal property. Interest-bearing liabilities primarily consist of interest-bearing deposit accounts, securities sold under agreements to repurchase, as well as short-term and long-term borrowing sources. FHLB advances have traditionally been a significant borrowing source for the Bank.
Other sources of Traditional Banking income include service charges on deposit accounts, debit and credit card interchange fee income, title insurance commissions, fees charged to clients for trust services, and increases in the cash surrender value of BOLI.
Traditional Banking operating expenses consist primarily of salaries and employee benefits, occupancy and equipment expenses, communication and transportation costs, data processing, interchange related expenses, marketing and development expenses, FDIC insurance expense, franchise tax expense and various other general and administrative costs. Traditional Banking results of operations are significantly impacted by general economic and competitive conditions, particularly changes in market interest rates, government laws and policies and actions of regulatory agencies.
The Traditional Bank has acquired for investment single family, first lien mortgage loans that meet the Traditional Bank’s specifications through its Correspondent Lending channel. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium.
Warehouse Lending segment — Through its Warehouse Lending segment, the Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single family, first lien residential real estate loans. The credit facility enables the mortgage banking clients to close single family, first lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
Mortgage Banking segment — Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single family, first lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.
Republic Processing Group
Tax Refund Solutions segment — Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the United States, as well as tax-preparation software providers (collectively, the “Tax Providers”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. First offered by TRS in 2016, the EA had the following features during its 2018, 2017, and 2016 offering periods:
·
Offered only during the first two months of each year;
·
No EA fee was charged to the taxpayer customer;
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All fees for the EA were paid by the Tax Providers with a restriction prohibiting the Tax Providers from passing along the fees to the taxpayer customer;
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No requirement that the taxpayer customer pays for another bank product, such as an RT;
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Multiple funds disbursement methods, including direct deposit, prepaid card, check, or Walmart Direct2Cash ® , based on the taxpayer-customer’s election;
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Repayment of the EA to the Bank was deducted from the taxpayer customer’s tax refund proceeds; and
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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.
The Company reports fees paid by the Tax Providers for the EA product as interest income on loans. EAs are generally repaid within three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considers an EA delinquent if it remains unpaid three weeks after the taxpayer customer’s tax return is submitted to the applicable taxing authority. Provisions for loan losses on EAs are estimated when advances are made, with provisions for all probable EA losses made in the first quarter of each year. Unpaid EAs are charged-off within 111 days after the taxpayer customer’s tax return is submitted to the applicable taxing authority, with the majority of charge-offs typically recorded during the second quarter of the year.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund funding patterns. Because much of the EA volume occurs each year before that year’s tax refund funding patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund funding patterns change materially between years.
Republic Payment Solutions — RPS is managed and operated within the TRS segment. The RPS division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees. Additionally, the Company’s portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “Interchange fee income.”
Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans and are dependent on various factors including the consumer’s ability to repay. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. Additional information regarding consumer loan products offered through RCS follows:
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RCS line-of-credit product – The Bank originates a line-of-credit product to generally subprime borrowers across the United States through Elevate Credit, Inc., its third-party servicer provider. RCS sells 90% of the balances generated within two business days of loan origination to a special purpose entity related to Elevate Credit, Inc. and retains the remaining 10% interest. The line-of-credit product represents the substantial majority of RCS activity. Loan balances held for sale are carried at the lower of cost or fair value.
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RCS credit-card product – From the fourth quarter of 2015 through the first quarter of 2018, the Bank piloted a credit-card product to generally subprime borrowers across the United States through one third-party marketer/servicer. For outstanding cards, RCS sold 90% of the balances generated within two business days of each transaction occurrence to a special purpose entity related to its third-party marketer/servicer and retained the remaining 10% interest. During the fourth quarter of 2018, the Bank and its third-party marketer/servicer finalized an agreement to sell 100% of the existing portfolio to an unrelated third party. The sale of the RCS credit-card portfolio receivables was settled in January 2019.
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RCS healthcare receivables product – The Bank originates a healthcare-receivables product across the United States through two different third-party service providers. For one third-party service provider, the Bank retains 100% of the receivables originated. For the other third-party service provider, the Bank retains 100% of the receivables originated in some instances, and in other instances, sells 100% of the receivables within one month of origination. Loan balances held for sale are carried at the lower of cost or fair value.
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RCS installment loan product – From the first quarter of 2016 through the first quarter of 2018, the Bank piloted a consumer installment-loan product across the United States using a third-party marketer/service. As part of the program, the Bank sold 100% of the balances generated through the program back to the third-party marketer/servicer approximately 21 days after origination. The Bank carried all unsold loans under the program as “held for sale” on its balance sheet. At the initiation of this program in 2016, the Bank elected to carry these loans at fair value under a fair-value option, with the portfolio thereafter marked to market monthly.
During the second quarter of 2018, the Bank and its third-party marketer/service provider suspended the origination of any new loans, and the subsequent sale of all recently originated loans under this program, while the two parties evaluated the future offering of this product due to changes in the applicable state law impacting the product. Concurrent with the suspension of this program, the Bank reclassified approximately $2.2 million of these loans from held for sale on the balance sheet into the held-for-investment category and revalued these loans accordingly.
The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”
Use of EstimatesUse of Estimates — Financial statements prepared in conformity with GAAP require management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates and assumptions impact the amounts reported in the financial statements and the disclosures provided. Actual amounts could differ from these estimates.
Concentration of Credit RiskConcentration of Credit Risk — With the exception of loans originated through its Correspondent Lending channel, most of the Company’s Traditional Banking business activity is with clients located in Kentucky, Indiana, Florida, and Tennessee. The Company’s Traditional Banking exposure to credit risk is significantly affected by changes in the economy in these specific areas.
Loans originated through the Traditional Bank’s Correspondent Lending channel are primarily secured by single family, first lien residences located outside the Company’s market footprint, with 74% of such loans secured by collateral located in the state of California as of December 31, 2018. Furthermore, warehouse lines of credit are secured by single family, first lien residential real estate loans originated by the Bank’s mortgage clients across the United States. As of December 31, 2018, 32% of collateral securing warehouse lines were located in California.
Earnings ConcentrationEarnings Concentration — For 2018, 2017 and 2016, approximately 27%, 25% and 19% of total Company net revenues (net interest income plus noninterest income) were derived from the RPG operations. Within RPG, the TRS segment accounted for 14%, 13% and 12%, while the RCS segment accounting for 13%, 12% and 7% of total Company net revenues.
For 2018, 2017 and 2016, approximately 5%, 7% and 8% of total Company net revenues (net interest income plus noninterest income) were derived from the Company’s Warehouse segment.
Cash FlowsCash Flows — Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days and federal funds sold. Net cash flows are reported for client loan and deposit transactions, interest-bearing deposits in other financial institutions, repurchase agreements and income taxes.
Interest-Bearing Deposits in Other Financial InstitutionsInterest-Bearing Deposits in Other Financial Institutions — Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
SecuritiesDebt Securities — Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Available-for-sale debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums on callable securities are amortized to the earliest call date. Other premiums and discounts on securities are amortized and accreted on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more-likely-than-not that it would be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in OCI. OTTI related to credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Bank compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
Equity Securities — On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments . Among other things, ASU 2016-01 requires the Company recognize changes in the fair value of equity investments with a readily determinable fair value in net income unless those investments are accounted for under the equity method of accounting.
Accounting for Business AcquisitionsAccounting for Business Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its internal growth strategies.
The Bank accounts for acquisitions in accordance with the acquisition method as outlined in ASC Topic 805, Business Combinations . The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any noncontrolling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.
Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in acquirees are generally recognized at their acquisition-date (“day-one”) fair values based on the requirements of ASC Topic 820, Fair Value Measurements and Disclosures. The measurement period for day-one fair values begins on the acquisition date and ends the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these recast adjustments for loans and other real estate owned may be made, as market value data, such as valuations, are received by the Bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.
Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.
Mortgage Banking ActivitiesMortgage Banking Activities — Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Net gains on mortgage loans held for sale are recorded as a component of Mortgage Banking income and represent the difference between the selling price and the carrying value of the loans sold. Substantially all of the gains or losses on the sale of loans are reported in earnings when the interest rates on loans are locked.
Commitments to fund mortgage loans (“interest rate lock commitments”) to be sold into the secondary market and non-exchange traded mandatory forward sales contracts (“forward contracts”) for the future delivery of these mortgage loans are accounted for as free-standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the Bank enters into the derivative. Generally, the Bank enters into forward contracts for the future delivery of mortgage loans when interest rate lock commitments are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these mortgage derivatives are included in net gains on sales of loans, which is a component of Mortgage Banking income on the income statement.
Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded as a component of net servicing income within Mortgage Banking income. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage Banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and subsequently adjusted on a quarterly basis based on the weighted average remaining life of the underlying loans.
MSRs are evaluated for impairment quarterly based upon the fair value of the MSRs as compared to carrying amount. Impairment is determined by stratifying MSRs into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Bank later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance is recorded as an increase to income. Changes in valuation allowances are reported within Mortgage Banking income on the income statement. The fair value of the MSR portfolios is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates.
A primary factor influencing the fair value is the estimated life of the underlying serviced loans. The estimated life of the serviced loans is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs generally will decline due to higher expected prepayments within the portfolio. Alternatively, during a period of rising interest rates the fair value of MSRs generally will increase, as prepayments on the underlying loans would be expected to decline. Based on the estimated fair value at December 31, 2018 and 2017, management determined there was no impairment within the MSR portfolio.
Loan servicing income is reported on the income statement as a component of Mortgage Banking income. Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. Loan servicing income totaled $2.4 million, $2.2 million and $2.0 million for the years ended December 31, 2018, 2017 and 2016. Late fees and ancillary fees related to loan servicing are considered nominal.
LoansLoans — The Bank’s financing receivables consist primarily of loans and lease financing receivables (together referred to as “loans”). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, inclusive of purchase premiums or discounts, deferred loan fees and costs and the Allowance. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method. Premiums on loans held for investment acquired though the Correspondent Lending channel are amortized into interest income on the level-yield method over the expected life of the loan.
Lease financing receivables, all of which are direct financing leases, are reported at their principal balance outstanding net of any unearned income, deferred fees and costs and applicable Allowance. Leasing income is recognized on a basis that achieves a constant periodic rate of return on the outstanding lease financing balances over the lease terms.
Interest income on mortgage and commercial loans is typically discontinued at the time the loan is 80 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan, which may define past due status by the number of days or the number of payments past due. In most cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 80 days still on accrual include both smaller balance, homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
Interest accrued but not received for all classes of loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, typically a minimum of six months of performance. Consumer and credit card loans, are not placed on nonaccrual status, but are reviewed periodically and charged off when the loan is deemed uncollectible, generally no more than 120 days.
Loans purchased in a business acquisition are accounted for using one of the following accounting standards:
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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.
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ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality , is used to value PCI loans. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan, or fair value, represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. Additionally, the difference between contractual cash flows and expected cash flows of PCI loans is referred to as the “non-accretable discount.”
Purchased loans accounted for under ASC Topic 310-20 are accounted for as any other Bank-originated loan, potentially becoming nonaccrual or impaired, as well as being risk rated under the Bank’s standard practices and procedures. In addition, these loans are considered in the determination of the Allowance once day-one fair values are final.
In determining the day-one fair values of PCI loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received. The Bank typically accounts for PCI loans individually, as opposed to aggregating the loans into pools based on common risk characteristics such as loan type.
Management separately monitors the PCI portfolio and on a quarterly basis reviews the loans contained within this portfolio against the factors and assumptions used in determining the day-one fair values. In addition to its quarterly evaluation, a loan is typically reviewed when it is modified or extended, or when material information becomes available to the Bank that provides additional insight regarding the loan’s performance, estimated life, the status of the borrower, or the quality or value of the underlying collateral.
To the extent that a PCI loan’s performance does not reflect an increased risk of loss of contractual principal beyond the non-accretable yield established as part of its initial day-one evaluation, such loan would be classified in the PCI-1 category, whose credit risk is considered by management equivalent to a non-PCI Special Mention loan within the Bank’s credit rating matrix. PCI-1 loans are considered impaired if, based on current information and events, it is probable that the future estimated cash flows of the loan have deteriorated from management’s initial acquisition day estimate. Provisions for loan losses are made for impaired PCI-1 loans to further discount the loan and allow its yield to conform to at least management’s initial expectations. Any improvement in the expected performance of a PCI-1 loan would result in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.
If during the Bank’s periodic evaluations of its PCI loan portfolio, management deems a PCI-1 loan to have an increased risk of loss of contractual principal beyond the non-accretable discount established as part of its initial day-one evaluation, such loan would be classified PCI-Sub within the Bank’s credit risk matrix. Management deems the risk of default and overall credit risk of a PCI-Sub loan to be greater than a PCI-1 loan and more analogous to a non-PCI Substandard loan. PCI-Sub loans are considered to be impaired. Any improvement in the expected performance of a PCI-Sub loan would result in a reversal of the Provision to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.
PCI loans are placed on nonaccrual if management cannot reasonably estimate future cash flows on such loans.
If a TDR is performed on a PCI loan, the loan is considered impaired under the applicable TDR accounting standards and transferred out of the PCI population. The loan may require an additional Provision if its restructured cash flows are less than management’s initial day-one expectations. PCI loans for which the Bank simply chooses to extend the maturity date are generally not considered TDRs and remain in the PCI population.
Allowance for Loan and Lease LossesAllowance for Loan and Lease Losses — The Bank maintains an allowance for probable incurred credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Loan losses are charged against the Allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the Allowance. Management estimates the Allowance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors. Allocations of the Allowance may be made for specific classes, but the entire Allowance is available for any loan that, in management’s judgment, should be charged off.
Management evaluates the adequacy of the Allowance on a monthly basis and presents and discusses the analysis with the Audit Committee and the Board of Directors on a quarterly basis.
The Allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component is based on historical loss experience adjusted for qualitative factors.
Specific Component –Loans Individually Classified as Impaired
The Bank defines impaired loans as follows:
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All loans internally rated as “Substandard,” “Doubtful” or “Loss”;
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All loans on nonaccrual status;
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All TDRs;
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All loans internally rated in a PCI category with cash flows that have deteriorated from management’s initial acquisition day estimate; and
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Any other situation where the full collection of the total amount due for a loan is improbable or otherwise meets the definition of impaired.
Generally, loans are designated as “Classified” or “Special Mention” to ensure more frequent monitoring. These loans are reviewed to ensure proper earning status and management strategy. If it is determined that there is serious doubt as to performance in accordance with original or modified contractual terms, then the loan is generally downgraded and often placed on nonaccrual status.
Under GAAP, the Bank uses the following methods to measure specific loan impairment, including:
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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.
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Collateral Method — The recorded investment in the loan is measured against the fair value of the collateral less applicable estimated selling costs. The Bank employs the fair value of collateral method for its impaired loans when repayment is based solely on the sale or operations of the underlying collateral. Collateral fair value is typically based on the most recent real estate valuation on file. Measured impairment under this method is generally charged off unless the loan is a smaller-balance, homogeneous mortgage loan. The Bank’s estimated selling costs for its collateral-dependent loans typically range from 10- 13% of the fair value of the underlying collateral, depending on the asset class. Selling costs are not applicable for collateral-dependent loans whose repayment is based solely on the operations of the underlying collateral.
In addition to obtaining appraisals at the time of origination, the Bank typically updates appraisals and/or BPOs for loans with potential impairment. Updated valuations for commercial-related credits exhibiting an increased risk of loss are typically obtained within one year of the previous valuation. Collateral values for past due residential mortgage loans and home equity loans are generally updated prior to a loan becoming 90 days delinquent, but no more than 180 days past due. When measuring impairment, to the extent updated collateral values cannot be obtained due to the lack of recent comparable sales or for other reasons, the Bank discounts such stale valuations primarily based on age and market conditions of the underlying collateral.
General Component – Pooled Loans Collectively Evaluated
The general component of the Allowance covers loans collectively evaluated for impairment by loan class and is based on historical loss experience, with potential adjustments for current relevant qualitative factors. Historical loss experience is determined by loan performance and class and is based on the actual loss history experienced by the Bank. Large groups of smaller-balance, homogeneous loans, such as consumer and residential real estate loans, are typically included in the general component but may be individually evaluated if classified as a TDRs, on nonaccrual, or a case where the full collection of the total amount due for a such loan is improbable or otherwise meets the definition of impaired.
In determining the historical loss rates for each respective loan class, management evaluates the following historical loss rate scenarios:
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Current year to date historical loss factor average
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Rolling four quarter average
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Rolling eight quarter average
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Rolling twelve quarter average
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Rolling sixteen quarter average
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Rolling twenty quarter average
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Rolling twenty-four quarter average
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Rolling twenty-eight quarter average
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Rolling thirty-two quarter average
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Rolling thirty-six quarter average
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Rolling forty quarter average
In order to take account of periods of economic growth and economic downturn, management generally uses the highest of the evaluated averages above for each loan class when determining its historical loss factors.
Loan classes are also evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each class. Management assigns risk multiples to certain classes to account for qualitative factors such as:
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Changes in nature, volume and seasoning of the portfolio;
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Changes in experience, ability and depth of lending management and other relevant staff;
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Changes in the quality of the Bank’s credit review system;
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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;
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Changes in the volume and severity of past due, nonperforming and classified loans;
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Changes in the value of underlying collateral for collateral-dependent loans;
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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;
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The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
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The effect of other external factors, such as competition and legal and regulatory requirements on the level of estimated credit losses in the Bank’s existing portfolio.
As this analysis, or any similar analysis, is an imprecise measure of loss, the Allowance is subject to ongoing adjustments. Therefore, management will often consider other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.
A “portfolio segment” is defined as the level at which an entity develops and documents a systematic methodology to determine its Allowance. A “class” of loans represents further disaggregation of a portfolio segment based on risk characteristics and the entity’s method for monitoring and assessing credit risk. In developing its Allowance methodology, the Company has identified the following Traditional Banking portfolio segments:
Portfolio Segment 1 — Loans where the Allowance methodology is determined based on a loan review and grading system (primarily commercial related loans and retail TDRs).
For this portfolio, the Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, public information, and current economic trends. The Bank also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). The Bank analyzes loans individually, and based on this analysis, establishes a credit risk rating consistent with its credit risk matrix.
Portfolio Segment 2 — Loans where the Allowance methodology is driven by delinquency and nonaccrual data (primarily small dollar, retail mortgage or consumer related).
For this portfolio, the Bank analyzes risk classes based on delinquency and/or nonaccrual status.
Allowance for Loans Originated Through the Republic Processing Group
The RPG Allowance at December 31, 2018 and 2017 primarily related to loans originated and held for investment through the RCS segment. RCS generally originates small-dollar, consumer credit products. In some instances, the Bank originates these products, sells 90% of the balances within two days of loan origination, and retains a 10% interest. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers.
RCS’s short-term line-of-credit product represented 36% and 42% of the RCS held-for-investment loan portfolio at December 31, 2018 and 2017. For this product, management conducted an analysis of historical losses and delinquencies by month of loan origination when determining the Allowance through September 30, 2018. Subsequent to September 30, 2018, management conducted an analysis of its line-of-credit product using a method similar to that employed for pooled loans collectively evaluated, as described above. This change in method of analysis did not a have a material impact on the Allowance calculated for RCS’s line-of-credit product as of December 31, 2018, September 30, 2018 or December 31, 2017. For RCS’s other products, the Allowance is and has been traditionally estimated using a method similar to that employed for pooled loans collectively evaluated, as described above.
RPG’s TRS segment first offered its EA tax-credit product during the first two months of 2016 and again during the first two months of 2017 and 2018. An Allowance for losses on EAs is estimated during the limited, short-term period the product is offered. EAs are generally repaid within three weeks of origination. Provisions for loan losses on EAs are estimated when advances are made, with all provisions made in the first quarter of each year. No Allowance for EAs existed as of December 31, 2018 and 2017, as all EAs originated during the first two months of each year had either been paid off or charged-off within 111 days of origination. The majority of EA charge-offs are recorded during the second quarter of each year.
See Footnote 4 “Loans and Allowance for Loan and Lease Losses” in this section of the filing for additional discussion regarding the Company’s Allowance.
Transfers of Financial AssetsTransfers of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate OwnedOther Real Estate Owned — Assets acquired through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. The Bank’s selling costs for OREO typically range from 10- 13% of each property’s fair value, depending on property class. Fair value is commonly based on recent real estate appraisals or broker price opinions. Operating costs after acquisition are expensed.
Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Once the appraisal is received, a member of the Bank’s CCAD reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral. Back tests are performed for each collateral class, e.g. residential real estate or commercial real estate, and may lead to additional adjustments to the value of unliquidated collateral of similar class.
Premises and Equipment, NetPremises and Equipment, Net — Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets on the straight-line method. Estimated lives typically range from 25 to 39 years for buildings and improvements, three to ten years for furniture, fixtures and equipment and three to five years for leasehold improvements.
Federal Home Loan Bank Stock ("FHLB")Federal Home Loan Bank Stock — The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security and annually evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are recorded as interest income.
Bank Owned Life Insurance ("BOLI")Bank Owned Life Insurance — The Bank maintains BOLI policies on certain employees. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. The Bank recognizes tax-free income from the periodic increases in cash surrender value of these policies and from death benefits in noninterest income. Credit ratings for the Bank’s BOLI carriers are reviewed at least annually.
Goodwill and Other Intangible AssetsGoodwill and Other Intangible Assets — Goodwill resulting from business acquisitions represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase combination and determined to have an indefinite useful life are not amortized, but tested annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.
The Company has selected September 30th as the date to perform its annual goodwill impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.
All goodwill is attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes. Based on its assessment, the Company believes its goodwill of $16 million at December 31, 2018 and 2017 was not impaired and is properly recorded in the consolidated financial.
Other intangible assets consist of CDI assets arising from business acquisitions. CDI assets are initially measured at fair value and then amortized on an accelerated method over their estimated useful lives.
Off Balance Sheet Financial InstrumentsOff Balance Sheet Financial Instruments — Financial instruments include off-balance sheet credit instruments, such as commitments to fund loans and standby letters of credit. The face amount for these items represents the exposure to loss, before considering client collateral or ability to repay. Such financial instruments are recorded upon funding. Instruments such as standby letters of credit are considered financial guarantees and are recorded at fair value.
DerivativesDerivatives —Derivatives are reported at fair value in other assets or other liabilities. The Company’s derivatives include interest rate swap agreements. For asset/liability management purposes, the Bank uses interest rate swap agreements to hedge the exposure or to modify the interest rate characteristic of certain immediately repricing liabilities.
The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s unrealized gain or loss
is recorded as a component of other comprehensive income (loss). For derivatives not designated as hedges, the gain or loss is recognized in current period earnings.
Net cash settlements on interest rate swaps are recorded in interest expense and cash flows related to the swaps are classified in the cash flow statement the same as the interest expense and cash flows from the liabilities being hedged. The Bank formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet. The Bank also formally assesses, both at the hedge’s inception and on an ongoing basis, whether a swap is highly effective in offsetting changes in cash flows of the hedged items. The Bank discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments to meet client needs, the Bank enters into offsetting positions with dealer counterparties in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty or client owes the Bank, and results in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty and therefore, has no credit risk.
Stock Based CompensationStock Based Compensation — For stock options and restricted stock awards issued to employees, compensation cost is recognized based on the fair value of these awards at the date of grant. The Company utilizes a Black-Scholes model to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures of stock-based awards are accounted for when incurred in lieu of using forfeiture estimates.
Income TaxesIncome Taxes — Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. DTAs and DTLs are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces DTAs to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Retirement PlansRetirement Plans — 401(k) plan expense is recorded as a component of salaries and employee benefits and represents the amount of Company matching contributions.
Earnings Per Common ShareEarnings Per Common Share — Basic earnings per share is based on net income (in the case of Class B Common Stock, less the dividend preference on Class A Common Stock), divided by the weighted average number of shares outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential Class A common shares issuable under stock options. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Earnings and dividends per share are restated for all stock dividends through the date of issuance of the financial statements.
Comprehensive IncomeComprehensive Income — Comprehensive income consists of net income and OCI. OCI includes, net of tax, unrealized gains and losses on available-for-sale debt securities and unrealized gains and losses on cash flow hedges, which are also recognized as separate components of equity.
Loss ContingenciesLoss Contingencies — Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are any outstanding matters that would have a material effect on the financial statements.
Restrictions on Cash and Cash EquivalentsRestrictions on Cash and Cash Equivalents — Republic is required by the FRB to maintain average reserve balances. Cash and due from banks on the consolidated balance sheet included no required reserve balances at December 31, 2018 and 2017.
The Company’s Captive maintains cash reserves to cover insurable claims. Reserves totaled $3 million and $3 million as of December 31, 2018 and 2017.
EquityEquity — Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid in capital. Fractional share amounts are paid in cash with a reduction in retained earnings.
Dividend RestrictionsDividend Restrictions — Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Republic or by Republic to shareholders.
Fair Value of Financial InstrumentsFair Value of Financial Instruments — Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Footnote 14 “ Fair Value” in this section of the filing. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Revenue from contracts with CustomersRevenue from contracts with Customers - On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”). While this update modified guidance for recognizing revenue, it did not have a material impact on the timing or presentation of the Company’s revenue. The majority of Company’s revenue comes from interest income and other sources, including loans, leases, securities, and derivatives, which are not subject to ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to its client. The Company did elect a practical expedient permitted under this guidance which allows it to expense as-incurred incremental costs of obtaining a contract when the amortization period of those costs would be less than one year.
Segment InformationSegment Information — Reportable segments represent parts of the Company evaluated by management with separate financial information. Republic’s internal information is primarily reported and evaluated in five reportable segments – Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS.
ReclassificationsReclassifications — Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported prior periods’ net income or shareholders’ equity.
Accounting Standards Update (“ASUs”)Accounting Standards Updates
The following ASUs were issued prior to December 31, 2018 and are considered relevant to the Company’s financial statements. Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to the Company has been disclosed in prior Company financial statements, it will not be included below.
ASU. No.
Topic
Nature of Update
Date Adoption Required
Permitted Adoption Methods
Expected Financial Statement Impact
2016-02
Leases (Topic 842)
Most leases are considered operating leases, which are not accounted for on the lessees’ balance sheets. The significant change under this ASU is that those operating leases will be recorded on the balance sheet.
January 1, 2019
Modified-retrospective approach, which includes a number of optional practical expedients.
The Company adopted this ASU on January 1, 2019 and upon adoption recorded $41 million of right-of-use lease assets and $42 million of operating lease liabilities on its balance sheet. The Company does not expect the adoption of this ASU to have a meaningful impact on the Company's performance metrics, including regulatory capital ratios and return on average assets. Additionally, the Company does not believe that the adoption of this ASU by its clients will have a significant impact on the Company's ability to underwrite credit when client financial statements are presented inclusive of the requirements of this ASU.
2016-13
Financial Instruments – Credit Losses (Topic 326)
This ASU amends guidance on reporting credit losses for assets held at amortized-cost basis and available-for-sale debt securities.
January 1, 2020
Modified-retrospective approach.
As a result of this ASU, the Company expects an as yet undetermined increase in its allowance for credit losses. A committee formed by the Company to oversee its transition to a current expected credit losses (“CECL”) methodology has analyzed the Company’s loan-level data and preliminarily concluded that no additional loan level segmentation beyond its current methodology segmentation would be warranted under CECL. The Company is also currently performing iterations of its allowance calculation under a “beta” CECL model provided by the same third-party software solution currently-employed to calculate the Company's allowance for loan and lease losses.
2018-10
Codification Improvements to Topic 842, Leases
This ASU affects narrow aspects of the guidance issued in the amendments in ASU 2016-02.
January 1, 2019
Adoption should conform to the adoption of ASU 2016-02 above.
Immaterial
2018-11
Leases (Topic 842): Targeted Improvements
This ASU provides the Company with an additional (and optional) transition method to adopt ASU 2016-02. This ASU also provides the Company with a practical expedient to not separate non-lease components from the associated lease component under certain circumstances.
January 1, 2019
Adoption should conform to the adoption of ASU 2016-02 above.
The Company elected the optional transition method permitted by this ASU, allowing the Company to adopt ASU 2016-02, effective January 1, 2019 with a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019.
2018-16
Derivatives and Hedging (Topic 815)
This ASU permits the use of the Overnight Index Swap (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815.
January 1, 2019
Prospectively.
Immaterial
2018-18
Collaborative Arrangements (Topic 808)
This ASU makes targeted improvements for accounting for collaborative arrangements in order to better align the accounting with guidance in Topic 606, Revenue from Contracts with Customers.
January 1, 2020
Retrospectively.
Immaterial
2018-20
Leases (Topic 842)
This ASU permits lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs, but instead account for such costs as lessee costs. This ASU also requires that lessors allocate rather than recognize certain variable payments to the lease and non-lease components when the changes in facts and circumstances on which the variable payment is based occur.
January 1, 2019
Prospectively.
Immaterial
The following ASUs were adopted by the Company during the year ended December 31, 2018:
ASU. No.
Topic
Nature of Update
Date Adopted
Method of Adoption
Financial Statement Impact
2014-09
Revenue from Contracts with Customers (Topic 606)
Requires that revenue from contracts with clients be recognized upon transfer of control of a good or service in the amount of consideration expected to be received. Changes the accounting for certain contract costs, including whether they may be offset against revenue in the statements of income, and requires additional disclosures about revenue and contract costs.
January 1, 2018
Modified-retrospective approach.
Because most financial instruments are not subject to this ASU, a substantial portion of the Company's revenue was not impacted by this standard. Furthermore, this new standard did not have a material impact on the timing of revenue recognition for any of the Company's revenue for 2018 nor is it expected to going forward. Additionally, the Company took the following actions in association with the adoption of this ASU: 1) amended its accounting policies and procedures to ensure proper revenue recognition in conformity with this ASU; and 2) updated its revenue-recognition financial statement disclosures (see footnote 23 in this section of the filing).
2016-01
Financial Instruments – Overall (Topic 825-10)
Among other things: Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.
January 1, 2018
Modified-retrospective approach.
The Company has updated its policies, procedures, and financial statement presentation and disclosures for this ASU. As provided by this ASU, the Company now reports its financial instruments at exit price (see footnote 14 in this section of the filing) and recognizes changes in the fair value of applicable equity investments in net income (see footnote 2 in this section of the filing).
2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
This ASU provides cash flow statement classification guidance on eight reportable topics.
January 1, 2018
Retrospective transition.
Immaterial.
2016-18
Statement of Cash Flows (Topic 230)
Requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents.
January 1, 2018
Retrospective transition.
Immaterial.
2017-09
Compensation - Stock Compensation (Topic 718)
The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require the Company to apply modification accounting under Topic 718.
January 1, 2018
Prospectively.
Immaterial.
2018-05
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB 118")
This ASU updates the FASB's ASC for guidance issued by the SEC in SAB 118. Among other things, SAB 118 allows companies a one-year measurement period to complete their accounting for the impact of the 2017 Tax Cuts and Jobs Act.
Upon addition to the ASC
Not Applicable.
For the Company's financial statement disclosures in accordance with SAB 118, see footnote 18 in this section of the filing.

SUMMARY OF SIGNIFICANT ACCOUN_3

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)12 Months Ended
Dec. 31, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Schedules of Accounting Standards UpdatesASU. No.
Topic
Nature of Update
Date Adoption Required
Permitted Adoption Methods
Expected Financial Statement Impact
2016-02
Leases (Topic 842)
Most leases are considered operating leases, which are not accounted for on the lessees’ balance sheets. The significant change under this ASU is that those operating leases will be recorded on the balance sheet.
January 1, 2019
Modified-retrospective approach, which includes a number of optional practical expedients.
The Company adopted this ASU on January 1, 2019 and upon adoption recorded $41 million of right-of-use lease assets and $42 million of operating lease liabilities on its balance sheet. The Company does not expect the adoption of this ASU to have a meaningful impact on the Company's performance metrics, including regulatory capital ratios and return on average assets. Additionally, the Company does not believe that the adoption of this ASU by its clients will have a significant impact on the Company's ability to underwrite credit when client financial statements are presented inclusive of the requirements of this ASU.
2016-13
Financial Instruments – Credit Losses (Topic 326)
This ASU amends guidance on reporting credit losses for assets held at amortized-cost basis and available-for-sale debt securities.
January 1, 2020
Modified-retrospective approach.
As a result of this ASU, the Company expects an as yet undetermined increase in its allowance for credit losses. A committee formed by the Company to oversee its transition to a current expected credit losses (“CECL”) methodology has analyzed the Company’s loan-level data and preliminarily concluded that no additional loan level segmentation beyond its current methodology segmentation would be warranted under CECL. The Company is also currently performing iterations of its allowance calculation under a “beta” CECL model provided by the same third-party software solution currently-employed to calculate the Company's allowance for loan and lease losses.
2018-10
Codification Improvements to Topic 842, Leases
This ASU affects narrow aspects of the guidance issued in the amendments in ASU 2016-02.
January 1, 2019
Adoption should conform to the adoption of ASU 2016-02 above.
Immaterial
2018-11
Leases (Topic 842): Targeted Improvements
This ASU provides the Company with an additional (and optional) transition method to adopt ASU 2016-02. This ASU also provides the Company with a practical expedient to not separate non-lease components from the associated lease component under certain circumstances.
January 1, 2019
Adoption should conform to the adoption of ASU 2016-02 above.
The Company elected the optional transition method permitted by this ASU, allowing the Company to adopt ASU 2016-02, effective January 1, 2019 with a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019.
2018-16
Derivatives and Hedging (Topic 815)
This ASU permits the use of the Overnight Index Swap (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815.
January 1, 2019
Prospectively.
Immaterial
2018-18
Collaborative Arrangements (Topic 808)
This ASU makes targeted improvements for accounting for collaborative arrangements in order to better align the accounting with guidance in Topic 606, Revenue from Contracts with Customers.
January 1, 2020
Retrospectively.
Immaterial
2018-20
Leases (Topic 842)
This ASU permits lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs, but instead account for such costs as lessee costs. This ASU also requires that lessors allocate rather than recognize certain variable payments to the lease and non-lease components when the changes in facts and circumstances on which the variable payment is based occur.
January 1, 2019
Prospectively.
Immaterial
The following ASUs were adopted by the Company during the year ended December 31, 2018:
ASU. No.
Topic
Nature of Update
Date Adopted
Method of Adoption
Financial Statement Impact
2014-09
Revenue from Contracts with Customers (Topic 606)
Requires that revenue from contracts with clients be recognized upon transfer of control of a good or service in the amount of consideration expected to be received. Changes the accounting for certain contract costs, including whether they may be offset against revenue in the statements of income, and requires additional disclosures about revenue and contract costs.
January 1, 2018
Modified-retrospective approach.
Because most financial instruments are not subject to this ASU, a substantial portion of the Company's revenue was not impacted by this standard. Furthermore, this new standard did not have a material impact on the timing of revenue recognition for any of the Company's revenue for 2018 nor is it expected to going forward. Additionally, the Company took the following actions in association with the adoption of this ASU: 1) amended its accounting policies and procedures to ensure proper revenue recognition in conformity with this ASU; and 2) updated its revenue-recognition financial statement disclosures (see footnote 23 in this section of the filing).
2016-01
Financial Instruments – Overall (Topic 825-10)
Among other things: Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.
January 1, 2018
Modified-retrospective approach.
The Company has updated its policies, procedures, and financial statement presentation and disclosures for this ASU. As provided by this ASU, the Company now reports its financial instruments at exit price (see footnote 14 in this section of the filing) and recognizes changes in the fair value of applicable equity investments in net income (see footnote 2 in this section of the filing).
2016-15
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
This ASU provides cash flow statement classification guidance on eight reportable topics.
January 1, 2018
Retrospective transition.
Immaterial.
2016-18
Statement of Cash Flows (Topic 230)
Requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents.
January 1, 2018
Retrospective transition.
Immaterial.
2017-09
Compensation - Stock Compensation (Topic 718)
The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require the Company to apply modification accounting under Topic 718.
January 1, 2018
Prospectively.
Immaterial.
2018-05
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB 118")
This ASU updates the FASB's ASC for guidance issued by the SEC in SAB 118. Among other things, SAB 118 allows companies a one-year measurement period to complete their accounting for the impact of the 2017 Tax Cuts and Jobs Act.
Upon addition to the ASC
Not Applicable.
For the Company's financial statement disclosures in accordance with SAB 118, see footnote 18 in this section of the filing.

INVESTMENT SECURITIES (Tables)

INVESTMENT SECURITIES (Tables)12 Months Ended
Dec. 31, 2018
INVESTMENT SECURITIES
Schedule of gross amortized cost and fair value of available-for-sale debt securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive incomeGross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2018 (in thousands)
Cost
Gains
Losses
Value
U.S. Treasury securities and U.S. Government agencies
$
218,502
$
25
$
(1,654)
$
216,873
Private label mortgage backed security
2,348
1,364

3,712
Mortgage backed securities - residential
168,992
1,470
(1,253)
169,209
Collateralized mortgage obligations
73,740
222
(1,151)
72,811
Corporate bonds
10,000

(942)
9,058
Trust preferred security
3,533
542

4,075
Total available-for-sale debt securities
$
477,115
$
3,623
$
(5,000)
$
475,738
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2017 (in thousands)
Cost
Gains
Losses
Value
U.S. Treasury securities and U.S. Government agencies
$
309,042
$
1
$
(1,451)
$
307,592
Private label mortgage backed security
3,065
1,384

4,449
Mortgage backed securities - residential
105,644
1,603
(873)
106,374
Collateralized mortgage obligations
87,867
371
(1,075)
87,163
Corporate bonds
15,001
124

15,125
Trust preferred security
3,493
107

3,600
Total available-for-sale debt securities
$
524,112
$
3,590
$
(3,399)
$
524,303
Schedule of carrying value, gross unrecognized gains and losses, and fair value of held-to-maturity debt securitiesGross
Gross
Carrying
Unrecognized
Unrecognized
Fair
December 31, 2018 (in thousands)
Value
Gains
Losses
Value
Mortgage backed securities - residential
$
132
$
8
$

$
140
Collateralized mortgage obligations
19,544
178
(46)
19,676
Corporate bonds
45,088
16
(514)
44,590
Obligations of state and political subdivisions
463

(11)
452
Total held-to-maturity debt securities
$
65,227
$
202
$
(571)
$
64,858
Gross
Gross
Carrying
Unrecognized
Unrecognized
Fair
December 31, 2017 (in thousands)
Value
Gains
Losses
Value
Mortgage backed securities - residential
$
151
$
10
$

$
161
Collateralized mortgage obligations
23,437
236
(17)
23,656
Corporate bonds
40,175
686
(3)
40,858
Obligations of state and political subdivisions
464

(6)
458
Total held-to-maturity debt securities
$
64,227
$
932
$
(26)
$
65,133
Schedule of amortized cost and fair value of debt securities by contractual maturityAvailable-for-Sale
Held-to-Maturity
Debt Securities
Debt Securities
Amortized
Fair
Carrying
Fair
December 31, 2018 (in thousands)
Cost
Value
Value
Value
Due in one year or less
$
74,692
$
74,083
$
75
$
75
Due from one year to five years
153,810
151,848
40,536
40,266
Due from five years to ten years


4,940
4,701
Due beyond ten years
3,533
4,075


Private label mortgage backed security
2,348
3,712


Mortgage backed securities - residential
168,992
169,209
132
140
Collateralized mortgage obligations
73,740
72,811
19,544
19,676
Total debt securities
$
477,115
$
475,738
$
65,227
$
64,858
Schedule of debt securities with unrealized lossesLess than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2018 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$
71,627
$
(598)
$
106,136
$
(1,056)
$
177,763
$
(1,654)
Mortgage backed securities - residential
43,691
(484)
32,003
(769)
75,694
(1,253)
Collateralized mortgage obligations
16,487
(473)
31,071
(678)
47,558
(1,151)
Corporate bonds
9,058
(942)


9,058
(942)
Total available-for-sale debt securities
$
140,863
$
(2,497)
$
169,210
$
(2,503)
$
310,073
$
(5,000)
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2017 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$
209,165
$
(499)
$
88,415
$
(952)
$
297,580
$
(1,451)
Mortgage backed securities - residential
61,348
(617)
10,192
(256)
71,540
(873)
Collateralized mortgage obligations
30,963
(642)
18,603
(433)
49,566
(1,075)
Total available-for-sale debt securities
$
301,476
$
(1,758)
$
117,210
$
(1,641)
$
418,686
$
(3,399)
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2018 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Held-to-maturity debt securities:
Collateralized mortgage obligations
$

$

$
5,539
$
(46)
$
5,539
$
(46)
Corporate bonds
39,499
(514)


39,499
(514)
Obligations of state and political subdivisions
105
(1)
347
(10)
452
(11)
Total held-to-maturity debt securities:
$
39,604
$
(515)
$
5,886
$
(56)
$
45,490
$
(571)
Less than 12 months
12 months or more
Total
Unrealized
Unrealized
Unrealized
December 31, 2017 (in thousands)
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
Held-to-maturity debt securities:
Collateralized mortgage obligations
$

$

$
6,390
$
(17)
$
6,390
$
(17)
Corporate bonds
4,997
(3)


4,997
(3)
Obligations of state and political subdivisions
458
(6)


458
(6)
Total held-to-maturity debt securities:
$
5,455
$
(9)
$
6,390
$
(17)
$
11,845
$
(26)
Rollforward of the private label mortgage backed security credit lossesYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
1,765
$
1,765
$
1,765
Recovery of losses previously recorded
(152)


Balance, end of period
$
1,613
$
1,765
$
1,765
Schedule of pledged investment securitiesDecember 31, (in thousands)
2018
2017
Carrying amount
$
240,590
$
262,679
Fair value
240,700
262,902
Schedule of carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair valuesGross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2018 (in thousands)
Cost
Gains
Losses
Value
Freddie Mac preferred stock
$

$
410
$

$
410
Community Reinvestment Act mutual fund
2,500

(104)
2,396
Total equity securities with readily determinable fair values
$
2,500
$
410
$
(104)
$
2,806
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2017 (in thousands)
Cost
Gains
Losses
Value
Freddie Mac preferred stock
$

$
473
$

$
473
Community Reinvestment Act mutual fund
2,500

(45)
2,455
Total equity securities with readily determinable fair values
$
2,500
$
473
$
(45)
$
2,928
Schedule of equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of incomeYear Ended December 31, 2018
Gains (Losses) Recognized on Equity Securities
(in thousands)
Realized
Unrealized
Total
Freddie Mac preferred stock
$

$
(63)
$
(63)
Community Reinvestment Act mutual fund

(59)
(59)
Total equity securities with readily determinable fair value
$

$
(122)
$
(122)

LOANS HELD FOR SALE (Tables)

LOANS HELD FOR SALE (Tables)12 Months Ended
Dec. 31, 2018
LOANS HELD FOR SALE.
Schedule of activity of consumer loans held for sale and carried at fair valueYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
2,677
$
2,198
$

Origination of consumer loans held for sale
16,985
59,467
45,274
Loans transferred to held for investment
(2,237)


Proceeds from the sale of consumer loans held for sale
(17,022)
(59,380)
(43,410)
Net gain (loss) recognized on consumer loans held for sale
(403)
392
334
Balance, end of period
$

$
2,677
$
2,198
Schedule of activity of consumer loans held for sale and carried at lower of cost or fair valueYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
8,551
$
1,310
$
514
Origination of consumer loans held for sale
761,491
603,704
334,792
Loans transferred from held for investment
1,392


Proceeds from the sale of consumer loans held for sale
(764,929)
(601,718)
(336,497)
Net gain on sale of consumer loans held for sale
6,333
5,255
2,501
Balance, end of period
$
12,838
$
8,551
$
1,310

LOANS AND ALLOWANCE FOR LOAN _2

LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES (Tables)12 Months Ended
Dec. 31, 2018
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Schedule of composition of loan portfolioDecember 31, (in thousands)
2018
2017
Traditional Banking:
Residential real estate:
Owner occupied
$
907,005
$
921,565
Owner occupied - correspondent*
94,827
116,792
Nonowner occupied
242,846
205,081
Commercial real estate
1,248,940
1,207,293
Construction & land development
175,178
150,065
Commercial & industrial
430,355
341,692
Lease financing receivables
15,031
16,580
Home equity
332,548
347,655
Consumer:
Credit cards
19,095
16,078
Overdrafts
1,102
974
Automobile loans
63,475
65,650
Other consumer
46,642
20,501
Total Traditional Banking
3,577,044
3,409,926
Warehouse lines of credit*
468,695
525,572
Total Core Banking
4,045,739
3,935,498
Republic Processing Group*:
Tax Refund Solutions:
Easy Advances


Other TRS loans
13,744
11,648
Republic Credit Solutions
88,744
66,888
Total Republic Processing Group
102,488
78,536
Total loans**
4,148,227
4,014,034
Allowance for loan and lease losses
(44,675)
(42,769)
Total loans, net
$
4,103,552
$
3,971,265
* Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
** Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs. See table directly below for expanded detail.
Schedule that reconciles the contractually receivable and carrying amounts of loansDecember 31, (in thousands)
2018
2017
Contractually receivable
$
4,147,249
$
4,014,673
Unearned income(1)
(1,038)
(1,157)
Unamortized premiums(2)
588
1,069
Unaccreted discounts(3)
(3,174)
(4,643)
Net unamortized deferred origination fees and costs(4)
4,602
4,092
Carrying value of loans
$
4,148,227
$
4,014,034
(1)
Unearned income relates to lease financing receivables.
(2)
Unamortized premiums predominately relate to loans acquired through the Bank’s Correspondent Lending channel.
(3)
Unaccreted discounts include accretable and non-accretable discounts and relate to loans acquired in the Bank’s 2016 Cornerstone acquisition and its 2012 FDIC-assisted transactions.
(4)
Primarily attributable to the Traditional Banking segment.
Reconciliation of contractually-required and carrying amounts of PCI loansDecember 31, (in thousands)
2018
2017
Contractually required principal
$
4,251
$
5,435
Non-accretable amount
(1,521)
(1,691)
Accretable amount
(50)
(140)
Carrying value of loans
$
2,680
$
3,604
Rollforward of the accretable amount on PCI loansYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
(140)
$
(3,600)
$
(4,125)
Transfers between non-accretable and accretable*
(573)
(28)
(206)
Net accretion into interest income on loans, including loan fees
663
3,488
1,120
Generated from acquisition of Cornerstone Bancorp, Inc. (recasted)


(389)
Balance, end of period
$
(50)
$
(140)
$
(3,600)
* Transfers are primarily attributable to changes in estimated cash flows of the underlying loans.
Schedule of the risk category of loans by class of loans based on the bank's internal analysis performedDecember 31, 2018
Special
Doubtful /
PCI Loans -
PCI Loans -
Total Rated
(in thousands)
Pass
Mention
Substandard
Loss
Group 1
Substandard
Loans*
Traditional Banking:
Residential real estate:
Owner occupied
$

$
14,536
$
11,690
$

$
170
$
1,476
$
27,872
Owner occupied - correspondent


382



382
Nonowner occupied

575
1,889



2,464
Commercial real estate
1,239,576
5,281
3,162

921

1,248,940
Construction & land development
175,113

65



175,178
Commercial & industrial
428,897
813
620

25

430,355
Lease financing receivables
15,031





15,031
Home equity


1,361

5
81
1,447
Consumer:
Credit cards







Overdrafts







Automobile loans


91



91
Other consumer


462


2
464
Total Traditional Banking
1,858,617
21,205
19,722

1,121
1,559
1,902,224
Warehouse lines of credit
468,695





468,695
Total Core Banking
2,327,312
21,205
19,722

1,121
1,559
2,370,919
Republic Processing Group:
Tax Refund Solutions:
Easy Advances







Other TRS loans







Republic Credit Solutions


138



138
Total Republic Processing Group


138



138
Total rated loans
$
2,327,312
$
21,205
$
19,860
$

$
1,121
$
1,559
$
2,371,057
December 31, 2017
Special
Doubtful /
PCI Loans -
PCI Loans -
Total Rated
(in thousands)
Pass
Mention
Substandard
Loss
Group 1
Substandard
Loans*
Traditional Banking:
Residential real estate:
Owner occupied
$

$
18,054
$
12,056
$

$
180
$
1,658
$
31,948
Owner occupied - correspondent







Nonowner occupied

635
1,240

248

2,123
Commercial real estate
1,197,299
4,824
3,798

1,372

1,207,293
Construction & land development
149,332

733



150,065
Commercial & industrial
341,377
267
21

27

341,692
Lease financing receivables
16,580





16,580
Home equity

33
1,609

6
110
1,758
Consumer:
Credit cards







Overdrafts







Automobile loans


108



108
Other consumer


571


3
574
Total Traditional Banking
1,704,588
23,813
20,136

1,833
1,771
1,752,141
Warehouse lines of credit
525,572





525,572
Total Core Banking
2,230,160
23,813
20,136

1,833
1,771
2,277,713
Republic Processing Group:
Tax Refund Solutions:
Easy Advances







Other TRS loans
11,648





11,648
Republic Credit Solutions


1,066



1,066
Total Republic Processing Group
11,648

1,066



12,714
Total rated loans
$
2,241,808
$
23,813
$
21,202
$

$
1,833
$
1,771
$
2,290,427
* The above tables exclude all non-classified or non-rated residential real estate, home equity and consumer loans at the respective period ends.
Schedule of activity in the allowance for loan and lease lossesAllowance Rollforward
Years Ended December 31,
2018
2017
Beginning
Charge-
Ending
Beginning
Charge-
Ending
(in thousands)
Balance
Provision
offs
Recoveries
Balance
Balance
Provision
offs
Recoveries
Balance
Traditional Banking:
Residential real estate:
Owner occupied
$
6,182
$
225
$
(855)
$
246
$
5,798
$
7,158
$
(933)
$
(300)
$
257
$
6,182
Owner occupied - correspondent
292
(55)


237
373
(81)


292
Nonowner occupied
1,396
559
(332)
39
1,662
1,139
272
(30)
15
1,396
Commercial real estate
9,043
863
(7)
131
10,030
8,078
826

139
9,043
Construction & land development
2,364
161

30
2,555
1,850
508

6
2,364
Commercial & industrial
2,198
824
(200)
51
2,873
1,511
842
(189)
34
2,198
Lease financing receivables
174
(16)


158
136
38


174
Home equity
3,754
(473)
(115)
311
3,477
3,757
37
(222)
182
3,754
Consumer:
Credit cards
607
906
(416)
43
1,140
490
247
(168)
38
607
Overdrafts
974
1,082
(1,215)
261
1,102
675
1,031
(960)
228
974
Automobile loans
687
57
(24)
4
724
526
188
(30)
3
687
Other consumer
1,162
(423)
(444)
296
591
771
948
(884)
327
1,162
Total Traditional Banking
28,833
3,710
(3,608)
1,412
30,347
26,464
3,923
(2,783)
1,229
28,833
Warehouse lines of credit
1,314
(142)


1,172
1,464
(150)


1,314
Total Core Banking
30,147
3,568
(3,608)
1,412
31,519
27,928
3,773
(2,783)
1,229
30,147
Republic Processing Group:
Tax Refund Solutions:
Easy Advances

10,760
(12,478)
1,718


6,789
(8,121)
1,332

Other TRS loans
12
159
(74)
10
107
25
(254)

241
12
Republic Credit Solutions
12,610
16,881
(17,692)
1,250
13,049
4,967
17,396
(10,659)
906
12,610
Total Republic Processing Group
12,622
27,800
(30,244)
2,978
13,156
4,992
23,931
(18,780)
2,479
12,622
Total
$
42,769
$
31,368
$
(33,852)
$
4,390
$
44,675
$
32,920
$
27,704
$
(21,563)
$
3,708
$
42,769
Allowance Rollforward
Year Ended December 31, 2016
Beginning
Charge-
Ending
(in thousands)
Balance
Provision
offs
Recoveries
Balance
Traditional Banking:
Residential real estate:
Owner occupied
$
8,301
$
(1,148)
$
(416)
$
421
$
7,158
Owner occupied - correspondent
623
(250)


373
Nonowner occupied
1,052
79

8
1,139
Commercial real estate
7,672
768
(514)
152
8,078
Construction & land development
1,303
513
(44)
78
1,850
Commercial & industrial
1,455
259
(330)
127
1,511
Lease financing receivables
89
47


136
Home equity
2,996
961
(351)
151
3,757
Consumer:
Credit cards
448
154
(164)
52
490
Overdrafts
351
898
(816)
242
675
Automobile loans
56
481
(12)
1
526
Other consumer
479
686
(735)
341
771
Total Traditional Banking
24,825
3,448
(3,382)
1,573
26,464
Warehouse lines of credit
967
497


1,464
Total Core Banking
25,792
3,945
(3,382)
1,573
27,928
Republic Processing Group:
Tax Refund Solutions:
Easy Advances

3,048
(3,474)
426

Refund Anticipation Loans

(301)

301

Commercial & industrial

25


25
Republic Credit Solutions
1,699
7,776
(5,000)
492
4,967
Total Republic Processing Group
1,699
10,548
(8,474)
1,219
4,992
Total
$
27,491
$
14,493
$
(11,856)
$
2,792
$
32,920
Schedule of non-performing loans and non-performing assets and select credit quality ratiosDecember 31, (dollars in thousands)
2018
2017
Loans on nonaccrual status*
$
15,993
$
14,118
Loans past due 90-days-or-more and still on accrual**
145
956
Total nonperforming loans
16,138
15,074
Other real estate owned
160
115
Total nonperforming assets
$
16,298
$
15,189
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans
0.39
%
0.38
%
Nonperforming assets to total loans (including OREO)
0.39
0.38
Nonperforming assets to total assets
0.31
0.30
Credit Quality Ratios - Core Bank:
Nonperforming loans to total loans
0.40
%
0.36
%
Nonperforming assets to total loans (including OREO)
0.40
0.36
Nonperforming assets to total assets
0.32
0.28
*Loans on nonaccrual status include impaired loans.
**Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Schedule of recorded investment in non-accrual loans and loans past due over 90-days-or-more and still on accrual by class of loansPast Due 90-Days-or-More
Nonaccrual
and Still Accruing Interest*
December 31, (in thousands)
2018
2017
2018
2017
Traditional Banking:
Residential real estate:
Owner occupied
$
10,800
$
9,230
$

$

Owner occupied - correspondent
382



Nonowner occupied
669
257


Commercial real estate
2,318
3,247


Construction & land development

67


Commercial & industrial
630



Lease financing receivables




Home equity
1,095
1,217


Consumer:
Credit cards




Overdrafts




Automobile loans
75
68


Other consumer
24
32
13
19
Total Traditional Banking
15,993
14,118
13
19
Warehouse lines of credit




Total Core Banking
15,993
14,118
13
19
Republic Processing Group:
Tax Refund Solutions:
Easy Advances




Other TRS loans


4

Republic Credit Solutions


128
937
Total Republic Processing Group


132
937
Total
$
15,993
$
14,118
$
145
$
956
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Schedule of recorded investment in loansResidential Real Estate
Consumer
Owner
Republic
December 31, 2018
Owner
Occupied -
Nonowner
Home
Credit
Automobile
Other
Credit
(in thousands)
Occupied
Correspondent
Occupied
Equity
Cards
Overdrafts
Loans
Consumer
Solutions
Performing
$
896,205
$
94,445
$
242,177
$
331,453
$
19,095
$
1,102
$
63,400
$
46,605
$
88,616
Nonperforming
10,800
382
669
1,095


75
37
128
Total
$
907,005
$
94,827
$
242,846
$
332,548
$
19,095
$
1,102
$
63,475
$
46,642
$
88,744
Residential Real Estate
Consumer
Owner
Republic
December 31, 2017
Owner
Occupied -
Nonowner
Home
Credit
Automobile
Other
Credit
(in thousands)
Occupied
Correspondent
Occupied
Equity
Cards
Overdrafts
Loans
Consumer
Solutions
Performing
$
912,335
$
116,792
$
204,824
$
346,438
$
16,078
$
974
$
65,582
$
20,450
$
65,951
Nonperforming
9,230

257
1,217


68
51
937
Total
$
921,565
$
116,792
$
205,081
$
347,655
$
16,078
$
974
$
65,650
$
20,501
$
66,888
Schedule of aging of the recorded investment in loans by class of loans30 - 59
60 - 89
90 or More
December 31, 2018
Days
Days
Days
Total
Total
(dollars in thousands)
Delinquent
Delinquent
Delinquent*
Delinquent**
Current
Total
Traditional Banking:
Residential real estate:
Owner occupied
$
1,137
$
748
$
3,640
$
5,525
$
901,480
$
907,005
Owner occupied - correspondent




94,827
94,827
Nonowner occupied
349

659
1,008
241,838
242,846
Commercial real estate
511

588
1,099
1,247,841
1,248,940
Construction & land development




175,178
175,178
Commercial & industrial


25
25
430,330
430,355
Lease financing receivables




15,031
15,031
Home equity
558

226
784
331,764
332,548
Consumer:
Credit cards
82
46
1
129
18,966
19,095
Overdrafts
223
5
2
230
872
1,102
Automobile loans

28

28
63,447
63,475
Other consumer
27
7
13
47
46,595
46,642
Total Traditional Banking
2,887
834
5,154
8,875
3,568,169
3,577,044
Warehouse lines of credit




468,695
468,695
Total Core Banking
2,887
834
5,154
8,875
4,036,864
4,045,739
Republic Processing Group:
Tax Refund Solutions:
Easy Advances






Other TRS loans
2
4
4
10
13,734
13,744
Republic Credit Solutions
5,734
1,215
128
7,077
81,667
88,744
Total Republic Processing Group
5,736
1,219
132
7,087
95,401
102,488
Total
$
8,623
$
2,053
$
5,286
$
15,962
$
4,132,265
$
4,148,227
Delinquency ratio***
0.21
%
0.05
%
0.13
%
0.38
%
* All loans past due 90-days-or-more, excluding small balance consumer loans, were on nonaccrual status.
** Delinquent status may be determined by either the number of days past due or number of payments past due.
*** Represents total loans 30-days-or-more past due by aging category divided by total loans.
30 - 59
60 - 89
90 or More
December 31, 2017
Days
Days
Days
Total
Total
(dollars in thousands)
Delinquent
Delinquent
Delinquent*
Delinquent**
Current
Total
Traditional Banking:
Residential real estate:
Owner occupied
$
2,559
$
1,166
$
1,057
$
4,782
$
916,783
$
921,565
Owner occupied - correspondent




116,792
116,792
Nonowner occupied
47

99
146
204,935
205,081
Commercial real estate
398

1,329
1,727
1,205,566
1,207,293
Construction & land development
67


67
149,998
150,065
Commercial & industrial
15


15
341,677
341,692
Lease financing receivables




16,580
16,580
Home equity
723
50
448
1,221
346,434
347,655
Consumer:
Credit cards
34
40

74
16,004
16,078
Overdrafts
230
3

233
741
974
Automobile loans
36

24
60
65,590
65,650
Other consumer
93
21
21
135
20,366
20,501
Total Traditional Banking
4,202
1,280
2,978
8,460
3,401,466
3,409,926
Warehouse lines of credit




525,572
525,572
Total Core Banking
4,202
1,280
2,978
8,460
3,927,038
3,935,498
Republic Processing Group:
Tax Refund Solutions:
Easy Advances






Other TRS loans




11,648
11,648
Republic Credit Solutions
3,631
1,073
937
5,641
61,247
66,888
Total Republic Processing Group
3,631
1,073
937
5,641
72,895
78,536
Total
$
7,833
$
2,353
$
3,915
$
14,101
$
3,999,933
$
4,014,034
Delinquency ratio***
0.20
%
0.06
%
0.10
%
0.35
%
*All loans past due 90 days-or-more, excluding small-dollar consumer loans, were on nonaccrual status.
**Delinquent status may be determined by either the number of days past due or number of payments past due.
***Represents total loans 30-days-or-more past due divided by total loans.
Schedule of Bank's impaired loansYears Ended December 31, (in thousands)
2018
2017
2016
Loans with no allocated Allowance
$
19,555
$
18,540
$
21,416
Loans with allocated Allowance
21,880
27,076
31,268
Total recorded investment in impaired loans
$
41,435
$
45,616
$
52,684
Amount of the allocated Allowance
$
3,764
$
4,685
$
4,925
Average of individually impaired loans during the year
45,620
47,361
56,981
Interest income recognized during impairment
1,245
1,392
1,466
Cash basis interest income recognized


Schedule of balance in the Allowance and the recorded investment in loans by portfolio class based on impairment methodAllowance for Loan and Lease Losses
Loans
Individually
PCI with
Individually
PCI with
PCI without
December 31, 2018
Evaluated
Collectively
Post-Acquisition
Total
Evaluated
Collectively
Post-Acquisition
Post-Acquisition
Total
Allowance to
(dollars in thousands)
Excluding PCI
Evaluated
Impairment
Allowance
Excluding PCI
Evaluated
Impairment
Impairment
Loans
Total Loans
Traditional Banking:
Residential real estate:
Owner occupied
$
2,052
$
3,365
$
381
$
5,798
$
24,860
$
880,500
$
1,645
$

$
907,005
0.64
%
Owner occupied - correspondent

237

237
382
94,445


94,827
0.25
Nonowner occupied
4
1,658

1,662
2,406
240,440


242,846
0.68
Commercial real estate
294
9,727
9
10,030
8,104
1,239,915
919
2
1,248,940
0.80
Construction & land development
4
2,551

2,555
65
175,113


175,178
1.46
Commercial & industrial
130
2,743

2,873
1,020
429,310

25
430,355
0.67
Lease financing receivables

158

158

15,031


15,031
1.05
Home equity
286
3,117
74
3,477
1,361
331,101
86

332,548
1.05
Consumer:
Credit cards

1,140

1,140

19,095


19,095
5.97
Overdrafts

1,102

1,102

1,102


1,102
100.00
Automobile loans
91
633

724
91
63,384


63,475
1.14
Other consumer
421
170

591
449
46,190
3

46,642
1.27
Total Traditional Banking
3,282
26,601
464
30,347
38,738
3,535,626
2,653
27
3,577,044
0.85
Warehouse lines of credit

1,172

1,172

468,695


468,695
0.25
Total Core Banking
3,282
27,773
464
31,519
38,738
4,004,321
2,653
27
4,045,739
0.78
Republic Processing Group:
Tax Refund Solutions:
Easy Advances










Other TRS loans

107

107

13,744


13,744
0.78
Republic Credit Solutions
18
13,031

13,049
44
88,700


88,744
14.70
Total Republic Processing Group
18
13,138

13,156
44
102,444


102,488
12.84
Total
$
3,300
$
40,911
$
464
$
44,675
$
38,782
$
4,106,765
$
2,653
$
27
$
4,148,227
1.08
%
Allowance for Loan and Lease Losses
Loans
Individually
PCI with
Individually
PCI with
PCI without
December 31, 2017
Evaluated
Collectively
Post-Acquisition
Total
Evaluated
Collectively
Post-Acquisition
Post-Acquisition
Total
Allowance to
(dollars in thousands)
Excluding PCI
Evaluated
Impairment
Allowance
Excluding PCI
Evaluated
Impairment
Impairment
Loans
Total Loans
Traditional Banking:
Residential real estate:
Owner occupied
$
2,361
$
3,501
$
320
$
6,182
$
27,605
$
892,122
$
1,838
$

$
921,565
0.67
%
Owner occupied - correspondent

292

292

116,792


116,792
0.25
Nonowner occupied
4
1,390
2
1,396
1,814
203,019
248

205,081
0.68
Commercial real estate
407
8,588
48
9,043
9,185
1,196,736
1,369
3
1,207,293
0.75
Construction & land development
107
2,257

2,364
733
149,332


150,065
1.58
Commercial & industrial
288
1,910

2,198
308
341,357

27
341,692
0.64
Lease financing receivables

174

174

16,580


16,580
1.05
Home equity
425
3,218
111
3,754
1,609
345,930
115
1
347,655
1.08
Consumer:
Credit cards

607

607

16,078


16,078
3.78
Overdrafts

974

974

974


974
100.00
Automobile loans
32
655

687
108
65,542


65,650
1.05
Other consumer
528
631
3
1,162
552
19,946
3

20,501
5.67
Total Traditional Banking
4,152
24,197
484
28,833
41,914
3,364,408
3,573
31
3,409,926
0.85
Warehouse lines of credit

1,314

1,314

525,572


525,572
0.25
Total Core Banking
4,152
25,511
484
30,147
41,914
3,889,980
3,573
31
3,935,498
0.77
Republic Processing Group:
Tax Refund Solutions:
Easy Advances










Other TRS loans

12

12

11,648


11,648
0.10
Republic Credit Solutions
49
12,561

12,610
129
66,759


66,888
18.85
Total Republic Processing Group
49
12,573

12,622
129
78,407


78,536
16.07
Total
$
4,201
$
38,084
$
484
$
42,769
$
42,043
$
3,968,387
$
3,573
$
31
$
4,014,034
1.07
%
Schedule of loans individually evaluated for impairment by class of loansAs of
Twelve Months Ended
December 31, 2018
December 31, 2018
Cash Basis
Unpaid
Average
Interest
Interest
Principal
Recorded
Allocated
Recorded
Income
Income
(in thousands)
Balance
Investment
Allowance
Investment
Recognized
Recognized
Impaired loans with no allocated Allowance:
Residential real estate:
Owner occupied
$
11,676
$
10,703
$

$
10,817
$
198
$

Owner occupied - correspondent
382
382

385


Nonowner occupied
2,729
2,350

2,561
87

Commercial real estate
5,688
4,607

5,040
151

Construction & land development



119


Commercial & industrial
712
604

755
3

Lease financing receivables






Home equity
919
876

682
17

Consumer
33
33

49
2

Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied
16,215
15,802
2,433
17,754
528

Owner occupied - correspondent






Nonowner occupied
78
56
4
136


Commercial real estate
4,416
4,416
303
5,495
206

Construction & land development
65
65
4
113
3

Commercial & industrial
416
416
130
158
19

Lease financing receivables






Home equity
572
571
360
925
9

Consumer
554
554
530
631
22

Total impaired loans
$
44,455
$
41,435
$
3,764
$
45,620
$
1,245
$

As of
Twelve Months Ended
December 31, 2017
December 31, 2017
Cash Basis
Unpaid
Average
Interest
Interest
Principal
Recorded
Allocated
Recorded
Income
Income
(in thousands)
Balance
Investment
Allowance
Investment
Recognized
Recognized
Impaired loans with no allocated Allowance:
Residential real estate:
Owner occupied
$
11,664
$
10,789
$

$
11,253
$
179
$

Owner occupied - correspondent






Nonowner occupied
1,784
1,704

1,526
86

Commercial real estate
5,504
4,430

4,863
71

Construction & land development
591
591

565
29

Commercial & industrial
20
20

116
4

Lease financing receivables






Home equity
1,071
981

1,205
11

Consumer
25
25

62
1

Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied
18,676
18,654
2,681
20,212
655

Owner occupied - correspondent






Nonowner occupied
361
358
6
416
14

Commercial real estate
6,124
6,124
455
5,501
294

Construction & land development
142
142
107
209
3

Commercial & industrial
288
288
288
225
8

Lease financing receivables






Home equity
743
743
536
820
17

Consumer
767
767
612
388
20

Total impaired loans
$
47,760
$
45,616
$
4,685
$
47,361
$
1,392
$

As of
Twelve Months Ended
December 31, 2016
December 31, 2016
Cash Basis
Unpaid
Average
Interest
Interest
Principal
Recorded
Allocated
Recorded
Income
Income
(in thousands)
Balance
Investment
Allowance
Investment
Recognized
Recognized
Impaired loans with no allocated Allowance:
Residential real estate:
Owner occupied
$
13,727
$
12,629
$

$
13,219
$
140
$

Owner occupied - correspondent






Non owner occupied
1,399
1,376

1,293
20

Commercial real estate
6,610
5,536

6,462
106

Construction & land development
476
476

476
20

Commercial & industrial
67
67

115
7

Lease financing receivables






Home equity
1,358
1,287

1,674
15

Consumer
45
45

70


Impaired loans with allocated Allowance:
Residential real estate:
Owner occupied
21,595
21,576
3,361
22,867
782

Owner occupied - correspondent






Non owner occupied
491
493
73
799
24

Commercial real estate
7,397
7,397
577
8,592
292

Construction & land development
405
406
120
421
19

Commercial & industrial
619
619
227
621
1

Lease financing receivables






Home equity
742
741
532
331
39

Consumer
37
36
35
41
1

Total impaired loans
$
54,968
$
52,684
$
4,925
$
56,981
$
1,466
$
Schedule of TDRs differentiated by loan type and accrual statusTroubled Debt
Troubled Debt
Total
Restructurings on
Restructurings on
Troubled Debt
Nonaccrual Status
Accrual Status
Restructurings
Number of
Recorded
Number of
Recorded
Number of
Recorded
December 31, 2018 (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate
60
$
6,378
156
$
17,232
216
$
23,610
Commercial real estate
3
1,203
14
6,571
17
7,774
Construction & land development


1
65
1
65
Commercial & industrial
2
571
3
408
5
979
Consumer


256
435
256
435
Total troubled debt restructurings
65
$
8,152
430
$
24,711
495
$
32,863
Troubled Debt
Troubled Debt
Total
Restructurings on
Restructurings on
Troubled Debt
Nonaccrual Status
Accrual Status
Restructurings
Number of
Recorded
Number of
Recorded
Number of
Recorded
December 31, 2017 (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate
62
$
4,926
183
$
20,189
245
$
25,115
Commercial real estate
2
1,366
14
6,499
16
7,865
Construction & land development
1
67
3
666
4
733
Commercial & industrial


2
287
2
287
Consumer


830
637
830
637
Total troubled debt restructurings
65
$
6,359
1,032
$
28,278
1,097
$
34,637
Schedule of categories of TDR loan modifications outstanding and respective performance under modified termsTroubled Debt
Troubled Debt
Restructurings
Restructurings
Total
Performing to
Not Performing to
Troubled Debt
Modified Terms
Modified Terms
Restructurings
Number of
Recorded
Number of
Recorded
Number of
Recorded
December 31, 2018 (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate loans (including home equity loans):
Interest only payments

$

1
$
970
1
$
970
Rate reduction
145
16,892
12
978
157
17,870
Principal deferral
11
1,171
4
1,871
15
3,042
Legal modification
35
1,500
8
228
43
1,728
Total residential TDRs
191
19,563
25
4,047
216
23,610
Commercial related and construction/land development loans:
Interest only payments
2
752


2
752
Rate reduction
8
2,962


8
2,962
Principal deferral
12
5,076


12
5,076
Legal modification


1
28
1
28
Total commercial TDRs
22
8,790
1
28
23
8,818
Consumer loans:
Rate reduction
1
16


1
16
Principal deferral
255
419


255
419
Legal modification






Total consumer TDRs
256
435


256
435
Total troubled debt restructurings
469
$
28,788
26
$
4,075
495
$
32,863
Troubled Debt
Troubled Debt
Restructurings
Restructurings
Total
Performing to
Not Performing to
Troubled Debt
Modified Terms
Modified Terms
Restructurings
Number of
Recorded
Number of
Recorded
Number of
Recorded
December 31, 2017 (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate loans (including home equity loans):
Interest only payments
2
$
463

$

2
$
463
Rate reduction
161
18,777
17
1,902
178
20,679
Principal deferral
14
1,455
2
121
16
1,576
Legal modification
42
1,997
7
400
49
2,397
Total residential TDRs
219
22,692
26
2,423
245
25,115
Commercial related and construction/land development loans:
Interest only payments
3
837


3
837
Rate reduction
7
3,185
1
79
8
3,264
Principal deferral
9
3,430
2
1,354
11
4,784
Total commercial TDRs
19
7,452
3
1,433
22
8,885
Consumer loans:
Principal deferral
830
637


830
637
Total troubled debt restructurings
1,068
$
30,781
29
$
3,856
1,097
$
34,637
Summary of categories of TDR loan modifications that occurred during the periodTroubled Debt
Troubled Debt
Restructurings
Restructurings
Total
Performing to
Not Performing to
Troubled Debt
Modified Terms
Modified Terms
Restructurings
Number of
Recorded
Number of
Recorded
Number of
Recorded
December 31, 2018 (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate loans (including home equity loans):
Interest only payments

$

1
$
970
1
$
970
Rate reduction
2
465


2
465
Principal deferral
3
43
3
1,849
6
1,892
Legal modification
7
121
1
18
8
139
Total residential TDRs
12
629
5
2,837
17
3,466
Commercial related and construction/land development loans:
Principal deferral
6
1,402


6
1,402
Legal modification


1
28
1
28
Total commercial TDRs
6
1,402
1
28
7
1,430
Consumer loans:
Principal deferral
1
52


1
52
Total consumer TDRs
1
52


1
52
Total troubled debt restructurings
19
$
2,083
6
$
2,865
25
$
4,948
Troubled Debt
Troubled Debt
Restructurings
Restructurings
Total
Performing to
Not Performing to
Troubled Debt
Modified Terms
Modified Terms
Restructurings
Number of
Recorded
Number of
Recorded
Number of
Recorded
December 31, 2017 (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate loans (including home equity loans):
Rate reduction
1
$
219

$

1
$
219
Principal deferral
4
1,013


4
1,013
Legal modification
6
351
2
197
8
548
Total residential TDRs
11
1,583
2
197
13
1,780
Commercial related and construction/land development loans:
Principal deferral
2
266


2
266
Legal modification






Total commercial TDRs
2
266


2
266
Consumer loans:
Principal deferral
830
637


830
637
Total consumer TDRs
830
637


830
637
Total troubled debt restructurings
843
$
2,486
2
$
197
845
$
2,683
The tables above are inclusive of loans that were TDRs at the end of previous years and were re-modified, e.g., a maturity date extension during the current year.
Troubled Debt
Troubled Debt
Restructurings
Restructurings
Total
Performing to
Not Performing to
Troubled Debt
Modified Terms
Modified Terms
Restructurings
Number of
Recorded
Number of
Recorded
Number of
Recorded
December 31, 2016 (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate loans (including home equity loans):
Interest only payments
1
$
146

$

1
$
146
Rate reduction
6
566
3
149
9
715
Legal modification
4
319
7
741
11
1,060
Total residential TDRs
11
1,031
10
890
21
1,921
Commercial related and construction/land development loans:
Interest only payments
2
1,718


2
1,718
Rate reduction
2
749
1
135
3
884
Principal deferral
1
465
1
1,429
2
1,894
Total commercial TDRs
5
2,932
2
1,564
7
4,496
Total troubled debt restructurings
16
$
3,963
12
$
2,454
28
$
6,417
The table above is inclusive of loans that were TDRs at the end of previous years and were re-modified, e.g., a maturity date extension during the current year.
Schedule of loans by class modified as troubled debt restructurings within the previous twelve months for which there was a payment default2018
2017
2016
Number of
Recorded
Number of
Recorded
Number of
Recorded
Years Ended December 31, (dollars in thousands)
Loans
Investment
Loans
Investment
Loans
Investment
Residential real estate:
Owner occupied
6
$
2,920
2
$
197
5
$
498
Commercial real estate
1
28




Construction & land development




1
86
Home equity




1
286
Consumer


823
129


Total
7
$
2,948
825
$
326
7
$
870
Schedule of carrying amount of foreclosed properties heldDecember 31, (in thousands)
2018
2017
Residential real estate
$
160
$
115
Total other real estate owned
$
160
$
115
Schedule of recorded investment in consumer mortgage loans secured by residential real estate propertiesDecember 31, (in thousands)
2018
2017
Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure
$
3,293
$
1,392
Schedule of Easy AdvancesYears Ended December 31, (dollars in thousands)
2018
2017
2016
Easy Advances originated
$
430,210
$
328,523
$
123,230
Net charge to the Provision for Easy Advances
10,760
6,789
3,048
Provision to total Easy Advances originated
2.50
%
2.07
%
2.47
%
Easy Advances net charge-offs
$
10,760
$
6,789
$
3,048
Easy Advances net charge-offs to total Easy Advances originated
2.50
%
2.07
%
2.47
%

PREMISES AND EQUIPMENT (Tables)

PREMISES AND EQUIPMENT (Tables)12 Months Ended
Dec. 31, 2018
PREMISES AND EQUIPMENT
Summary of the cost and accumulated depreciation of premises and equipmentDecember 31, (in thousands)
2018
2017
Land
$
4,185
$
4,185
Buildings and improvements
35,264
34,513
Furniture, fixtures and equipment
43,245
40,550
Leasehold improvements
19,638
18,760
Total premises and equipment
102,332
98,008
Less: Accumulated depreciation and amortization
59,206
55,420
Premises and equipment, net
$
43,126
$
42,588
Schedule of depreciation expense related to premises and equipmentYears Ended December 31, (in thousands)
2018
2017
2016
Depreciation expense
$
9,347
$
8,472
$
7,304

GOODWILL AND CORE DEPOSIT INT_2

GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS (Tables)12 Months Ended
Dec. 31, 2018
GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
Schedule of progression of the balance for goodwillYears Ended December 31, (in thousands)
2018
2017
2016
Beginning of period
$
16,300
$
16,300
$
10,168
Acquired goodwill


6,132
Impairment



End of period
$
16,300
$
16,300
$
16,300

INTEREST RATE SWAPS (Tables)

INTEREST RATE SWAPS (Tables)12 Months Ended
Dec. 31, 2018
INTEREST RATE SWAPS
Summary of swaps designated as cash flow hedgesDecember 31, 2018
December 31, 2017
Unrealized
Unrealized
Notional
Pay
Receive
Assets /
Gain (Loss)
Assets /
Gain (Loss)
(dollars in thousands)
Amount
Rate
Rate
Term
(Liabilities)
AOCI
(Liabilities)
in AOCI
Interest rate swap on money market deposits
$
10,000
2.17
%
1M LIBOR
12/2013 - 12/2020
$
58
$
45
$
(60)
$
(25)
Interest rate swap on FHLB advance
10,000
2.33
%
3M LIBOR
12/2013 - 12/2020
57
45
(31)
(48)
Total
$
20,000
$
115
$
90
$
(91)
$
(73)
Schedule of interest expense recorded on swap transactions in the consolidated statements of incomeDecember 31, (in thousands)
2018
2017
2016
Interest rate swap on money market deposits
$
18
$
109
$
168
Interest rate swap on FHLB advance
10
110
164
Total interest expense on swap transactions
$
28
$
219
$
332
Summary of net gains recorded in AOCI and the consolidated statements of income relating to the swapsDecember 31, (in thousands)
2018
2017
2016
Gains (losses) recognized in OCI on derivative (effective portion)
$
178
$
83
$
(125)
Losses reclassified from OCI on derivative (effective portion)
(28)
(219)
(332)
Gains (losses) recognized in income on derivative (ineffective portion)


Summary of interest rate swaps related to clients2018
2017
Notional
Notional
December 31, (in thousands)
Bank Position
Amount
Fair Value
Amount
Fair Value
Interest rate swaps with Bank clients - Assets
Pay variable/receive fixed
$
26,398
$
1,264
$
48,942
$
312
Interest rate swaps with Bank clients - Liabilities
Pay variable/receive fixed
54,718
(908)
12,477
(228)
Interest rate swaps with Bank clients - Total
Pay variable/receive fixed
$
81,116
$
356
$
61,419
$
84
Offsetting interest rate swaps with institutional swap dealer
Pay fixed/receive variable
81,116
(356)
61,419
(84)
Total
$
162,232
$

$
122,838
$

DEPOSITS (Tables)

DEPOSITS (Tables)12 Months Ended
Dec. 31, 2018
DEPOSITS
Ending deposit balancesDecember 31, (in thousands)
2018
2017
Core Bank:
Demand
$
937,402
$
944,812
Money market accounts
717,954
546,998
Savings
187,868
182,800
Individual retirement accounts(1)
53,524
47,982
Time deposits, $250 and over(1)
84,104
77,891
Other certificates of deposit(1)
239,324
189,661
Reciprocal money market and time deposits(1)(2)
217,153
346,613
Brokered deposits(1)
9,394
72,718
Total Core Bank interest-bearing deposits
2,446,723
2,409,475
Total Core Bank noninterest-bearing deposits
971,422
988,537
Total Core Bank deposits
3,418,145
3,398,012
Republic Processing Group:
Money market accounts
5,453
1,641
Total RPG interest-bearing deposits
5,453
1,641
Brokered prepaid card deposits
4,350
1,509
Other noninterest-bearing deposits
28,197
31,996
Total RPG noninterest-bearing deposits
32,547
33,505
Total RPG deposits
38,000
35,146
Total deposits
$
3,456,145
$
3,433,158
(1)
Represents a time deposit.
(2)
Prior to June 2018, reciprocal deposits were classified as “brokered deposits.” The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018, provides that most reciprocal deposits are no longer classified as brokered deposits if the Bank meets certain regulatory criteria.
Schedule of time deposits of $250,000 or moreDecember 31, (in thousands)
2018
2017
Time deposits of $250 or more
$
84,104
$
77,891
Schedule of maturities of all time deposits, including brokered certificates of depositWeighted
Average
Year (dollars in thousands)
Principal
Rate
2019
$
177,702
1.42
%
2020
91,045
1.86
2021
53,494
2.17
2022
34,014
2.12
2023
60,220
2.93
Thereafter


Total
$
416,475
1.89

SECURITIES SOLD UNDER AGREEME_2

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Tables)12 Months Ended
Dec. 31, 2018
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Schedule of securities sold under agreements to repurchaseDecember 31, (dollars in thousands)
2018
2017
Outstanding balance at end of period
$
182,990
$
204,021
Weighted average interest rate at end of period
0.83
%
0.31
%
Fair value of securities pledged:
U.S. Treasury securities and U.S. Government agencies
$
110,854
$
71,824
Mortgage backed securities - residential
84,657
83,452
Collateralized mortgage obligations
10,136
84,693
Total securities pledged
$
205,647
$
239,969
Additional information regarding securities sold under agreements to repurchase for the years ended December 31, 2018, 2017 and 2016 follows:
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Average outstanding balance during the period
$
225,145
$
219,515
$
280,296
Average interest rate during the period
%
0.23
%
0.02
%
Maximum outstanding at any month end during the period
$
260,147
$
293,944
$
367,373

FEDERAL HOME LOAN BANK ADVANC_2

FEDERAL HOME LOAN BANK ADVANCES (Tables)12 Months Ended
Dec. 31, 2018
FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank AdvancesDecember 31, (dollars in thousands)
2018
2017
Overnight advances
$
510,000
$
330,000
Variable interest rate advance indexed to 3-Month LIBOR plus 0.14%
10,000
10,000
Fixed interest rate advances
290,000
397,500
Total FHLB advances
$
810,000
$
737,500
Aggregate Future Principal Payments on FHLB AdvancesWeighted
Average
Year (dollars in thousands)
Principal
Rate
2019 (Overnight)
$
510,000
2.45
%
2019 (Term)
110,000
1.91
2020
120,000
1.81
2021
30,000
1.93
2022
20,000
2.12
2023
20,000
2.56
2024


Thereafter


Total
$
810,000
2.26
%
Information Regarding Overnight FHLB AdvancesDecember 31, (dollars in thousands)
2018
2017
Outstanding balance at end of period
$
510,000
$
330,000
Weighted average interest rate at end of period
2.45
%
1.42
%
Years Ended December 31, (dollars in thousands)
2018
2017
2016
Average outstanding balance during the period
$
202,830
$
141,918
$
91,087
Average interest rate during the period
1.98
%
1.09
%
0.43
%
Maximum outstanding at any month end during the period
$
560,000
$
625,000
$
495,000
Real Estate Loans PledgedDecember 31, (in thousands)
2018
2017
First lien, single family residential real estate
$
1,129,588
$
1,123,402
Home equity lines of credit
311,419
320,649

OFF BALANCE SHEET RISKS, COMM_2

OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES (Tables)12 Months Ended
Dec. 31, 2018
OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
Bank Commitment Exclusive of Mortgage Bank Loan CommitmentsDecember 31, (in thousands)
2018
2017
Unused warehouse lines of credit
$
591,305
$
525,328
Unused home equity lines of credit
377,277
367,887
Unused loan commitments - other
720,645
598,002
Standby letters of credit
10,642
12,643
FHLB letter of credit
10,000
10,000
Total commitments
$
1,709,869
$
1,513,860

STOCKHOLDERS' EQUITY AND REGU_2

STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL MATTERS (Tables)12 Months Ended
Dec. 31, 2018
STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL MATTERS
Schedule of compliance with regulatory capital requirementsis
Minimum Requirement
to be Well Capitalized
Minimum Requirement
Under Prompt
for Capital Adequacy
Corrective Action
Actual
Purposes
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2018
Total capital to risk-weighted assets
Republic Bancorp, Inc.
$
757,726
16.80
%
$
360,911
8.00
%
NA
NA
Republic Bank & Trust Company
654,258
14.52
360,359
8.00
$
450,449
10.00
%
Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.
673,051
14.92
203,012
4.50
NA
NA
Republic Bank & Trust Company
609,583
13.53
202,702
4.50
292,792
6.50
Tier 1 (core) capital to risk-weighted assets
Republic Bancorp, Inc.
713,051
15.81
270,683
6.00
NA
NA
Republic Bank & Trust Company
609,583
13.53
270,269
6.00
360,359
8.00
Tier 1 leverage capital to average assets
Republic Bancorp, Inc.
713,051
14.11
202,119
4.00
NA
NA
Republic Bank & Trust Company
609,583
12.06
202,126
4.00
252,658
5.00
Minimum Requirement
to be Well Capitalized
Minimum Requirement
Under Prompt
for Capital Adequacy
Corrective Action
Actual
Purposes
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2017
Total capital to risk-weighted assets
Republic Bancorp, Inc.
$
694,369
16.04
%
$
346,215
8.00
%
NA
NA
Republic Bank & Trust Company
591,592
13.69
345,589
8.00
$
431,987
10.00
%
Common equity tier 1 capital to risk-weighted assets
Republic Bancorp, Inc.
612,315
14.15
194,746
4.50
NA
NA
Republic Bank & Trust Company
548,823
12.70
194,394
4.50
280,791
6.50
Tier 1 (core) capital to risk-weighted assets
Republic Bancorp, Inc.
651,600
15.06
259,662
6.00
NA
NA
Republic Bank & Trust Company
548,823
12.70
259,192
6.00
345,589
8.00
Tier 1 leverage capital to average assets
Republic Bancorp, Inc.
651,600
13.21
197,309
4.00
NA
NA
Republic Bank & Trust Company
548,823
11.15
196,961
4.00
246,201
5.00

FAIR VALUE (Tables)

FAIR VALUE (Tables)12 Months Ended
Dec. 31, 2018
Fair Value Disclosures
Assets and Liabilities Measured at Fair Value on Recurring BasisFair Value Measurements at
December 31, 2018 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$

$
216,873
$

$
216,873
Private label mortgage backed security


3,712
3,712
Mortgage backed securities - residential

169,209

169,209
Collateralized mortgage obligations

72,811

72,811
Corporate bonds

9,058

9,058
Trust preferred security


4,075
4,075
Total available-for-sale debt securities
$

$
467,951
$
7,787
$
475,738
Equity securities with readily determinable fair value:
Freddie Mac preferred stock
$

$
410
$

$
410
Community Reinvestment Act mutual fund
2,396


2,396
Total equity securities with readily determinable fair value
$
2,396
$
410
$

$
2,806
Mortgage loans held for sale
$

$
8,971
$

$
8,971
Consumer loans held for investment


1,922
1,922
Rate lock loan commitments

356

356
Interest rate swap agreements

1,264

1,264
Financial liabilities:
Mandatory forward contracts
$

$
262
$

$
262
Interest rate swap agreements

1,149

1,149
Fair Value Measurements at
December 31, 2017 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies
$

$
307,592
$

$
307,592
Private label mortgage backed security


4,449
4,449
Mortgage backed securities - residential

106,374

106,374
Collateralized mortgage obligations

87,163

87,163
Corporate bonds

15,125

15,125
Trust preferred security


3,600
3,600
Total available-for-sale debt securities
$

$
516,254
$
8,049
$
524,303
Equity securities with readily determinable fair value:
Freddie Mac preferred stock
$

$
473
$

$
473
Community Reinvestment Act mutual fund
2,455


2,455
Total equity securities with readily determinable fair value
$
2,455
$
473
$

$
2,928
Mortgage loans held for sale
$

$
5,761
$

$
5,761
Consumer loans held for sale


2,677
2,677
Rate lock loan commitments

310

310
Interest rate swap agreements

312

312
Financial liabilities:
Mandatory forward contracts
$

$
9
$

$
9
Interest rate swap agreements

403

403
Assets Measured at Fair Value on a Non-Recurring BasisFair Value Measurements at
December 31, 2018 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Consumer loans held for sale
$

$

$
1,249
$
1,249
Impaired loans:
Residential real estate:
Owner occupied
$

$

$
4,708
$
4,708
Nonowner occupied


1,007
1,007
Commercial real estate


1,255
1,255
Commercial & industrial


609
609
Home equity


356
356
Total impaired loans*
$

$

$
7,935
$
7,935
Premises
$

$

$
1,694
$
1,694
Fair Value Measurements at
December 31, 2017 Using:
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets
Inputs
Inputs
Fair
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Value
Impaired loans:
Residential real estate:
Owner occupied
$

$

$
4,107
$
4,107
Nonowner occupied


237
237
Commercial real estate


1,366
1,366
Home equity


393
393
Total impaired loans*
$

$

$
6,103
$
6,103
Other real estate owned:
Residential real estate
$

$

$
83
$
83
Total other real estate owned
$

$

$
83
$
83
Premises
$

$

$
3,017
$
3,017
* The difference between the carrying value and the fair value of impaired loans measured at fair value is reconciled in a subsequent table of this Footnote.
Schedule of Consumer Loans Held for SaleDecember 31, (in thousands)
December 31, 2018
Carrying amount of loans measured at fair value
$
2,867
Estimated discount for loan losses
(1,618)
Total fair value
$
1,249
Impaired collateral dependent loans classified with Level 3 fair value hierarchyDecember 31, (in thousands)
2018
2017
Carrying amount of loans measured at fair value
$
7,380
$
5,358
Estimated selling costs considered in carrying amount
913
752
Valuation allowance
(358)
(7)
Total fair value
$
7,935
$
6,103
Provisions for loss on collateral dependent impaired loansYears Ended December 31, (in thousands)
2018
2017
2016
Provisions on collateral-dependent, impaired loans
$
1,629
$
169
$
552
Other Real Estate OwnedDecember 31, (in thousands)
2018
2017
2016
Other real estate owned carried at fair value
$

$
83
$
400
Other real estate owned carried at cost
160
32
991
Total carrying value of other real estate owned
$
160
$
115
$
1,391
Other real estate owned write-downs during the years ended
$

$
155
$
270
Schedule of Impairment charges on premises and equipmentYears Ended December 31, (in thousands)
2018
2017
2016
Impairment charges on premises
$
482
$
1,175
$
191
Carrying amount and estimated exit-price fair values of financial instrumentsFair Value Measurements at
December 31, 2018:
Total
Carrying
Fair
(in thousands)
Value
Level 1
Level 2
Level 3
Value
Assets:
Cash and cash equivalents
$
351,474
$
351,474
$

$

$
351,474
Available-for-sale debt securities
475,738

467,951
7,787
475,738
Held-to-maturity debt securities
65,227

64,858

64,858
Equity securities with readily determinable fair values
2,806
2,396
410

2,806
Mortgage loans held for sale, at fair value
8,971

8,971

8,971
Consumer loans held for sale, at the lower of cost or fair value
12,838

12,838

12,838
Loans, net
4,103,552


4,062,457
4,062,457
Federal Home Loan Bank stock
32,067



NA
Accrued interest receivable
13,942

13,942

13,942
Rate lock loan commitments
356

356

356
Interest rate swap agreements
1,264

1,264

1,264
Liabilities:
Noninterest-bearing deposits
$
1,003,969

$
1,003,969

$
1,003,969
Transaction deposits
2,035,701

2,035,701

2,035,701
Time deposits
416,475

412,477

412,477
Securities sold under agreements to repurchase and other short-term borrowings
182,990

182,990

182,990
Federal Home Loan Bank advances
810,000

804,251

804,251
Subordinated note
41,240

33,724

33,724
Accrued interest payable
1,084

1,084

1,084
Mandatory forward contracts
262

262

262
Interest rate swap agreements
1,149

1,149

1,149
NA - Not applicable
Fair Value Measurements at
December 31, 2017:
Total
Carrying
Fair
(in thousands)
Value
Level 1
Level 2
Level 3
Value
Assets:
Cash and cash equivalents
$
299,351
$
299,351
$

$

$
299,351
Available-for-sale debt securities
524,303

516,254
8,049
524,303
Held-to-maturity debt securities
64,227

65,133

65,133
Equity securities with readily determinable fair values
2,928
2,455
473

2,928
Mortgage loans held for sale, at fair value
5,761

5,761

5,761
Consumer loans held for sale, at fair value
2,677


2,677
2,677
Consumer loans held for sale, at the lower of cost or fair value
8,551

8,551

8,551
Loans, net
3,971,265


3,938,998
3,938,998
Federal Home Loan Bank stock
32,067



NA
Accrued interest receivable
12,082

12,082

12,082
Rate lock loan commitments
310

310

310
Interest rate swap agreements
312

312

312
Liabilities:
Noninterest-bearing deposits
$
1,022,042

$
1,022,042

$
1,022,042
Transaction deposits
2,049,493

2,049,493

2,049,493
Time deposits
361,623

358,627

358,627
Securities sold under agreements to repurchase and other short-term borrowings
204,021

204,021

204,021
Federal Home Loan Bank advances
737,500

730,712

730,712
Subordinated note
41,240

31,763

31,763
Accrued interest payable
1,100

1,100

1,100
Mandatory forward contracts
9

9

9
Interest rate swap agreements
403

403

403
NA - Not applicable
Nonrecurring basis
Fair Value Disclosures
Fair value inputs quantitative informationRange
Fair
Valuation
Unobservable
(Weighted
December 31, 2018 (dollars in thousands)
Value
Technique
Inputs
Average)
Consumer loans held for sale
$
1,249
Sales comparison approach
Adjustments determined for differences between comparable sales
6% (6%)
Impaired loans - residential real estate owner occupied
$
4,708
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 67% (9%)
Impaired loans - residential real estate nonowner occupied
$
1,007
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 27% (15%)
Impaired loans - commercial real estate
$
123
Sales comparison approach
Adjustments determined for differences between comparable sales
21% (21%)
Impaired loans - commercial real estate
$
1,132
Income approach
Adjustments for differences between net operating income expectations
17% (17%)
Impaired loans - commercial & industrial
$
609
Sales comparison approach
Adjustments determined for differences between comparable sales
3% (3%)
Impaired loans - home equity
$
356
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 22% (8%)
Premises
$
1,694
Sales comparison approach
Adjustments determined for differences between comparable sales
27% - 72% (40%)
Range
Fair
Valuation
Unobservable
(Weighted
December 31, 2017 (dollars in thousands)
Value
Technique
Inputs
Average)
Impaired loans - residential real estate owner occupied
$
4,107
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 54% (10%)
Impaired loans - residential real estate nonowner occupied
$
237
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 8% (5%)
Impaired loans - commercial real estate
$
79
Sales comparison approach
Adjustments determined for differences between comparable sales
21% (21%)
Impaired loans - commercial real estate
$
1,287
Income approach
Adjustments for differences between net operating income expectations
17% (17%)
Impaired loans - home equity
$
393
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 23% (15%)
Other real estate owned - residential real estate
$
83
Sales comparison approach
Adjustments determined for differences between comparable sales
86% (86%)
Premises
$
3,017
Sales comparison approach
Adjustments determined for differences between comparable sales
4% - 67% (21%)
Private label mortgage backed security
Fair Value Disclosures
Reconciliation of the Bank's investments measured at fair value on a recurring basis using significant unobservable inputsYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
4,449
$
4,777
$
5,132
Total gains or losses included in earnings:
Net change in unrealized gain
(20)
298
(9)
Recovery of actual losses previously recorded
152


Principal paydowns
(869)
(626)
(346)
Balance, end of period
$
3,712
$
4,449
$
4,777
Private label mortgage backed security | Recurring basis
Fair Value Disclosures
Fair value inputs quantitative informationFair
Valuation
December 31, 2018 (dollars in thousands)
Value
Technique
Unobservable Inputs
Range
Private label mortgage backed security
$
3,712
Discounted cash flow
(1) Constant prepayment rate
6.5% - 8.9%
(2) Probability of default
1.8% - 4.7%
(3) Loss severity
50% - 75%
Fair
Valuation
December 31, 2017 (dollars in thousands)
Value
Technique
Unobservable Inputs
Range
Private label mortgage backed security
$
4,449
Discounted cash flow
(1) Constant prepayment rate
3.5% - 6.5%
(2) Probability of default
1.8% - 8.0%
(3) Loss severity
60% - 85%
Trust preferred security
Fair Value Disclosures
Reconciliation of the Bank's investments measured at fair value on a recurring basis using significant unobservable inputsYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
3,600
$
3,200
$
3,405
Total gains or losses included in earnings:
Discount accretion
40
44
44
Net change in unrealized gain
435
356
(249)
Balance, end of period
$
4,075
$
3,600
$
3,200
Mortgage loans held for sale
Fair Value Disclosures
Schedule of aggregate fair value, contractual balance and unrealized gainDecember 31, (in thousands)
2018
2017
Aggregate fair value
$
8,971
$
5,761
Contractual balance
8,676
5,668
Unrealized gain
295
93
Schedule of gains and losses from changes in fair value included in earningsYears Ended December 31, (in thousands)
2018
2017
2016
Interest income
$
402
$
346
$
200
Change in fair value
203
(1)
4
Total included in earnings
$
605
$
345
$
204
Consumer loans
Fair Value Disclosures
Schedule of aggregate fair value, contractual balance and unrealized gainDecember 31, (in thousands)
2018
2017
Aggregate fair value
$
1,922
$
2,677
Contractual balance
2,170
2,535
Unrealized (loss) gain
(248)
142
Schedule of gains and losses from changes in fair value included in earningsYears Ended December 31, (in thousands)
2018
2017
2016
Interest income
$
602
$
962
$
700
Change in fair value
(390)
29
114
Total included in earnings
$
212
$
991
$
814
Consumer loans | Recurring basis
Fair Value Disclosures
Fair value inputs quantitative informationFair
Valuation
December 31, 2018 (dollars in thousands)
Value
Technique
Unobservable Inputs
Rate
Consumer loans held for investment
$
1,922
Discounted Cash Flows
(1) Constant prepayment rate
15.0%
(2) Probability of default
45.0%
(3) Loss severity
20.0%
Fair
Valuation
December 31, 2017 (dollars in thousands)
Value
Technique
Unobservable Inputs
Rate
Consumer loans held for sale
$
2,677
Contractual Sales Terms
(1) Net Premium
0.9%
(2) Discounted Sales
5.0%

MORTGAGE BANKING ACTIVITIES (Ta

MORTGAGE BANKING ACTIVITIES (Tables)12 Months Ended
Dec. 31, 2018
MORTGAGE BANKING ACTIVITIES
Activity for Mortgage Loans Held for Sale, at fair valueYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
5,761
$
11,662
$
4,083
Origination of mortgage loans held for sale
176,916
160,091
216,812
Transferred from held for investment to held for sale


71,201
Proceeds from the sale of mortgage loans held for sale
(177,545)
(169,969)
(287,090)
Net gain on sale of mortgage loans held for sale
3,839
3,977
6,656
Balance, end of period
$
8,971
$
5,761
$
11,662
Components of Mortgage Banking IncomeYears Ended December 31, (in thousands)
2018
2017
2016
Net gain realized on sale of mortgage loans held for sale
$
3,843
$
4,180
$
5,478
Net gain realized on sale of mortgage loans transferred from held for investment to held for sale


1,129
Net change in fair value recognized on loans held for sale
203
(1)
4
Net change in fair value recognized on rate lock loan commitments
46
11
(8)
Net change in fair value recognized on forward contracts
(253)
(213)
53
Net gain recognized
3,839
3,977
6,656
Loan servicing income
2,418
2,169
1,983
Amortization of mortgage servicing rights
(1,432)
(1,504)
(1,757)
Net servicing income recognized
986
665
226
Total Mortgage Banking income
$
4,825
$
4,642
$
6,882
Activity for capitalized mortgage servicing rightsYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
5,044
$
5,180
$
4,912
Additions
1,307
1,368
2,025
Amortized to expense
(1,432)
(1,504)
(1,757)
Balance, end of period
$
4,919
$
5,044
$
5,180
Other information relating to mortgage servicing rightsDecember 31, (in thousands)
2018
2017
Fair value of mortgage servicing rights portfolio
$
9,357
$
7,984
Monthly weighted average prepayment rate of unpaid principal balance*
160
%
200
%
Discount rate
10.00
%
10.00
%
Weighted average default rate
%
3.75
%
Weighted average life in years
* Rates are applied to individual tranches with similar characteristics.
Schedule of estimated future amortization expense of the MSR portfolio (net of the impairment charge)Year
(in thousands)
2019
$
796
2020
778
2021
756
2022
721
2023
638
2024
523
2025
707
Total
$
4,919
Schedule of notional amounts and fair values of mortgage loans held for sale at fair value and mortgage banking derivatives2018
2017
Notional
Notional
December 31, (in thousands)
Amount
Fair Value
Amount
Fair Value
Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value
$
8,676
$
8,971
$
5,668
$
5,761
Included in other assets:
Rate lock loan commitments
$
14,788
$
356
$
14,696
$
310
Included in other liabilities:
Mandatory forward contracts
$
20,063
$
262
$
17,159
$
9

STOCK PLANS AND STOCK BASED C_2

STOCK PLANS AND STOCK BASED COMPENSATION (Tables)12 Months Ended
Dec. 31, 2018
Schedule of weighted average assumptions used to determine the fair value of stock options grantedYears Ended December 31,
2018
2017
2016
Risk-free interest rate
3.00
%
2.07
%
1.43
%
Expected dividend yield
2.01
%
2.41
%
3.16
%
Expected stock price volatility
18.59
%
20.36
%
20.17
%
Expected life of options (in years)
5
5
5
Estimated fair value per share
$
8.09
$
5.46
$
3.27
Summary of stock option activityWeighted
Weighted
Average
Options
Average
Remaining
Aggregate
Class A
Exercise
Contractual
Intrinsic
Shares
Price
Term
Value
Outstanding, January 1, 2017
312,600
$
24.49
Granted
4,500
35.54
Exercised
(3,500)
19.63
Forfeited or expired
(18,600)
24.99
Outstanding, December 31, 2017
295,000
$
24.68
2.86
$
3,935,010
Outstanding, January 1, 2018
295,000
$
24.68
Granted
165,000
48.08
Exercised
(3,500)
24.10
Forfeited or expired
(23,300)
26.51
Outstanding, December 31, 2018
433,200
$
33.50
3.15
$
3,786,820
Unvested
433,200
$
33.50
3.15
$
3,786,820
Exercisable (vested) at December 31, 2018

$


$
Schedule of intrinsic value and cash received from options exercised and weighted average fair value of options grantedYears Ended December 31, (in thousands, except per share data)
2018
2017
2016
Intrinsic value of options exercised
$
79
$
71
$
18
Cash received from options exercised, net of shares redeemed
83
68
80
Schedule of loan balances of non-executive officer employees that were originated to fund stock option exercisesDecember 31, (in thousands)
2018
2017
Outstanding loans
$
134
$
139
Summary of activity for non-vested restricted stock awardsRestricted
Stock Awards
Weighted-Average
Class A Shares
Grant Date Fair Value
Outstanding, January 1, 2017
77,000
$
20.02
Granted
7,413
35.77
Forfeited
(750)
19.85
Earned and issued
(42,053)
21.66
Outstanding, December 31, 2017
41,610
$
21.18
Outstanding, January 1, 2018
41,610
$
21.18
Granted
48,323
40.16
Forfeited
(1,500)
19.85
Earned and issued
(37,323)
21.33
Outstanding, December 31, 2018
51,110
$
39.06
Unvested
51,110
$
39.06
Summary of PSU activityPerformance
Stock Units
Weighted-Average
Class A Shares
Grant Date Fair Value
Outstanding, January 1, 2017
55,000
$
23.13
Granted


Forfeited
(6,500)
23.48
Earned and issued


Outstanding, December 31, 2017
48,500
$
23.08
Outstanding, January 1, 2018
48,500
$
23.08
Granted


Forfeited
(2,500)
23.08
Earned and issued


Outstanding, December 31, 2018
46,000
$
23.08
Expected to vest
46,000
$
23.08
Schedule of expenses recorded related to stock options and restricted stock awardsYears Ended December 31, (in thousands)
2018
2017
2016
Stock option expense
$
265
$
227
$
248
Restricted stock award expense
630
424
258
Performance stock unit expense
106
491
524
Total expense
$
1,001
$
1,142
$
1,030
Schedule of estimated unrecognized stock option and restricted stock award expense related to unvested options and awards (net of estimated forfeitures)Stock
Restricted
Year Ended (in thousands)
Options
Stock Awards
Total
2019
$
415
$
606
$
1,021
2020
320
261
581
2021
291
261
552
2022
249
237
486
2023
106
119
225
2024 and beyond
3
16
19
Total
$
1,384
$
1,500
$
2,884
Schedule of employee stock purchase planYear Ended December 31, (in thousands)
2018
ESPP expense
$
23
Director
Schedule of information on deferred compensation shares reserved for the periodsOutstanding
Weighted-Average
Stock
Market Price
Units
at Date of Deferral
Outstanding, January 1, 2017
64,155
$
22.94
Deferred fees and dividend equivalents converted to stock units
5,199
36.81
Stock units converted to Class A Common Shares
(5,456)
22.84
Outstanding, December 31, 2017
63,898
$
24.08
Outstanding, January 1, 2018
63,898
$
24.08
Deferred fees and dividend equivalents converted to stock units
5,081
41.82
Stock units converted to Class A Common Shares
(2,835)
23.94
Outstanding, December 31, 2018
66,144
$
25.45
Vested
66,144
$
25.45
Schedule of deferred compensation expensesYears Ended December 31, (in thousands)
2018
2017
2016
Director deferred compensation expense
$
214
$
191
$
170
Deferred Compensation - Key Employees
Schedule of information on deferred compensation shares reserved for the periodsOutstanding
Weighted-Average
Stock
Market Price
Units
at Date of Deferral
Outstanding, January 1, 2018

$

Deferred base salaries and dividend equivalents converted to stock units
4,992
43.09
Matching stock units credited
4,992
43.09
Matching stock units forfeited
(362)
42.99
Stock units converted to Class A Common Shares


Outstanding, December 31, 2018
9,622
$
43.10
Vested
4,992
$
43.10
Unvested
4,630
$
43.10
Schedule of deferred compensation expensesYear Ended December 31, (in thousands)
2018
Key-employee deferred compensation expense - base salary
$
215
Key-employee deferred compensation expense - employer match
215
Total
$
430

BENEFIT PLANS (Tables)

BENEFIT PLANS (Tables)12 Months Ended
Dec. 31, 2018
BENEFIT PLANS
Schedule of normal and bonus contributionsYears Ended December 31, (in thousands)
2018
2017
2016
Employer matching contributions
$
2,890
$
2,190
$
1,789
Discretionary employer bonus matching contributions
392
335
583

INCOME TAXES (Tables)

INCOME TAXES (Tables)12 Months Ended
Dec. 31, 2018
INCOME TAXES
Schedule of allocation of federal income tax between current and deferred portionYears Ended December 31, (in thousands)
2018
2017
2016
Current expense:
Federal
$
10,638
$
26,983
$
24,295
State
1,532
486
465
Deferred expense:
SAB 118 related discrete items
(2,762)


Deferred tax asset devaluation upon enactment of TCJA

6,326

Federal
6,815
(965)
(1,753)
State
188
(76)
53
Total
$
16,411
$
32,754
$
23,060
Schedule of effective tax rate that differs from that computed at the federal statutory rateYears Ended December 31,
2018
2017
2016
Federal rate times financial statement income
21.00
%
35.00
%
35.00
%
Effect of:
SAB 118 related discrete items
(2.93)


Deferred tax asset devaluation upon enactment of TCJA

8.07

State taxes, net of federal benefit
1.44
0.34
0.49
General business tax credits
(1.44)

(0.33)
Nontaxable income
(0.99)
(1.90)
(2.12)
Other, net
0.33
0.28
0.39
Effective tax rate
17.41
41.79
33.43
*Discrete items include the impact of a cost-segregation study, a research and development tax-credit study, and a tax-accounting-method change related to the immediate recognition of loan origination costs.
Schedule of deferred tax assets and liabilitiesDecember 31, (in thousands)
2018
2017
Deferred tax assets:
Allowance for loan and lease losses
$
9,746
$
9,057
Accrued expenses
3,802
3,009
Net operating loss carryforward(1)
3,514
3,934
Other-than-temporary impairment
478
462
Partnership losses

156
OREO writedowns

17
Fair value of cash flow hedges

19
Acquisition fair value adjustments
580
748
Unrealized investment security losses
289

Other
1,644
1,620
Total deferred tax assets
20,053
19,022
Deferred tax liabilities:
Depreciation and amortization
(3,970)
(783)
Federal Home Loan Bank dividends
(2,676)
(2,659)
Deferred loan fees
(1,921)
(7)
Leases
(1,839)
(1,633)
Mortgage servicing rights
(1,106)
(1,127)
Bargain purchase gain
(553)
(599)
Unrealized investment securities gains

(130)
Fair value of cash flow hedges
(24)

Partnership losses
(11)

Other

(23)
Total deferred tax liabilities
(12,100)
(6,961)
Less: Valuation allowance
(1,475)
(1,718)
Net deferred tax asset
$
6,478
$
10,343
(1)
The Company has federal and state net operating loss carryforwards (acquired in its 2016 Cornerstone acquisition) of $8.7 million (federal) and $5.7 million (state). These carryforwards begin to expire in 2030 for both federal and state purposes. The use of these federal and state carryforwards is each limited under IRC Section 382 to $722,000 annually for federal and $709,000 annually for state. The Company also has a Kentucky net operating loss carryforward of $28.6 million which began expiring in 2013. The company maintains a valuation allowance as it does not anticipate generating taxable income in Kentucky to utilize this carryforward prior to expiration. Finally, the Company has AMT credit carryforwards of $87,000 with no expiration date.
Schedule of reconciliation of the beginning and ending amount of unrecognized tax benefitsYears Ended December 31, (in thousands)
2018
2017
2016
Balance, beginning of period
$
912
$
1,495
$
1,800
Additions based on tax related to the current period
306
259
268
Additions for tax positions of prior periods
339


Reductions for tax positions of prior periods
(34)
(42)
(90)
Reductions due to the statute of limitations
(196)
(800)
(340)
Settlements


(143)
Balance, end of period
$
1,327
$
912
$
1,495
Schedule of amount of interest and penaltiesYears Ended December 31, (in thousands)
2018
2017
2016
Interest and penalties recorded in the income statement as a component of income tax expense
$
42
$
(258)
$
(290)
Interest and penalties accrued on balance sheet
341
299
557
Schedule of low income housing tax creditsDecember 31, (in thousands)
2018
2017
Unfunded
Unfunded
Investment
Accounting Method
Investment
Commitment
Investment
Commitment
Low income housing tax credit investments
Proportional amortization
$
3,971
$
14,029
$
1,264
$
9,736

EARNINGS PER SHARE (Tables)

EARNINGS PER SHARE (Tables)12 Months Ended
Dec. 31, 2018
EARNINGS PER SHARE
Earnings Per Share and Diluted Earnings Per ShareYears Ended December 31, (in thousands, except per share data)
2018
2017
2016
Net income
$
77,852
$
45,632
$
45,903
Dividends declared on Common Stock:
Class A Shares
(18,076)
(16,158)
(15,359)
Class B Shares
(1,955)
(1,773)
(1,685)
Undistributed net income for basic earnings per share
57,821
27,701
28,859
Weighted average potential dividends on Class A shares upon exercise of dilutive options
(102)
(75)
(10)
Undistributed net income for diluted earnings per share
$
57,719
$
27,626
$
28,849
Weighted average shares outstanding:
Class A Shares
18,736
18,678
18,697
Class B Shares
2,224
2,243
2,245
Effect of dilutive securities on Class A Shares outstanding
105
86
12
Weighted average shares outstanding including dilutive securities
21,065
21,007
20,954
Basic earnings per share:
Class A Common Stock:
Per share dividends distributed
$
0.97
$
0.87
$
0.83
Undistributed earnings per share*
2.79
1.34
1.39
Total basic earnings per share - Class A Common Stock
$
3.76
$
2.21
$
2.22
Class B Common Stock
Per share dividends distributed
$
0.88
$
0.79
$
0.75
Undistributed earnings per share*
2.53
1.22
1.27
Total basic earnings per share - Class B Common Stock
$
3.41
$
2.01
$
2.02
Diluted earnings per share:
Class A Common Stock:
Per share dividends distributed
$
0.97
$
0.87
$
0.83
Undistributed earnings per share*
2.77
1.33
1.39
Total diluted earnings per share - Class A Common Stock
$
3.74
$
2.20
$
2.22
Class B Common Stock:
Per share dividends distributed
$
0.88
$
0.79
$
0.75
Undistributed earnings per share*
2.52
1.21
1.26
Total diluted earnings per share - Class B Common Stock
$
3.40
$
2.00
$
2.01
*To arrive at undistributed earnings per share, undistributed net income is first pro rated between Class A and Class B Common Shares, with Class A Common Shares receiving a 10% premium. The resulting pro-rated, undistributed net income for each class is then divided by the weighted average shares for each class.
Antidilutive Stock OptionsYears Ended December 31, (in thousands)
2018
2017
2016
Antidilutive stock options
165,000
4,500
5,000
Average antidilutive stock options
47,712
2,375
3,125

TRANSACTIONS WITH RELATED PAR_2

TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES (Tables)12 Months Ended
Dec. 31, 2018
TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES
Schedule of rent expense under the leasesYears Ended December 31, (in thousands)
2018
2017
2016
Rent expense under leases from related parties
$
4,487
$
4,008
$
3,791
Schedule of total minimum lease commitments under non-cancelable operating leasesYear (in thousands)
Affiliate
Other
Total
2019
$
4,632
2,661
7,293
2020
4,590
2,541
7,131
2021
4,175
2,311
6,486
2022
3,312
1,908
5,220
2023
3,312
1,377
4,689
Thereafter
15,914
2,572
18,486
Total
$
35,935
$
13,370
$
49,305
Schedule of loans made to executive officers and directors of the company and their related interests(in thousands)
Beginning balance
$
37,152
Effect of changes in composition of related parties
703
New loans
8,177
Repayments
(7,662)
Ending balance
$
38,370

OTHER COMPREHENSIVE INCOME (Tab

OTHER COMPREHENSIVE INCOME (Tables)12 Months Ended
Dec. 31, 2018
OTHER COMPREHENSIVE INCOME
Summary of OCI components and related tax effectsYears Ended December 31, (in thousands)
2018
2017
2016
Available-for-Sale Debt Securities:
Change in unrealized (loss) gain on AFS debt securities (2018), debt and equity securities (2017 and 2016)
$
(1,548)
$
(1,265)
$
(2,294)
Adjustment for adoption of ASU 2016-01
(428)


Reclassification adjustment for net (gain) loss on AFS debt securities recognized in earnings

136

Change in unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
(20)
298
(9)
Net unrealized (losses) gains
(1,996)
(831)
(2,303)
Tax effect
419
377
807
Net of tax
(1,577)
(454)
(1,496)
Cash Flow Hedges:
Change in fair value of derivatives used for cash flow hedges
178
83
(125)
Reclassification amount for net derivative losses realized in income
28
219
332
Net unrealized gains
206
302
207
Tax effect
(42)
(119)
(73)
Net of tax
164
183
134
Total other comprehensive (loss) income components, net of tax
$
(1,413)
$
(271)
$
(1,362)
Summary of amounts reclassified out of each component of AOCIAmounts Reclassified From
Affected Line Items
Accumulated Other
in the Consolidated
Comprehensive Income
Years Ended December 31, (in thousands)
Statements of Income
2018
2017
2016
Available for Sale Debt Securities:
Net losses on debt securities
Noninterest income
$

$
(136)
$

Tax effect
Income tax expense (benefit)

48

Net of tax
Net income

(88)

Cash Flow Hedges:
Interest rate swap on money market deposits
Interest expense on deposits
(18)
(109)
(168)
Interest rate swap on FHLB advance
Interest expense on FHLB advances
(10)
(110)
(164)
Total derivative losses on cash flow hedges
Total interest expense
(28)
(219)
(332)
Tax effect
Income tax expense
6
77
116
Net of tax
Net income
(22)
(142)
(216)
Net of tax, total all reclassification amounts
Net income
$
(22)
$
(230)
$
(216)
Summary of the AOCI balances, net of tax2018
(in thousands)
December 31, 2017
Change
December 31, 2018
Unrealized loss on AFS debt securities and reclassification of equity securities
$
(604)
$
(1,561)
$
(2,165)
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings
1,093
(15)
1,078
Unrealized gain (loss) on cash flow hedges
(73)
163
90
Total unrealized gain (loss)
$
416
$
(1,413)
$
(997)
2017
(in thousands)
December 31, 2016
Change
December 31, 2017
Unrealized gain on AFS debt and equity securities
$
237
$
(841)
$
(604)
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
706
387
1,093
Unrealized gain (loss) on cash flow hedges
(256)
183
(73)
Total unrealized gain
$
687
$
(271)
$
416

PARENT COMPANY CONDENSED FINA_2

PARENT COMPANY CONDENSED FINANCIAL INFORMATION (Tables)12 Months Ended
Dec. 31, 2018
PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Schedule of balance sheetsDecember 31, (in thousands)
2018
2017
Assets:
Cash and cash equivalents
$
99,440
$
98,943
Available-for-sale debt security
4,075
3,600
Investment in bank subsidiary
625,814
569,162
Investment in non-bank subsidiaries
3,343
3,211
Other assets
4,854
5,512
Total assets
$
737,526
$
680,428
Liabilities and Stockholders’ Equity:
Subordinated note
$
41,240
$
41,240
Other liabilities
6,352
6,764
Stockholders’ equity
689,934
632,424
Total liabilities and stockholders’ equity
$
737,526
$
680,428
Schedule of statements of incomeYears Ended December 31, (in thousands)
2018
2017
2016
Income and expenses:
Dividends from subsidiary
$
22,385
$
20,063
$
19,114
Interest income
231
186
162
Other income
45
45
45
Less: Interest expense
1,508
1,094
915
Less: Other expenses
469
394
446
Income before income tax benefit
20,684
18,806
17,960
Income tax benefit
348
116
394
Income before equity in undistributed net income of subsidiaries
21,032
18,922
18,354
Equity in undistributed net income of subsidiaries
56,820
26,710
27,549
Net income
$
77,852
$
45,632
$
45,903
Comprehensive income
$
76,439
$
45,361
$
44,541
Schedule of statements of cash flowsYears Ended December 31, (in thousands)
2018
2017
2016
Operating activities:
Net income
$
77,852
$
45,632
$
45,903
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of investment security
(40)
(44)
(44)
Equity in undistributed net income of subsidiaries
(56,820)
(26,710)
(27,549)
Director deferred compensation - Parent Company
117
108
103
Change in other assets
605
1,215
(1,366)
Change in other liabilities
(976)
1,623
(313)
Net cash provided by operating activities
20,738
21,824
16,734
Investing activities:
Acquisition of Cornerstone Bancorp, Inc.


(31,795)
Investment in subsidiary bank
(230)


Net cash used in investing activities
(230)

(31,795)
Financing activities:
Payoff of subordinated note, net of common security interest


(4,000)
Common Stock repurchases
(827)
(1,048)
(1,207)
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
230


Net proceeds from Common Stock options exercised
83
68
80
Cash dividends paid
(19,497)
(17,656)
(16,768)
Net cash used in financing activities
(20,011)
(18,636)
(21,895)
Net change in cash and cash equivalents
497
3,188
(36,956)
Cash and cash equivalents at beginning of period
98,943
95,755
132,711
Cash and cash equivalents at end of period
$
99,440
$
98,943
$
95,755

REVENUE FROM CONTRACTS WITH C_2

REVENUE FROM CONTRACTS WITH CUSTOMERS (Tables)12 Months Ended
Dec. 31, 2018
REVENUE FROM CONTRACTS WITH CUSTOMERS
Schedule of net revenues by reportable segmentsYear Ended December 31, 2018
Core Banking
Republic Processing Group
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income(1)
$
160,398
$
15,726
$
402
$
176,526
$
19,203
$
30,329
$
49,532
$
226,058
Noninterest income:
Service charges on deposit accounts
14,233
40

14,273



14,273
Net refund transfer fees




20,029

20,029
20,029
Mortgage banking income(1)


4,825
4,825



4,825
Interchange fee income
10,868


10,868
226
65
291
11,159
Program fees(1)




295
5,930
6,225
6,225
Increase in cash surrender value of BOLI(1)
1,527


1,527



1,527
Net gains (losses) on OREO
729


729



729
Other
2,608

550
3,158
1,003
497
1,500
4,658
Total noninterest income
29,965
40
5,375
35,380
21,553
6,492
28,045
63,425
Total net revenue
$
190,363
$
15,766
$
5,777
$
211,906
$
40,756
$
36,821
$
77,577
$
289,483
Net-revenue concentration(2)
66
%
5
%
2
%
73
%
14
%
13
%
27
%
100
%
(1)
This revenue is not subject to ASU 2014-09, Revenue from Contracts with Customers.
(2)
Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.

SEGMENT INFORMATION (Tables)

SEGMENT INFORMATION (Tables)12 Months Ended
Dec. 31, 2018
SEGMENT INFORMATION
Segment InformationYear Ended December 31, 2018
Core Banking
Republic Processing Group
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income
$
160,398
$
15,726
$
402
$
176,526
$
19,203
$
30,329
$
49,532
$
226,058
Provision for loan and lease losses
3,710
(142)

3,568
10,919
16,881
27,800
31,368
Net refund transfer fees




20,029

20,029
20,029
Mortgage banking income


4,825
4,825



4,825
Program fees




295
5,930
6,225
6,225
Other noninterest income
29,965
40
550
30,555
1,229
562
1,791
32,346
Total noninterest income
29,965
40
5,375
35,380
21,553
6,492
28,045
63,425
Total noninterest expense
136,439
3,367
4,356
144,162
14,686
5,004
19,690
163,852
Income before income tax expense
50,214
12,541
1,421
64,176
15,151
14,936
30,087
94,263
Income tax expense
6,819
2,869
298
9,986
3,033
3,392
6,425
16,411
Net income
$
43,395
$
9,672
$
1,123
$
54,190
$
12,118
$
11,544
$
23,662
$
77,852
Period-end assets
$
4,647,037
$
470,126
$
14,246
$
5,131,409
$
20,288
$
88,707
$
108,995
$
5,240,404
Net interest margin
3.76
%
3.17
%
NM
3.70
%
NM
NM
NM
4.62
%
Net-revenue concentration*
66
%
5
%
2
%
73
%
14
%
13
%
27
%
100
%
Year Ended December 31, 2017
Core Banking
Republic Processing Group
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income
$
142,823
$
17,533
$
346
$
160,702
$
15,197
$
22,621
$
37,818
$
198,520
Provision for loan and lease losses
3,923
(150)

3,773
6,535
17,396
23,931
27,704
Net refund transfer fees




18,500

18,500
18,500
Mortgage banking income


4,642
4,642



4,642
Program fees




176
5,648
5,824
5,824
Other noninterest income
27,452
37
279
27,768
164
1,516
1,680
29,448
Total noninterest income
27,452
37
4,921
32,410
18,840
7,164
26,004
58,414
Total noninterest expense
124,637
3,392
4,765
132,794
14,491
3,559
18,050
150,844
Income before income tax expense
41,715
14,328
502
56,545
13,011
8,830
21,841
78,386
Income tax expense (benefit)
18,202
5,421
(526)
23,097
4,721
4,936
9,657
32,754
Net income
$
23,513
$
8,907
$
1,028
$
33,448
$
8,290
$
3,894
$
12,184
$
45,632
Period-end 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
Total
Tax
Republic
Traditional
Warehouse
Mortgage
Core
Refund
Credit
Total
Total
(dollars in thousands)
Banking
Lending
Banking
Banking
Solutions
Solutions
RPG
Company
Net interest income
$
121,692
$
16,529
$
200
$
138,421
$
6,607
$
11,026
$
17,633
$
156,054
Provision for loan and lease losses
3,448
497

3,945
2,772
7,776
10,548
14,493
Net refund transfer fees




19,240

19,240
19,240
Mortgage banking income


6,882
6,882



6,882
Program fees




210
2,834
3,044
3,044
Other noninterest income
26,090
18
360
26,468
189
1,686
1,875
28,343
Total noninterest income
26,090
18
7,242
33,350
19,639
4,520
24,159
57,509
Total noninterest expense
108,360
3,142
4,688
116,190
11,701
2,216
13,917
130,107
Income (loss) before income tax expense
35,974
12,908
2,754
51,636
11,773
5,554
17,327
68,963
Income tax expense (benefit)
11,015
4,798
964
16,777
4,270
2,013
6,283
23,060
Net income (loss)
$
24,959
$
8,110
$
1,790
$
34,859
$
7,503
$
3,541
$
11,044
$
45,903
Period-end 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*
70
%
8
%
3
%
81
%
12
%
7
%
19
%
100
%
*Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.

SUMMARY OF QUARTERLY FINANCIA_2

SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) (Tables)12 Months Ended
Dec. 31, 2018
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary of consolidated quarterly financial data2018
Fourth
Third
Second
First
(dollars in thousands, except per share data)
Quarter
Quarter
Quarter
Quarter(1)
Interest income
$
62,902
$
61,090
$
58,356
$
73,833
Interest expense
8,626
8,057
7,272
6,168
Net interest income
54,276
53,033
51,084
67,665
Provision for loan and lease losses(2)
5,104
4,077
4,932
17,255
Net interest income after provision
49,172
48,956
46,152
50,410
Noninterest income
10,119
11,465
14,296
27,545
Noninterest expense(3)
38,963
41,212
40,632
43,045
Income before income taxes
20,328
19,209
19,816
34,910
Income tax expense(4)
3,022
1,798
4,150
7,441
Net income
$
17,306
$
17,411
$
15,666
$
27,469
Basic earnings per share:
Class A Common Stock
$
0.83
$
0.84
$
0.75
$
1.32
Class B Common Stock
0.76
0.76
0.68
1.21
Diluted earnings per share:
Class A Common Stock
$
0.83
$
0.83
$
0.74
$
1.32
Class B Common Stock
0.75
0.76
0.68
1.20
Dividends declared per common share:
Class A Common Stock
$
0.242
$
0.242
$
0.242
$
0.242
Class B Common Stock
0.220
0.220
0.220
0.220
2017
Fourth
Third
Second
First
(dollars in thousands, except per share data)
Quarter
Quarter
Quarter
Quarter(1)
Interest income
$
56,349
$
53,725
$
47,821
$
60,883
Interest expense
5,711
5,418
4,684
4,445
Net interest income
50,638
48,307
43,137
56,438
Provision for loan and lease losses(2)
6,071
4,221
5,061
12,351
Net interest income after provision
44,567
44,086
38,076
44,087
Noninterest income
10,190
10,374
12,927
24,923
Noninterest expense(43
38,145
38,026
35,734
38,939
Income before income taxes
16,612
16,434
15,269
30,071
Income tax expense(4)
11,774
5,728
5,198
10,054
Net income
$
4,838
$
10,706
$
10,071
$
20,017
Basic earnings per share:
Class A Common Stock
$
0.23
$
0.51
$
0.48
$
0.97
Class B Common Stock
0.21
0.47
0.44
0.88
Diluted earnings per share:
Class A Common Stock
$
0.23
$
0.51
$
0.48
$
0.96
Class B Common Stock
0.21
0.47
0.44
0.88
Dividends declared per common share:
Class A Common Stock
$
0.220
$
0.220
$
0.220
$
0.209
Class B Common Stock
0.200
0.200
0.200
0.190
(1)
The first quarters of 2018 and 2017 were significantly impacted by the TRS segment of RPG.
(2)
Provision expense:
The relatively higher levels of provision expense during the first quarters of 2018 and 2017 were driven by the TRS segment’s EA product. Provision expense for EAs during the first quarters of 2018 and 2017 was $13.2 million and $8.6 million.
(3)
Noninterest expense:
During the fourth quarters of 2018 and 2017, the Company reversed $2.8 million and $1.1 million of incentive compensation accruals based on revised payout estimates.
(4)
Income tax expense:
The TCJA was enacted on December 22, 2017 and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The Company’s quarters for the year ended December 31, 2018 reflect this reduction in the federal corporate tax rate.
During the second quarter of 2018, the Company began a cost-segregation study that was completed during the third quarter of 2018. The Company’s cost-segregation study assigned revised tax lives to select fixed assets resulting from a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future. The Company also made the decision to adopt an automatic tax-accounting-method change related to deferred loan costs during the third quarter of 2018, as it was preparing its 2017 federal tax return. The Company’s tax-accounting-method change related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The cost-segregation study and the change in tax-accounting-method did result in a further impact from the TCJA, as they affected the Company’s 2017 federal tax return due October 15, 2018.
In addition to the completed cost-segregation study and the change in the tax-accounting-method related to loan origination costs, the Company also completed a R&D tax-credit study during the third quarter of 2018, which resulted in the recognition of R&D credits dating back to 2014. In total, these three tax-related items provided $3.4 million in federal income tax benefits for 2018, of which $3.2 million was the cumulative benefit related to years prior to 2018.
Upon enactment of the TCJA on December 22, 2017, the Company recorded a charge to income tax expense of $6.3 million due to the remeasurement of its deferred tax assets and liabilities at a 21% corporate tax rate

SUMMARY OF SIGNIFICANT ACCOUN_4

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - OPERATIONS (Details)12 Months Ended
Dec. 31, 2018segmentitem
Basis of Presentation
Number of reportable segments | segment5
Number of operating segments | segment5
Number of banking centers45
Number of loan production offices1
Kentucky
Basis of Presentation
Number of banking centers32
Metropolitan Louisville
Basis of Presentation
Number of banking centers18
Central Kentucky
Basis of Presentation
Number of banking centers9
Elizabethtown
Basis of Presentation
Number of banking centers1
Frankfort
Basis of Presentation
Number of banking centers1
Georgetown
Basis of Presentation
Number of banking centers1
Lexington
Basis of Presentation
Number of banking centers5
Shelbyville
Basis of Presentation
Number of banking centers1
Western Kentucky
Basis of Presentation
Number of banking centers2
Owensboro
Basis of Presentation
Number of banking centers2
Northern Kentucky
Basis of Presentation
Number of banking centers3
Covington
Basis of Presentation
Number of banking centers1
Crestview Hills
Basis of Presentation
Number of banking centers1
Florence
Basis of Presentation
Number of banking centers1
Southern Indiana
Basis of Presentation
Number of banking centers3
Floyds Knobs
Basis of Presentation
Number of banking centers1
Jeffersonville
Basis of Presentation
Number of banking centers1
New Albany
Basis of Presentation
Number of banking centers1
Metropolitan Tampa, Florida
Basis of Presentation
Number of banking centers7
Metropolitan Cincinnati, Ohio
Basis of Presentation
Number of banking centers1
Metropolitan Nashville, Tennessee
Basis of Presentation
Number of banking centers3
Core Banking Activities
Basis of Presentation
Number of reportable segments | segment3
Core Banking Activities | Minimum
Basis of Presentation
Period of loan expected to remain in warehouse line15 days
Core Banking Activities | Maximum
Basis of Presentation
Period of loan expected to remain in warehouse line30 days
Republic Processing Group
Basis of Presentation
Number of reportable segments | segment2

SUMMARY OF SIGNIFICANT ACCOUN_5

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - SEGMENTS (Details) $ in Thousands2 Months Ended3 Months Ended12 Months Ended27 Months Ended30 Months Ended
Feb. 28, 2018USD ($)Feb. 28, 2017USD ($)Feb. 29, 2016Dec. 31, 2018USD ($)Sep. 30, 2018Jun. 30, 2018USD ($)Dec. 31, 2018USD ($)itemDec. 31, 2016USD ($)Mar. 31, 2018Mar. 31, 2018
Basis of Presentation
Transfers from loans held for sale to held for investment $ 2,237 $ 71,201
Tax Refund Solutions | Easy Advances
Basis of Presentation
Amount of credit risk associated with refund transfers $ 0 $ 0
Period Easy Advance tax credit product offered2 months2 months2 months
Fee charged $ 0 $ 0 $ 0
EA's repayment term21 days
Maximum repayment period before Easy Advances considered delinquent21 days
Duration of unpaid EA's write off111 days
Republic Credit Solutions | Line of credit
Basis of Presentation
Percentage of loan receivable held for sale (as a percent)90.00%
Interest retained (as a percent)10.00%
Consumer loans held for sale period2 days
Republic Credit Solutions | Credit card
Basis of Presentation
Percentage of loan receivable held for sale (as a percent)100.00%100.00%90.00%
Interest retained (as a percent)10.00%
Consumer loans held for sale period2 days
Republic Credit Solutions | Healthcare receivables
Basis of Presentation
Number of third party relationship | item2
Interest retained - Third party relationship one (as a percent)100.00%
Interest retained - Third party relationship two (as a percent)100.00%
Percentage of loan receivable held for sale - Third party relationship two (as a percent)100.00%
Consumer loans held for sale period1 month
Republic Credit Solutions | Installment loan
Basis of Presentation
Percentage of loan receivable held for sale (as a percent)100.00%
Consumer loans held for sale period21 days
Transfers from loans held for sale to held for investment $ 2,200

SUMMARY OF SIGNIFICANT ACCOUN_6

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONCENTRATION (Details) - USD ($) $ in Thousands12 Months Ended
Dec. 31, 2018Dec. 31, 2017Dec. 31, 2016
Mortgage Banking Activities
Initial amortization period of MSRs7 years
Impairment in MSR portfolio $ 0 $ 0
Loan Servicing Income $ 2,418 $ 2,169 $ 1,983
Geographic concentration risk | California
Mortgage Banking Activities
Concentration Risk, Percentage74.00%
Warehouse lines of credit | Geographic concentration risk | California
Mortgage Banking Activities
Concentration Risk, Percentage32.00%
Net income | Geographic concentration risk | Republic Processing Group
Mortgage Banking Activities
Concentration Risk, Percentage27.00%25.00%19.00%
Net income | Geographic concentration risk | Tax Refund Solutions
Mortgage Banking Activities
Concentration Risk, Percentage14.00%13.00%12.00%
Net income | Geographic concentration risk | Republic Credit Solutions
Mortgage Banking Activities
Concentration Risk, Percentage13.00%12.00%7.00%
Net income | Geographic concentration risk | Warehouse Lending
Mortgage Banking Activities
Concentration Risk, Percentage5.00%7.00%8.00%

SUMMARY OF SIGNIFICANT ACCOUN_7

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - LOANS (Details)12 Months Ended
Dec. 31, 2018
Loans disclosures
Delinquency period for interest income on mortgage and commercial loans to be discontinued80 days
Period for non-accrual loans and loans past due still on accrual evaluated for impairment80 days
Minimum performance period for loans to be returned to accrual status6 months
Period for valuation of commercial-related credits1 year
Minimum
Loans disclosures
Selling cost for collateral dependent loans expressed as a percentage of fair value of the underlying collateral10.00%
Maximum
Loans disclosures
Selling cost for collateral dependent loans expressed as a percentage of fair value of the underlying collateral13.00%
Consumer: Credit cards | Maximum
Loans disclosures
Period for past due loans for updating collateral values120 days
Residential mortgage loans and home equity loans | Minimum
Loans disclosures
Period for past due loans for updating collateral values90 days
Residential mortgage loans and home equity loans | Maximum
Loans disclosures
Period for past due loans for updating collateral values180 days

SUMMARY OF SIGNIFICANT ACCOUN_8

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CREDIT SOLUTIONS AND OREO (Details) - USD ($) $ in Thousands2 Months Ended3 Months Ended12 Months Ended30 Months Ended
Feb. 28, 2018Feb. 28, 2017Feb. 29, 2016Dec. 31, 2018Sep. 30, 2018Dec. 31, 2018Dec. 31, 2017Mar. 31, 2018
Minimum
Other Real Estate Owned
Selling cost for OREO expressed as a percentage of each property's fair value10.00%
Maximum
Other Real Estate Owned
Selling cost for OREO expressed as a percentage of each property's fair value13.00%
Credit card | Republic Credit Solutions
Republic Credit Solutions
Percentage of loan receivable held for sale (as a percent)100.00%100.00%90.00%
Interest retained (as a percent)10.00%
Consumer loans held for sale period2 days
Line of credit | Republic Credit Solutions
Republic Credit Solutions
Percentage of loan receivable held for sale (as a percent)90.00%
Interest retained (as a percent)10.00%
Consumer loans held for sale period2 days
Percentage of total held-for-investment loan portfolio36.00%42.00%
Easy Advances | Tax Refund Solutions
Republic Credit Solutions
Period Easy Advance tax credit product offered2 months2 months2 months
EA's repayment term21 days
Allowance for EAs $ 0 $ 0 $ 0
Duration of unpaid EA's write off111 days

SUMMARY OF SIGNIFICANT ACCOUN_9

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - PREMISES AND EQUIPMENT (Details)12 Months Ended
Dec. 31, 2018
Buildings and improvements | Minimum
Premises and equipment, net
Estimated useful lives25 years
Buildings and improvements | Maximum
Premises and equipment, net
Estimated useful lives39 years
Furniture, fixtures and equipment | Minimum
Premises and equipment, net
Estimated useful lives3 years
Furniture, fixtures and equipment | Maximum
Premises and equipment, net
Estimated useful lives10 years
Leasehold improvements | Minimum
Premises and equipment, net
Estimated useful lives3 years
Leasehold improvements | Maximum
Premises and equipment, net
Estimated useful lives5 years

SUMMARY OF SIGNIFICANT ACCOU_10

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - INTANGIBLES (Details) - USD ($) $ in ThousandsDec. 31, 2018Dec. 31, 2017Dec. 31, 2016Dec. 31, 2015
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Goodwill $ 16,300 $ 16,300 $ 16,300 $ 10,168

SUMMARY OF SIGNIFICANT ACCOU_11

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ADDITIONAL DISCLOSURES (Details)12 Months Ended
Dec. 31, 2018USD ($)segmentDec. 31, 2017USD ($)
Restrictions on Cash and Cash Equivalents
Required reserve balances by the Federal Reserve Bank $ 0 $ 0
Cash reserve to cover insurable claims $ 3,000,000 $ 3,000,000
Equity
Percentage of stock dividend in excess of which are reported by transferring the par value of the stock issued from retained earnings to common stock20.00%
Minimum percentage of stock dividend which are reported by transferring the par value of the stock issued from retained earnings to common stock and additional paid in capital20.00%
Segment Information
Number of Operating Segments | segment5
Revenue Recognition
Practical expedient allows incremental costs of obtaining contract when amortization period less than one yeartrue

SUMMARY OF SIGNIFICANT ACCOU_12

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ASUs (Details) - Accounting Standards Update 2016-02 - Adjustments $ in MillionsJan. 01, 2019USD ($)
Accounting Pronouncements
Right-of-use lease assets $ 41
Operating lease liabilities $ 42

INVESTMENT SECURITIES - AFS (De

INVESTMENT SECURITIES - AFS (Details) - USD ($) $ in ThousandsDec. 31, 2018Dec. 31, 2017
Available-for-Sale Debt Securities
Amortized Cost $ 477,115 $ 524,112
Gross Unrealized Gains3,623 3,590
Gross Unrealized Losses(5,000)(3,399)
Fair Value475,738 524,303
U.S. Treasury securities and U.S. Government agencies
Available-for-Sale Debt Securities
Amortized Cost218,502 309,042
Gross Unrealized Gains25 1
Gross Unrealized Losses(1,654)(1,451)
Fair Value216,873 307,592
Private label mortgage backed security
Available-for-Sale Debt Securities
Amortized Cost2,348 3,065
Gross Unrealized Gains1,364 1,384
Fair Value3,712 4,449
Mortgage backed securities - residential
Available-for-Sale Debt Securities
Amortized Cost168,992 105,644
Gross Unrealized Gains1,470 1,603
Gross Unrealized Losses(1,253)(873)
Fair Value169,209 106,374
Collateralized mortgage obligations
Available-for-Sale Debt Securities
Amortized Cost73,740 87,867
Gross Unrealized Gains222 371
Gross Unrealized Losses(1,151)(1,075)
Fair Value72,811 87,163
Corporate bonds
Available-for-Sale Debt Securities
Amortized Cost10,000 15,001
Gross Unrealized Gains124
Gross Unrealized Losses(942)
Fair Value9,058 15,125
Trust preferred security
Available-for-Sale Debt Securities
Amortized Cost3,533 3,493
Gross Unrealized Gains542 107
Fair Value $ 4,075 $ 3,600

INVESTMENT SECURITIES - HTM (De

INVESTMENT SECURITIES - HTM (Details) - USD ($) $ in ThousandsDec. 31, 2018Dec. 31, 2017
Held-to-Maturity Debt Securities
Carrying Value $ 65,227 $ 64,227
Gross Unrecognized Gains202 932
Gross Unrecognized Losses(571)(26)
Fair Value $ 64,858 $ 65,133
Maximum percentage of holdings of securities of any one issuer, other than the U.S. Government and its agencies10.00%10.00%
Mortgage backed securities - residential
Held-to-Maturity Debt Securities
Carrying Value $ 132 $ 151
Gross Unrecognized Gains8 10
Fair Value140 161
Collateralized mortgage obligations
Held-to-Maturity Debt Securities
Carrying Value19,544 23,437
Gross Unrecognized Gains178 236
Gross Unrecognized Losses(46)(17)
Fair Value19,676 23,656
Corporate bonds
Held-to-Maturity Debt Securities
Carrying Value45,088 40,175
Gross Unrecognized Gains16 686
Gross Unrecognized Losses(514)(3)
Fair Value44,590 40,858
Obligations of state and political subdivisions
Held-to-Maturity Debt Securities
Carrying Value463 464
Gross Unrecognized Losses(11)(6)
Fair Value $ 452 $ 458

INVESTMENT SECURITIES - SALES O

INVESTMENT SECURITIES - SALES OF AFS (Details)12 Months Ended
Dec. 31, 2018USD ($)Dec. 31, 2017USD ($)itemDec. 31, 2016USD ($)
INVESTMENT SECURITIES
Net gains (losses) on securities available for sale $ 136,000
Number of securities sold | item2
Tax benefit related to Bank's realized losses $ 48,000