Table of Contents
1 min
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2023
or
◻ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-24649
REPUBLIC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
61-0862051
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
601 West Market Street, Louisville, Kentucky
40202
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (502) 584-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common
RBCAA
The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧ Yes ◻ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ◻ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ⌧
Non-accelerated filer ◻
Smaller reporting company ◻
Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ◻ Yes ☒ No
The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, as of July 31, 2023 was 17,386,257 and 2,156,662.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements.
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
66
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
118
Item 4.
Controls and Procedures.
PART II — OTHER INFORMATION
Legal Proceedings.
Item 1A.
Risk Factors.
119
Unregistered Sales of Equity Securities and Use of Proceeds.
120
Item 5.
Other Information.
Item 6.
Exhibits.
SIGNATURES
122
2
GLOSSARY OF TERMS
The terms identified in alphabetical order below are used throughout this Form 10-Q. You may find it helpful to refer to this page as you read this report.
Term
Definition
ACH
Automated Clearing House
ACL
Allowance for Credit Losses
ACLC
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
ACLL
Allowance for Credit Losses on Loans
ACLS
Allowance for Credit Losses on Securities
AFS
Available for Sale
AOCI
Accumulated Other Comprehensive Income
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Basic EPS
Basic earnings per Class A Common Share
BOLI
Bank Owned Life Insurance
BPO
Brokered Price Opinion
C&D
Construction and Development
C&I
Commercial and Industrial
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
CBank Agreement
Agreement and Plan of Merger between Republic Bancorp, Inc., CBank, and RB&T
CECL
Current Expected Credit Losses
CMO
Collateralized Mortgage Obligation
Core Bank
The Traditional Banking, Warehouse Lending, and Mortgage Banking reportable segments of the Company
COVID
Coronavirus Disease of 2019
CRE
Commercial Real Estate
DDA
Demand Deposit Account
Diluted EPS
Diluted earnings per Class A Common Share
Economic Aid Act
Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
ERA
Early Season Refund Advance
ESPP
Employee Stock Purchase Plan
EVP
Executive Vice President
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFTR
Federal Funds Target Rate
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FICO
Fair Isaac Corporation
FNMA
Federal National Mortgage Association
FOMC
Federal Open Market Committee
FRB
Federal Reserve Bank
FTE
Full Time Equivalent
FTP
Funds Transfer Pricing
GAAP
Generally Accepted Accounting Principles in the United States
Green Dot
Green Dot Corporation
HEAL
Home Equity Amortizing Loan
HELOC
Home Equity Line of Credit
HTM
Held to Maturity
IRS
Internal Revenue Service
ITM
Interactive Teller Machine
Lawsuit
The lawsuit the Bank filed against Green Dot in the Delaware Court of Chancery on October 5, 2021
LGD
Loss Given Default
LIBOR
London Interbank Offered Rate
LOC
Line of Credit
LOC I
RCS product introduced in 2014 for which the Bank participates out a 90% interest and holds a 10% interest
LOC II
RCS product introduced in 2021 for which the Bank participates out a 95% interest and holds a 5% interest
LTV
Loan to Value
MBS
Mortgage Backed Securities
MSRs
Mortgage Servicing Rights
NA
Not Applicable
NIM
Net Interest Margin
NM
Not Meaningful
OBS
Off-Balance Sheet
OCI
Other Comprehensive Income
OREO
Other Real Estate Owned
OTTI
Other than Temporary Impairment
PCD
Purchased with Credit Deterioration
PD
Probability of Default
PPP
SBA's Paycheck Protection Program
Prime
The Wall Street Journal Prime Interest Rate
Provision
Provision for Expected Credit Loss Expense
PSU
Performance Stock Unit
RA
Refund Advance
RB&T / the Bank
Republic Bank & Trust Company
RCS
Republic Credit Solutions segment
Republic / the Company
Republic Bancorp, Inc.
RPG
Republic Processing Group
RPS
Republic Payment Solutions
RT
Refund Transfer
Sale Transaction
Sale contemplated in the May 13, 2021 Asset Purchase Agreement between the Bank and Green Dot
SBA
U.S. Small Business Administration
Settlement Agreement
The agreement between the Bank and Green Dot that settled the Lawsuit filed by the Bank against Green Dot
SEC
Securities and Exchange Commission
SSUAR
Securities Sold Under Agreements to Repurchase
TDR
Troubled Debt Restructuring
The Captive
Republic Insurance Services, Inc.
TRS
Tax Refund Solutions segment
TRS Purchase Agreement
May 13, 2021 Asset Purchase Agreement for the sale of substantially all of the Bank's TRS assets and operations to Green Dot
TRUP
Trust Preferred Security Investment
Warehouse
Warehouse Lending segment
3
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share data)
June 30,
December 31,
2023
2022
ASSETS
Cash and cash equivalents
$
241,967
313,689
Available-for-sale debt securities, at fair value (amortized cost of $645,968 in 2023 and $663,003 in 2022, allowance for credit losses of $0 in 2023 and 2022)
604,150
620,365
Held-to-maturity debt securities (fair value of $101,190 in 2023 and $87,357 in 2022, allowance for credit losses of $10 in 2023 and $10 in 2022)
101,966
87,386
Equity securities with readily determinable fair value
111
Mortgage loans held for sale, at fair value
4,038
1,302
Consumer loans held for sale, at fair value
5,757
4,706
Consumer loans held for sale, at the lower of cost or fair value
15,787
13,169
Loans (loans carried at fair value of $0 in 2023 and $2 in 2022)
5,053,142
4,515,802
Allowance for credit losses
(72,202)
(70,413)
Loans, net
4,980,940
4,445,389
Federal Home Loan Bank stock, at cost
29,395
9,146
Premises and equipment, net
33,840
31,978
Right-of-use assets
34,939
37,017
Goodwill
40,516
16,300
Other real estate owned
1,478
1,581
Bank owned life insurance
102,521
101,687
Low-income housing tax credit investments
77,426
75,324
Other assets and accrued interest receivable
94,937
76,393
TOTAL ASSETS
6,369,779
5,835,543
LIABILITIES
Deposits:
Noninterest-bearing
1,854,907
1,908,768
Interest-bearing
2,874,374
2,629,077
Total deposits
4,729,281
4,537,845
Securities sold under agreements to repurchase and other short-term borrowings
92,093
216,956
Operating lease liabilities
35,721
37,809
Federal Home Loan Bank advances
520,000
95,000
Low-income housing tax credit obligations
55,998
43,609
Other liabilities and accrued interest payable
49,715
47,711
Total liabilities
5,482,808
4,978,930
Commitments and contingent liabilities (Footnote 10)
—
STOCKHOLDERS’ EQUITY
Preferred stock, no par value
Class A Common Stock, no par value, 30,000,000 shares authorized, 17,449,709 shares (2023) and 17,584,928 shares (2022) issued and outstanding; Class B Common Stock, no par value, 5,000,000 shares authorized, 2,156,662 shares (2023) and 2,159,495 shares (2022) issued and outstanding
4,617
4,648
Additional paid in capital
142,462
141,694
Retained earnings
771,260
742,250
Accumulated other comprehensive (loss) income
(31,368)
(31,979)
Total stockholders’ equity
886,971
856,613
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying footnotes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended
Six Months Ended
INTEREST INCOME:
Loans, including fees
72,200
48,498
164,809
110,068
Taxable investment securities
4,784
2,688
9,387
4,747
Federal Home Loan Bank stock and other
2,070
1,716
5,214
2,197
Total interest income
79,054
52,902
179,410
117,012
INTEREST EXPENSE:
Deposits
11,216
945
16,094
1,824
174
49
422
77
3,135
94
5,723
130
Total interest expense
14,525
1,088
22,239
2,031
NET INTEREST INCOME
64,529
51,814
157,171
114,981
Provision for expected credit loss expense for on-balance sheet exposures (loans and investment securities)
6,139
3,705
32,905
12,931
NET INTEREST INCOME AFTER PROVISION
58,390
48,109
124,266
102,050
NONINTEREST INCOME:
Service charges on deposit accounts
3,527
3,363
6,826
6,589
Net refund transfer fees
4,479
3,950
15,286
16,001
Mortgage banking income
907
1,763
1,707
4,420
Interchange fee income
3,419
3,461
6,470
6,531
Program fees
3,739
3,885
6,980
7,739
Increase in cash surrender value of bank owned life insurance
689
623
1,324
1,235
Death benefits in excess of cash surrender value of life insurance
1,728
Net losses on other real estate owned
(52)
(105)
Contract termination fee
5,000
Legal settlement
13,000
Other
1,215
576
2,116
1,168
Total noninterest income
19,651
30,569
42,332
61,578
NONINTEREST EXPENSE:
Salaries and employee benefits
30,764
28,896
60,725
58,208
Technology, equipment, and communication
6,920
7,229
14,148
14,443
Occupancy
3,591
3,224
6,997
6,664
Marketing and development
2,513
1,720
4,087
3,068
FDIC insurance expense
724
399
1,361
818
Interchange related expense
1,350
1,264
2,849
2,381
Legal and professional fees
829
804
1,890
2,169
Merger expense
127
2,200
4,715
4,120
9,719
8,486
Total noninterest expense
51,533
47,656
103,976
96,237
INCOME BEFORE INCOME TAX EXPENSE
26,508
31,022
62,622
67,391
INCOME TAX EXPENSE
5,456
6,675
13,478
14,694
NET INCOME
21,052
24,347
49,144
52,697
BASIC EARNINGS PER SHARE:
Class A Common Stock
1.07
1.23
2.50
2.65
Class B Common Stock
0.98
1.12
2.27
2.41
DILUTED EARNINGS PER SHARE:
1.22
2.64
1.11
2.40
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Net income
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on AFS debt securities
(4,418)
(10,133)
787
(31,382)
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings
28
(15)
33
9
Total other comprehensive income (loss) before income tax
(4,390)
(10,148)
820
(31,373)
Income tax benefit (expense) related to items of other comprehensive income
1,096
2,537
(209)
7,845
Total other comprehensive income (loss), net of tax
(3,294)
(7,611)
611
(23,528)
COMPREHENSIVE INCOME
17,758
16,736
49,755
29,169
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended June 30, 2023
Common Stock
Accumulated
Class A
Class B
Additional
Total
Shares
Paid In
Retained
Comprehensive
Stockholders’
Outstanding
Amount
Capital
Earnings
Income (Loss)
Equity
Balance, April 1, 2023
17,598
2,160
142,601
763,027
(28,074)
882,202
Net change in AOCI
Dividends declared on Common Stock:
Class A Shares ($0.374 per share)
(6,537)
Class B Shares ($0.340 per share)
(733)
Stock options exercised, net of shares withheld
Conversion of Class B to Class A Common Shares
(3)
(1)
(99)
(100)
Repurchase of Class A Common Stock
(156)
(33)
(1,131)
(5,549)
(6,713)
Net change in notes receivable on Class A Common Stock
(84)
Deferred compensation - Class A Common Stock:
Directors
116
Designated key employees
238
Employee stock purchase plan - Class A Common Stock
1
201
202
Stock-based awards - Class A Common Stock:
Performance stock units
(39)
Restricted stock
(5)
453
455
Stock options
206
Balance, June 30, 2023
17,449
2,157
Three Months Ended June 30, 2022
Balance, April 1, 2022
17,834
2,165
4,703
140,795
710,120
(14,043)
841,575
Class A Shares ($0.341 per share)
(6,047)
Class B Shares ($0.310 per share)
(670)
Stock options exercised and equity awards vested, net of shares withheld
88
90
(4)
(215)
(43)
(1,384)
(7,409)
(8,836)
(42)
82
178
163
164
38
447
151
Balance, June 30, 2022
17,629
2,161
4,663
140,516
720,341
(21,654)
843,866
7
Six Months Ended June 30, 2023
Balance, January 1, 2023
17,585
Class A Shares ($0.748 per share)
(13,118)
Class B Shares ($0.680 per share)
(1,467)
(183)
(184)
(34)
(6,714)
226
459
363
365
626
628
408
Six Months Ended June 30, 2022
Balance, January 1, 2022
17,816
4,702
139,956
688,522
1,874
835,054
Class A Shares ($0.682 per share)
(12,128)
Class B Shares ($0.620 per share)
(1,341)
40
42
18
211
357
325
327
76
8
610
307
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization on investment securities and low-income housing investments
2,834
1,496
Net accretion and amortization on loans
(1,480)
(2,220)
Unrealized and realized losses on equity securities with readily determinable fair value
(10)
190
Depreciation of premises and equipment
3,269
4,029
Amortization of mortgage servicing rights
974
1,248
Provision for on-balance sheet exposures
Provision for off-balance sheet exposures
280
48
Net gain on sale of mortgage loans held for sale
(959)
(3,919)
Origination of mortgage loans held for sale
(29,890)
(162,150)
Proceeds from sale of mortgage loans held for sale
28,113
186,971
Net gain on sale of consumer loans held for sale
(5,543)
(6,265)
Origination of consumer loans held for sale
(469,626)
(527,996)
Proceeds from sale of consumer loans held for sale
471,500
525,709
Writedowns of other real estate owned
105
Deferred compensation expense - Class A Common Stock
685
568
Stock-based awards and ESPP expense - Class A Common Stock
1,060
1,042
(1,324)
(1,235)
Gain from death benefits in excess of cash surrender value of BOLI
(1,728)
Net change in other assets and liabilities:
Accrued interest receivable
(2,585)
Accrued interest payable
629
Other assets
(9,184)
1,718
Other liabilities
(4,276)
9,602
Net cash provided by operating activities
64,893
94,577
INVESTING ACTIVITIES:
Net cash proceeds paid in acquisition
(40,970)
Purchases of available-for-sale debt securities
(40,000)
(189,820)
Purchases of held-to-maturity debt securities
(25,000)
Proceeds from calls, maturities and paydowns of equity and available-for-sale debt securities
73,554
33,340
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities
10,420
11,330
Net change in outstanding warehouse lines of credit
(136,000)
253,872
Net change in other loans
(213,857)
(130,331)
Purchase of Federal Home Loan Bank stock
(20,249)
Investments in low-income housing tax partnerships
7,389
(5,509)
Net purchases of premises and equipment
(3,531)
(1,842)
Proceeds of principal and earnings from bank-owned life insurance
2,218
Net cash used in investing activities
(386,026)
(28,960)
FINANCING ACTIVITIES:
Net change in deposits
(30,242)
(13,472)
Net change in securities sold under agreements to repurchase and other short-term borrowings
(124,863)
12,348
Payments of Federal Home Loan Bank advances
(88,000)
Proceeds from Federal Home Loan Bank advances
513,000
20,000
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
341
278
Net proceeds from option exercises and equity awards vested - Class A Common Stock
Cash dividends paid
(13,927)
(12,805)
Net cash (used in) provided by financing activities
249,411
(27,445)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(71,722)
38,172
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
756,971
CASH AND CASH EQUIVALENTS AT END OF PERIOD
795,143
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest
21,610
2,028
Income taxes
17,124
8,677
SUPPLEMENTAL NONCASH DISCLOSURES:
Mortgage servicing rights capitalized
200
1,459
New unfunded obligations in low-income-housing investments
10,100
Right-of-use assets recorded
1,050
4,956
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –JUNE 30, 2023 and 2022 AND DECEMBER 31, 2022 (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. 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. In May 2023, the Company’s Board of Directors voted to dissolve the Company’s Captive. The dissolution of the Captive is expected to occur during the second half of 2023.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and footnotes thereto included in Republic’s Form 10-K for the year ended December 31, 2022.
As of June 30, 2023, 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.
10
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2023, Republic had 45 banking centers with locations as follows:
●
Kentucky — 29
Metropolitan Louisville — 18
Central Kentucky — 7
Georgetown — 1
Lexington — 5
Shelbyville — 1
Northern Kentucky — 4
●Bellevue— 1
Crestview Hills — 1
Florence — 1
Indiana — 3
Southern Indiana — 3
Floyds Knobs — 1
Jeffersonville — 1
New Albany — 1
Florida — 7
Metropolitan Tampa — 7
Ohio — 4
Metropolitan Cincinnati — 4
Tennessee — 2
Metropolitan Nashville — 2
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, and increases in the cash surrender value of BOLI.
Traditional Banking operating expenses consist primarily of salaries and employee benefits; technology, equipment, and communication; occupancy; interchange related expense; marketing and development; FDIC insurance 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.
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. Advances for Reverse mortgage loans and construction loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual advance during the time the advance 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.
11
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.
As part of the sale of loans with servicing retained, the Bank records MSRs. MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs, which the Bank expects to receive on loans sold with servicing retained by the Bank. MSRs are capitalized as separate assets. This transaction is posted to net gain on sale of loans, a component of “Mortgage Banking income” in the income statement. Management considers all relevant factors, in addition to pricing considerations from other servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially sold with servicing retained by the Bank. The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and subsequently adjusted quarterly based on the weighted average remaining life of the underlying loans. The MSR amortization is recorded as a reduction to net servicing income, a component of Mortgage Banking income.
With the assistance of an independent third-party, the MSRs asset is reviewed at least quarterly for impairment based on the fair value of the MSRs using groupings of the underlying loans based on predominant risk characteristics. Any impairment of a grouping is reported as a valuation allowance. A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs would be expected to increase as prepayment speeds on the underlying loans would be expected to decline.
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 U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). The majority of all the business generated by the TRS business occurs during the first half of each year. During the second half of each year, TRS generates limited revenue and incurs costs preparing for the next year’s tax season. TRS also originated $98 million of ERAs during December 2022 related to estimated tax returns that were anticipated to be filed during the first quarter 2023 tax filing 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 RA credit product is a loan made in conjunction with the filing of a taxpayer’s federal tax return, which allows the taxpayer to borrow funds as an advance of a portion of their tax refund. The RA product had the following features during the first quarters of 2023 and 2022:
The ERA credit product is also a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. Unlike the RA product described immediately above, however, which is originated in conjunction with the filing of the taxpayer’s federal tax return, an ERA is originated prior to the filing of the taxpayer’s federal tax return and prior to the taxpayer receiving their year-end
12
taxable income documentation, e.g., W-2. As such, the Company generally uses paystub information to estimate the potential tax refund and to underwrite the ERA. The repayment of the ERA is incumbent upon the taxpayer client returning to the Bank’s Tax Provider for the filing of their federal tax return in order for the tax refund to potentially be received by the Bank from the federal government to pay off the advance. The ERA product related to the first quarter 2023 tax filing season had the following features:
The Company reports fees paid for the RAs, including ERAs, as interest income on loans. RAs that were originated related to the first quarter 2022 tax season were repaid, on average, within 32 days after the taxpayer’s tax return was submitted to the applicable taxing authority. RAs do not have a contractual due date but the Company considered a RA, related to the first quarter 2022 tax season, delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. In 2023, the Company also considered a RA, related to the first quarter 2023 tax season, delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. For the ERA product originated in December of 2022 and January 2023, the Company considered it delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management’s annual analysis of tax return processing times. Provisions on RAs are estimated when advances are made. Provisions on RAs are estimated when advances are made. Unpaid RAs, including ERAs, related to the first quarter tax season of a given year are charged-off by June 30th of that year, with RAs collected during the second half of that year recorded as recoveries of previously charged-off loans, unless they were covered under a loss guaranty arrangement. Any RAs subject to a loss guaranty arrangement that are recovered during the second half of the year are distributed to the guarantor.
Related to the overall credit losses on RAs, including ERAs, 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 RA approval model is based primarily on the prior-year’s tax refund payment patterns. Because the substantial majority of the RA volume occurs each year before that year’s tax refund payment 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 payment patterns change materially between years.
In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the RA, including the ERA, product parameters. Further changes in the RA product parameters do not ensure positive results and could have an overall material negative impact on the performance of all RA product offerings and therefore on the Company’s financial condition and results of operations.
Cancelled Sale Transaction – As previously disclosed, Green Dot paid RB&T a contract termination fee of $5.0 million during the first quarter of 2022 related to the cancelled Sale Transaction.
Settlement of Lawsuit Against Green Dot - As previously disclosed, on June 3, 2022, the Bank and Green Dot entered into the Settlement Agreement to fully resolve the Lawsuit that the Bank filed against Green Dot in the Delaware Court of Chancery on October 5, 2021. The Lawsuit arose from Green Dot’s inability to consummate the Sale Transaction contemplated in the TRS Purchase Agreement through which Green Dot would purchase all of the assets and operations of the Bank’s Tax Refund Solutions business.
In accordance with the Settlement Agreement, on June 6, 2022, Green Dot paid $13.0 million to the Bank, which was in addition to a $5.0 million termination fee that Green Dot paid to the Bank during the first quarter of 2022 under the terms of the TRS Purchase Agreement. On June 6, 2022, the Bank and Green Dot filed a stipulation of dismissal of the Lawsuit with the Delaware Court of Chancery, which was effective to dismiss the Lawsuit when filed.
13
Republic Payment Solutions division
RPS is currently managed and operated within the TRS segment. The RPS division offers general-purpose reloadable prepaid cards, payroll debit cards, and limited-purpose demand deposit accounts with linked debit cards as an issuing bank through third-party service providers. Until the operating results of the RPS division are material to the Company’s overall results of operations, they will be reported as part of the TRS segment. The Company does not expect to report the RPS division as 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 that are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:
The Bank sells participation interests in this product. These participations sold represent a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
The Bank sells participation interests in this product. These participations sold represent a 95% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 5% participation interest in each advance, it maintains 100% ownership of the underlying LOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
14
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.”
15
Recently Adopted Accounting Standards
The following ASUs were adopted by the Company during the six months ended June 30, 2023:
Method of
Financial
ASU. No.
Topic
Nature of Update
Date Adopted
Adoption
Statement Impact
2022-02
Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
This ASU eliminates the TDR recognition and measurement guidance and, instead, requires the Company to evaluate (consistent with the accounting for other loan modifications) whether a modification represents a new loan or a continuation of an existing loan. This ASU also enhances existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.This ASU requires the Company to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross writeoff information must be included in the vintage disclosures required for the Company in accordance with ASC 326-20-50-6, which requires that the Company disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. (see Note 5 in this section of the filing)
January 1, 2023
Prospectively
Immaterial
2022-06
Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
This ASU extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
Immaterial. The Company ceased making new loans and renewing loans indexed to LIBOR on January 1, 2022.
16
The following not-yet-effective ASUs are considered relevant to the Company’s financial statements.
Date Adoption
Expected
Required
Method
Financial Impact
2022-03
Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject toContractual Sale Restrictions
This ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.
January 1, 2024
2023-03
Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock (SEC Update)
This ASU amends the FASB Accounting Standards Codification™ for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.
Upon addition to the FASB Codification.
The Company is currently analyzing the impact of this ASU on its financial statements.
2023-02
Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)
This ASU allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.
2023-01
Leases (Topic 842): Common Control Arrangements
This ASU requires entities to determine whether a related party arrangement between entities under common control is a lease. If the arrangement is determined to be a lease, an entity must classify and account for the lease on the same basis as an arrangement with a related party (on the basis of legally enforceable terms and conditions).
17
2. ACQUISITION OF CBANK
OVERVIEW
On March 15, 2023, the Company completed its acquisition of CBank (“CBank”), and its wholly owned bank subsidiary Commercial Industrial Finance (“CIF”), for approximately $51 million in cash. The primary reason for the acquisition of CBank was to expand the Company’s footprint in the Cincinnati, Ohio metropolitan statistical area.
ACQUISITION SUMMARY
The following table provides a summary of the assets acquired and liabilities assumed as recorded by CBank, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, recast adjustments to those previously reported preliminary fair values, and the expected fair values of those assets and liabilities as recorded by the Company. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary resultant fair values shown in the following table continue to be evaluated by management and may be subject to further recast adjustments.
March 15, 2023
As Previously Reported
As Recasted
As Recorded
Fair Value
Recast
by CBank
Adjustments (1)
by Republic
Assets acquired:
10,030
Investment securities
16,463
a
(65)
16,394
Loans
221,707
(4,219)
b
(150)
217,338
Allowance for loan and lease losses
(2,953)
1,353
c
1,391
c, j
218,754
(2,866)
1,241
217,129
954
(954)
d
Core deposit intangible
2,844
e
162
35
f
(24)
173
7,067
(320)
g
6,747
Total assets acquired
253,430
(1,265)
1,152
253,317
Liabilities assumed:
42,160
179,487
31
h
179,518
221,647
221,678
4,709
96
i
50
4,855
Total liabilities assumed
226,356
226,533
Net assets acquired
27,074
(1,392)
1,102
26,784
Cash consideration paid
(51,000)
24,216
Explanation of fair value and recast adjustments:
Goodwill of approximately $24 million, which is the excess of the merger consideration over the fair value of net assets acquired, was recorded in the CBank acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Traditional Banking segment and is expected to be deductible for tax purposes.
3. INVESTMENT SECURITIES
Available-for-Sale Debt Securities
The following tables summarize the amortized cost, fair value, and ACLS of AFS debt securities and the corresponding amounts of related gross unrealized gains and losses recognized in AOCI:
Gross
Allowance
Amortized
Unrealized
for
Fair
June 30, 2023 (in thousands)
Cost
Gains
Losses
Credit Losses
Value
U.S. Treasury securities and U.S. Government agencies
431,450
(24,093)
407,357
Private label mortgage-backed security
671
1,317
1,988
Mortgage-backed securities - residential
183,843
(17,569)
166,287
Collateralized mortgage obligations
24,222
30
(1,505)
22,747
Corporate bonds
2,012
2,025
Trust preferred security
3,770
3,746
Total available-for-sale debt securities
645,968
1,373
(43,191)
December 31, 2022 (in thousands)
436,333
(25,193)
411,141
843
1,284
2,127
189,312
(17,455)
171,873
22,774
21
(1,427)
21,368
10,000
10,001
3,741
114
3,855
663,003
1,437
(44,075)
19
Held-to-Maturity Debt Securities
The following tables summarize the amortized cost, fair value, and ACLS of HTM debt securities and the corresponding amounts of related gross unrecognized gains and losses:
Unrecognized
90,000
(725)
89,275
26
25
6,845
(134)
6,761
4,980
5,005
Obligations of state and political subdivisions
125
124
Total held-to-maturity debt securities
101,976
75
(861)
101,190
75,000
106
75,106
27
7,270
54
(148)
7,176
4,974
(49)
4,925
87,396
160
(199)
87,357
Sales of Available-for-Sale Debt Securities
During the three and six months ended June 30, 2023 and 2022, there were no material gains or losses on sales or calls of AFS debt securities.
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity as of June 30, 2023 follow. 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
Due in one year or less
139,768
136,180
Due from one year to five years
293,694
273,202
94,980
94,279
Due from five years to ten years
Due beyond ten years
Total debt securities
20
Unrealized-Loss Analysis on Debt Securities
The following tables summarize AFS debt securities in an unrealized loss position for which an ACLS had not been recorded as of June 30, 2023 and December 31, 2022, aggregated by investment category and length of time in a continuous unrealized loss position:
Less than 12 months
12 months or more
Available-for-sale debt securities:
218,670
(7,852)
188,687
(16,241)
63,616
(6,546)
101,546
(11,023)
165,162
8,551
(525)
12,550
(980)
21,101
294,583
(14,947)
302,783
(28,244)
597,366
229,372
(7,139)
171,676
(18,054)
401,048
105,274
(7,434)
65,520
(10,021)
170,794
20,418
(1,426)
20,424
355,064
(15,999)
237,202
(28,076)
592,266
As of June 30, 2023, the Bank’s security portfolio consisted of 197 securities, 179 of which were in an unrealized loss position.
As of December 31, 2022, the Bank’s security portfolio consisted of 179 securities, 163 of which were in an unrealized loss position.
As of June 30, 2023 and December 31, 2022, 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.
Private Label Mortgage-Backed Security
The Bank owns one private label mortgage-backed security with a total carrying value of $2 million as of June 30, 2023. 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 Measurement. 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 under Footnote 11 “Fair Value” in this section of the filing.
Mortgage-Backed Securities and Collateralized Mortgage Obligations
As of June 30, 2023, with the exception of the $2 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 FHLMC and FNMA. As of June 30, 2023 and December 31, 2022, there were gross unrealized losses of $19.1 million and $18.9 million related to AFS 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.
Roll-forward of the Allowance for Credit Losses on Debt Securities
The table below presents a roll-forward for the three months ended June 30, 2023 and 2022 of the ACLS on AFS and HTM debt securities:
ACLS Roll-forward
Three Months Ended June 30,
Beginning
Charge-
Ending
Balance
offs
Recoveries
Available-for-Sale Securities:
Corporate Bonds
Held-to-Maturity Securities:
80
Six Months Ended June 30,
47
The Company’s ACLS on its HTM corporate bonds during the three and six months ended June 30, 2023 remained unchanged from December 31, 2022.
There were no HTM debt securities on nonaccrual or past due 90 days or more as of June 30, 2023 and December 31, 2022. All of the Company’s HTM corporate bonds were rated investment grade as of June 30, 2023 and December 31, 2022.
There were no HTM debt securities considered collateral dependent as of June 30, 2023 and December 31, 2022.
Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet and is excluded from the ACLS. Accrued interest on AFS debt securities totaled $2 million and $2 million as of June 30, 2023 and December 31, 2022. Accrued interest receivable on HTM debt securities totaled $398,000 and $92,000 as of June 30, 2023 and December 31, 2022.
Pledged Debt Securities
Debt securities pledged to secure public deposits, securities sold under agreements to repurchase, and debt securities held for other purposes, as required or permitted by law, were as follows:
June 30, 2023
December 31, 2022
Amortized cost
97,400
236,047
Fair value
92,450
217,562
Carrying amount
22
Equity Securities
The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:
Freddie Mac preferred stock
Total equity securities with readily determinable fair values
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:
Gains (Losses) Recognized on Equity Securities
Realized
Community Reinvestment Act mutual fund
(97)
Total equity securities with readily determinable fair value
(72)
(190)
23
4. LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 12 “Mortgage Banking Activities” of this section of the filing.
Consumer Loans Held for Sale, at Fair Value
The Bank offers RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.
Activity for consumer loans held for sale and carried at fair value was as follows:
Balance, beginning of period
4,688
11,709
19,747
30,147
98,704
52,944
195,436
Proceeds from the sale of consumer loans held for sale
(29,889)
(94,435)
(53,449)
(201,083)
811
1,481
1,556
3,359
Balance, end of period
17,459
Consumer Loans Held for Sale, at the Lower of Cost or Fair Value
RCS originates for sale 90% or 95% of the balances from its line-of-credit products and 100% for some of its healthcare receivables products. Ordinary gains or losses on the sale of these 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:
12,744
3,026
2,937
232,257
184,078
416,682
332,560
(231,412)
(174,994)
(418,051)
(324,626)
2,198
1,667
3,987
2,906
13,777
24
5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio follows:
Traditional Banking:
Residential real estate:
Owner occupied
1,086,751
911,427
Nonowner occupied
350,390
321,358
Commercial real estate
1,727,092
1,599,510
Construction & land development
179,479
153,875
Commercial & industrial
478,759
413,387
Lease financing receivables
79,804
10,505
Aircraft
208,512
179,785
Home equity
255,755
241,739
Consumer:
Credit cards
17,134
15,473
Overdrafts
706
726
Automobile loans
4,177
6,731
Other consumer
6,109
Total Traditional Banking
4,394,668
3,855,142
Warehouse lines of credit*
539,560
403,560
Total Core Banking
4,934,228
4,258,702
Republic Processing Group*:
Tax Refund Solutions:
Refund Advances
97,505
Other TRS commercial & industrial loans
193
51,767
Republic Credit Solutions
118,721
107,828
Total Republic Processing Group
118,914
257,100
Total loans**
Total loans, net
*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:
Contractually receivable
5,059,937
4,519,136
Unearned income
(1,303)
(835)
Unamortized premiums
1,313
99
Unaccreted discounts
(3,721)
(479)
PPP net unamortized deferred origination (fees) and costs
(67)
(91)
Other net unamortized deferred origination (fees) and costs
(3,017)
(2,028)
Carrying value of loans
Credit Quality Indicators
The following tables include loans by segment, risk category, and, for non-revolving loans, origination year. Loan segments and risk categories as of June 30, 2023 remain unchanged from those defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Regarding origination year, loan extensions and renewals are generally considered originated in the year extended or renewed unless the loan is classified as a loan modification (formerly TDR.) Loan extensions and renewals classified as loan modifications (formerly TDRs) generally receive no change in origination date upon extension or renewal.
Revolving Loans
Term Loans Amortized Cost Basis by Origination Year
Converted
As of June 30, 2023
2021
2020
Prior
Cost Basis
to Term
Residential real estate owner occupied:
Risk Rating
Pass or not rated
228,708
212,810
185,875
179,237
257,247
1,025
1,064,902
Special Mention
6,710
Substandard
1,729
1,460
1,161
10,789
15,139
Doubtful
214,539
187,335
180,398
274,746
YTD Gross Charge-offs
Residential real estate nonowner occupied:
50,814
72,662
84,995
50,396
83,144
8,277
350,288
29
73
83,246
Commercial real estate:
129,293
466,364
385,492
202,957
368,264
22,465
112,808
1,687,643
579
1,758
4,696
30,629
831
38,493
956
129,872
468,122
390,188
399,849
23,296
Construction and land development:
38,394
114,290
25,561
531
429
274
Commercial and industrial:
70,111
104,044
83,637
17,742
69,772
114,103
3,563
462,972
480
12,467
665
1,920
255
104,524
96,104
18,407
71,692
114,358
Lease financing receivables:
26,163
28,658
13,197
6,296
5,195
79,509
133
5,490
Aircraft:
43,840
60,247
49,496
32,309
22,620
Home equity:
254,090
1,559
Term Loans Amortized Cost Basis by Origination Year (Continued)
1,278
1,474
690
107
5,104
19,444
28,097
697
5,126
28,126
555
Warehouse:
TRS:
126
25,824
25,950
RCS:
30,079
13,643
1,304
919
22,113
49,929
117,987
734
50,663
6,118
Grand Total:
618,873
1,074,192
830,247
490,494
833,888
999,865
125,673
4,973,232
2,238
17,163
39,450
1,192
61,287
1,467
11,973
2,293
18,623
Grand Total
619,452
1,078,159
848,877
492,320
885,311
1,003,350
32,473
32,638
As of December 31, 2022
2019
231,638
189,495
188,004
71,306
208,296
888,739
7,240
7,400
1,230
1,103
1,501
9,994
15,288
232,868
190,758
189,505
72,766
225,530
78,337
91,778
55,058
32,803
57,053
6,147
321,176
32
150
91,808
57,205
451,327
394,317
210,055
117,928
253,213
25,499
99,791
1,552,130
3,124
11,870
21,296
9,967
318
46,575
805
454,451
406,187
139,224
263,985
25,817
107,153
43,289
638
641
373
1,781
116,483
82,431
17,944
36,254
36,367
103,257
4,865
397,601
536
13,239
1,756
15,786
117,019
95,670
38,123
103,512
5,469
1,964
542
1,548
982
65,399
54,749
35,085
16,888
7,454
179,575
210
7,664
240,704
171
864
415
499
168
2,531
4,328
15,573
23,514
2,540
4,361
23,556
1,274
1,290
149,272
11,659
22,357
2,273
602
29,594
50,589
106,679
1,149
51,738
11,390
1,078,578
860,795
508,758
280,501
597,660
990,235
110,803
4,427,330
3,660
25,269
18,995
744
69,964
1,133
1,469
11,162
2,013
18,508
1,083,468
887,197
510,259
303,266
627,817
992,992
24,323
24,369
The following table presents the activity in the ACLL by portfolio class:
ACLL Roll-forward
CBank
Adjustment*
8,798
1,100
(9)
9,899
8,358
62
8,445
2,895
3,086
2,746
(14)
2,733
24,827
250
25,089
24,624
(284)
24,341
4,452
359
4,811
3,893
(302)
5,676
(1,008)
(365)
4,322
3,412
348
3,768
(376)
(149)
825
109
461
60
521
378
400
4,660
110
4,770
4,044
(40)
4,113
1,080
43
944
59
(31)
994
595
257
(186)
716
315
(194)
64
901
(16)
53
(32)
356
(11)
382
241
(38)
(20)
55,216
1,860
(239)
55,567
49,616
(245)
49,727
Warehouse lines of credit
1,144
1,346
1,725
(234)
1,491
56,360
2,062
56,913
51,341
(128)
51,218
Republic Processing Group:
25,797
(161)
(25,824)
188
8,315
564
(11,505)
2,626
184
(58)
(126)
55
(204)
(153)
302
13,780
4,296
(3,018)
231
15,289
11,945
3,433
(2,411)
264
13,231
39,761
4,077
(28,968)
419
20,315
3,793
(14,069)
3,192
96,121
(29,207)
533
72,202
71,656
3,665
(14,314)
3,442
64,449
8,909
980
8,647
(269)
67
2,831
254
2,700
23,739
1,291
23,769
570
4,123
688
4,128
(537)
3,976
237
3,487
216
91
449
72
4,628
141
4,111
(110)
112
996
155
(73)
934
(70)
39
309
(433)
104
683
503
(408)
123
87
(7)
186
(68)
135
314
(113)
(30)
50,709
4,844
(570)
368
49,407
433
(508)
395
1,009
337
2,126
(635)
51,718
5,181
(202)
3,797
21,554
473
8,879
(607)
664
14,807
6,135
(6,118)
465
12,948
4,828
(5,084)
539
18,695
27,724
(32,068)
938
13,044
13,100
(16,742)
3,829
70,413
(32,638)
1,306
64,577
12,898
(17,250)
4,224
The cumulative loss rate used as the basis for the estimate of the Company’s ACLL as of June 30, 2023 was primarily based on a static pool analysis of each of the Company’s loan pools using the Company’s loss experience from 2013 through 2023, supplemented by qualitative factor adjustments for current and forecasted conditions. The Company employs one-year forecasts of unemployment and CRE values within its ACLL model, with reversion to long-term averages following the forecasted period. The cumulative loss rate within the Company’s ACLL also includes estimated losses based on an individual evaluation of loans which are either collateral dependent or which do not share risk characteristics with pooled loans, e.g., Loan Modifications.
For its CRE loan pool, the Company employed a one-year forecast of CRE vacancy rates through March 31, 2022 but discontinued use of this forecast during the second quarter of 2022 in favor of a one-year forecast of general CRE values. This change in forecast method had no material impact on the Company’s ACLL.
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans, nonperforming assets, and select credit quality ratios follows:
(dollars in thousands)
Loans on nonaccrual status*
16,957
15,562
Loans past due 90-days-or-more and still on accrual**
547
756
Total nonperforming loans
17,504
16,318
Total nonperforming assets
18,982
17,899
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans
0.35
%
0.36
Nonperforming assets to total loans (including OREO)
0.38
0.40
Nonperforming assets to total assets
0.30
0.31
Credit Quality Ratios - Core Bank:
0.34
0.37
0.32
*
Loans on nonaccrual status include collateral-dependent loans.
**
Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
The following tables present 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*
14,432
13,388
117
927
1,001
1,498
815
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Interest Income
Loans with
Loans without
Recognized
on Nonaccrual Loans*
256
14,176
232
438
Consumer
1,207
15,750
351
619
* Includes interest income for loans on nonaccrual as of the beginning of the period that were paid off during the period.
June 30, 2022
2,252
11,136
154
56
61
644
84
146
52
3,324
12,238
301
Nonaccrual loans and loans past due 90-days-or-more and still on accrual both include smaller balance, primarily retail, homogeneous 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. Loan Modifications (formerly TDRs prior to the adoption of ASU 2022-02) on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.
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
Days
Delinquent
Delinquent*
Delinquent**
Current
3,453
841
873
5,167
1,081,584
343
472
255,283
17,101
139
565
4,167
44
6,057
4,003
971
5,875
4,388,793
4,928,353
7,058
2,438
10,043
108,678
108,871
11,061
3,409
1,448
15,918
5,037,224
Delinquency ratio***
0.22
0.07
0.03
* 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.
2,382
1,185
1,267
4,834
906,593
604
1,598,906
177
413,210
93
175
241,564
15,418
158
566
6,720
582
3,478
1,285
1,297
6,060
3,849,082
4,252,642
6,488
1,956
9,200
98,628
247,900
9,966
3,241
2,053
15,260
4,500,542
0.05
* All loans past due 90-days-or-more, excluding smaller balance consumer loans, were on nonaccrual status.
34
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by class of loans:
Secured
by Real
by Personal
Estate
Property
17,178
18,057
959
1,041
1,130
967
19,339
20,215
236
Collateral-dependent loans are generally secured by real estate or personal property. If there is insufficient collateral value to secure the Company’s recorded investment in these loans, they are charged down to collateral value less estimated selling costs, when selling costs are applicable. Selling costs range from 10% to 13%, with those percentages based on annual studies performed by the Company.
Loan Modification Disclosures Pursuant to ASU 2022-02
The following table shows the amortized cost of loans and leases as of June 30, 2023 that were both experiencing financial difficulty and modified during the three months ended June 30, 2023, segregated by portfolio segment and type of modification. The following tables shows the amortized cost of loans and leases modified by type.
Amortized Cost Basis of Modified Financing Receivables
June 30, 2023 (dollars in thousands)
Loans (#)
Rate Reduction ($)
Term Extension ($)
Principal Deferral ($)
143
423
Total Loan Modifications
781
Total Loan Modification by Type
Accruing
Nonaccruing
Recorded investment ($)
Term extension
Principal deferral
The following table shows the amortized cost of loans and leases as of June 30, 2023 that were both experiencing financial difficulty and modified during the six months ended June 30, 2023, segregated by portfolio segment and type of modification. The following tables shows the amortized cost of loans and leases modified by type.
261
852
214
424
439
1,159
1,066
1,327
The following tables show the percentage of the amortized cost of loans and leases that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financing receivable.
Accruing Loan Modifications
% of Total
of Financing
Cost Basis ($)
Receivable
0.08
Total Accruing Loan Modifications
0.00
Nonaccruing Loan Modifications
1,113
0.10
0.06
Total Nonaccruing Loan Modifications
0.01
There were no commitments to lend additional amounts to the borrowers included in the previous table.
The Company closely monitors the performance of loans and leases that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans and leases that have been modified during the three and six months ended June 30, 2023.
30-89 Days
90+ Days
Past Due
379
522
There were two loans and leases with a total balance of $168,000 that had a payment default during the three months and six months ended June 30, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.
Upon the Company’s determination that a modified loan or lease has subsequently been deemed uncollectible, the loan or lease is written off. Therefore, the amortized cost of the loan is reduced by the uncollectible amount and the allowance for loan and lease losses is adjusted by the same amount.
Troubled Debt Restructuring (TDR) Disclosures Prior to the Adoption of ASU 2022-02
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2022 that were modified during the three months ended June 30, 2022 follows:
Troubled Debt
Restructurings
Performing to
Not Performing to
Modified Terms
Number of
Recorded
June 30, 2022 (dollars in thousands)
Investment
Residential real estate loans (including home equity loans):
Legal modification
Total residential TDRs
Consumer loans:
489
Total consumer TDRs
Total troubled debt restructurings
492
494
136
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2022 that were modified during the six months ended June 30, 2022 follows:
477
51
528
554
497
605
The classification between nonperforming and performing was determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. Modifications do not result in the contractual forgiveness of principal or interest. There were no modifications during the three months or six months ended June 30, 2022 that resulted in an interest rate below market rate.
There were two TDRs with a recorded investment of $24,000 which had a payment default within the twelve months following modification during the three months ended June 30, 2022. There were three TDRs with a recorded investment of $51,000 which had a payment default within the twelve months following modification during the six months ended June 30, 2022. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.
37
The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of December 31, 2022.
December 31, 2022 (dollars in thousands)
Rate reduction
6,305
242
70
6,547
699
3,149
377
3,526
10,153
10,772
Commercial related and construction/land development loans:
847
Total commercial TDRs
848
2,320
393
2,323
406
2,466
11,407
2,475
12,026
There was no significant change between the pre and post modification loan balances for the three months ending June 30, 2022.
Foreclosures
The following table presents the carrying amount of foreclosed properties held as a result of the Bank obtaining physical possession of such properties:
Total other real estate owned
The following table presents the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to requirements of the applicable jurisdiction:
Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure
1,611
909
The Company’s TRS segment offered its RA product during the first two months of 2023 and 2022, along with its ERA product which was offered during December 2022 and the first two weeks of 2023. The ERA originations during December 2022 and the first two weeks of 2023 were made in relation to estimated tax returns that were anticipated to be filed during the first quarter 2023 tax season. The Company originated $98 million of ERAs during December 2022 that were made in anticipation of the first quarter 2023 tax season. Each year, all unpaid RAs, including ERAs, are charged off by June 30th, and each quarter thereafter, any credits to the Provision for RAs, including ERAs, match the recovery of previously charged-off accounts.
Information regarding RAs follows:
Refund Advances originated during the period
737,047
311,207
Net charge to the Provision for RAs, including ERAs
Provision as a percentage of RAs, including ERAs, originated during the period
2.92
2.85
Refund Advances net charge-offs (recoveries)
25,636
25,351
Refund Advances net charge-offs (recoveries) to total Refund Advances originated during the period
3.44
6. DEPOSITS
The composition of the deposit portfolio follows:
Core Bank:
Demand
1,161,743
1,336,082
Money market accounts
851,090
707,272
Savings
289,209
323,015
Reciprocal money market
169,619
28,635
Individual retirement accounts (1)
34,227
38,640
Time deposits, $250 and over (1)
91,036
54,855
Other certificates of deposit (1)
186,053
129,324
Reciprocal time deposits (1)
73,205
7,405
Wholesale brokered deposits (1)
8,033
Total Core Bank interest-bearing deposits
2,864,215
2,625,228
Total Core Bank noninterest-bearing deposits
1,405,543
1,464,493
Total Core Bank deposits
4,269,758
4,089,721
10,159
3,849
Total RPG interest-bearing deposits
Brokered prepaid card deposits
344,441
328,655
Other noninterest-bearing deposits
104,923
115,620
Total RPG noninterest-bearing deposits
449,364
444,275
Total RPG deposits
459,523
448,124
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS
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.
As of June 30, 2023 and December 31, 2022, all securities sold under agreements to repurchase had overnight maturities. Additional information regarding securities sold under agreements to repurchase and other short-term borrowings follows:
Outstanding balance at end of period
Weighted average interest rate at end of period
0.43
0.41
Fair value of securities pledged:
254,296
Total securities pledged
Average outstanding balance during the period
117,852
294,388
160,146
297,263
Weighted average interest rate during the period
0.59
0.53
Maximum outstanding at any month end during the period
121,835
303,315
224,067
8. RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES
The Company records as operating lease liabilities the present value of its required minimum lease payments plus any amounts probable of being owed under a residual value guarantee. Offsetting these operating lease liabilities, the Company records right-of-use assets for the underlying leased property.
As of June 30, 2023, the Company was under 45 separate and distinct operating lease contracts to lease the land and/or buildings for 38 of its offices, with 12 such operating leases contracted with a related party of the Company. As of June 30, 2023, payments on 22 of the Company’s operating leases were considered variable because such payments were adjustable based on periodic changes in the Consumer Price Index.
The Company recorded a renewal to one of its third-party leases during the first six months of 2023 with a total right-of-use asset value of $1.1 million and recorded two new third-party leases during the first six months of 2023 with a total right-of-use asset value of $278,000.
The following table presents information concerning the Company’s operating lease expense recorded as a noninterest expense within the “Occupancy” category for the three and six months ended June 30, 2023 and 2022:
Operating lease expense:
Related Party:
Variable lease expense
1,205
1,269
2,429
2,535
Fixed lease expense
58
57
92
Third-Party:
369
220
680
417
386
349
775
693
Total operating lease expense
2,018
1,895
4,001
3,737
Other information concerning operating leases:
Cash paid for amounts included in the measurement of operating lease liabilities
1,771
1,705
3,500
Cash paid for variable rent payments not included in measurement of operating lease liabilities
Short-term lease payments not included in the measurement of lease liabilities
The following table presents the weighted average remaining term and weighted average discount rate for the Company’s non-short-term operating leases as of June 30, 2023 and December 31, 2022:
Weighted average remaining term in years
7.96
8.44
Weighted average discount rate
2.13
2.10
The following table presents a maturity schedule of the Company’s operating lease liabilities based on undiscounted cash flows, and a reconciliation of those undiscounted cash flows to the operating lease liabilities recognized on the Company’s balance sheet as of June 30, 2023:
Year (in thousands)
Related Party
Third-Party
1,923
1,322
3,245
2024
3,726
2,447
6,173
2025
3,570
1,842
5,412
2026
3,640
5,131
2027
3,680
1,160
4,840
Thereafter
11,751
3,630
15,381
Total undiscounted cash flows
28,290
11,892
40,182
Discount applied to cash flows
(3,035)
(4,461)
Total discounted cash flows reported as operating lease liabilities
25,255
10,466
41
9. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances were as follows:
Overnight advances
450,000
Fixed interest rate advances
70,000
Total FHLB advances
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances that are paid off earlier than maturity. FHLB advances are collateralized by a blanket pledge of eligible real estate loans. As of June 30, 2023 and December 31, 2022, Republic had available borrowing capacity of $543 million and $900 million, respectively, from the FHLB. In addition to its borrowing capacity with the FHLB, Republic also had unsecured lines of credit totaling $125 million available through various other financial institutions as of June 30, 2023 and December 31, 2022.
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
5.09
1.89
50,000
4.17
2028
4.88
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:
226,659
226,006
5.20
4.82
The following table illustrates real estate loans pledged to collateralize advances and letters of credit with the FHLB:
First lien, single family residential real estate
1,303,563
1,106,287
Home equity lines of credit
232,304
219,644
10. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
Commitments to Extend Credit
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. 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 period ended:
Unused warehouse lines of credit
440,940
733,940
Unused home equity lines of credit
430,954
410,057
Unused loan commitments - other
1,175,149
951,021
Standby letters of credit
10,232
9,735
FHLB letter of credit
233
643
Total commitments
2,057,508
2,105,396
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.
The following tables present a roll-forward of the ACLC for the three and six months ended June 30, 2023 and 2022:
ACLC Roll-forward
Loan Commitments
198
(53)
145
353
277
Unused construction lines of credit
86
633
374
654
661
1,530
1,040
(45)
332
247
384
249
344
651
1,250
1,052
The Company increased its ACLC during the three and six months ended June 30, 2023 based primarily on a change in the loan mix to loans with higher reserve rates.
11. FAIR VALUE
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Bank used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Available-for-sale debt securities: Except for the Bank’s U.S. Treasury securities, its private label mortgage-backed security, and its TRUP investment, the fair value of AFS 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 U.S. Treasury securities are based on quoted market prices (Level 1 inputs) and considered highly liquid.
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 3 “Investment Securities” for additional discussion regarding the Bank’s private label mortgage-backed security.
For its TRUP investment, the Company considered the most recent bid price for the same instrument to approximate market value as of June 30, 2023. 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 Community Reinvestment Act 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: In December 2019, the Bank began offering RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intent to sell within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. Fair value for these loans is based on contractual sales terms, Level 3 inputs.
Consumer loans held for investment, at fair value: The Bank held an immaterial amount of consumer loans at fair value through a consumer loan program the Company is currently unwinding. The fair value of these loans was based on the discounted cash flows of the underlying loans, Level 3 inputs. Further disclosure of these loans is considered immaterial and thus omitted.
45
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.
Collateral-dependent loans: Collateral-dependent 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.
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 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.
46
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. Information as of June 30, 2023 is presented net of any applicable ACL.
Fair Value Measurements at
June 30, 2023 Using:
Quoted Prices in
Significant
Active Markets
for Identical
Observable
Unobservable
Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial assets:
174,323
233,034
424,093
5,734
Equity securities with readily determinable fair value:
Mortgage loans held for sale
Consumer loans held for sale
Rate lock loan commitments
189
Interest rate swap agreements
7,829
Financial liabilities:
Mandatory forward contracts
December 31, 2022 Using:
193,385
217,756
420,998
5,982
Consumer loans held for investment
8,128
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 three months and six months ended June 30, 2023 and 2022.
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):
2,010
2,602
2,731
Total gains or losses included in earnings:
Net change in unrealized gain
Principal paydowns
(48)
(109)
(171)
(262)
2,478
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.
Quantitative information about recurring Level 3 fair value measurement inputs for the Bank’s single private label mortgage-backed security follows:
Valuation
Technique
Unobservable Inputs
Range
Discounted cash flow
(1) Constant prepayment rate
2.7% - 4.5%
(2) Probability of default
1.8% - 9.3%
(3) Loss severity
12% - 35%
4.5% - 4.7%
25% - 35%
Trust Preferred Security
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):
3,725
3,847
Discount accretion
(270)
85
(138)
(51)
3,824
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 loans 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 June 30, 2023 and December 31, 2022.
The aggregate fair value, contractual balance, and unrealized gain were as follows:
Aggregate fair value
Contractual balance
3,961
1,265
Unrealized gain
The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2023 and 2022 for mortgage loans held for sale are presented in the following table:
Interest income
153
Change in fair value
(597)
Total included in earnings
108
262
161
(240)
Consumer Loans Held for Sale
RCS carries loans originated through its installment loan program at fair value. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more or on nonaccrual as of June 30, 2023 and December 31, 2022.
The significant unobservable inputs in the fair value measurement of the Bank’s short-term installment loans are the net contractual premiums and level of loans sold at a discount price. Significant fluctuations in any of those inputs in isolation would result in a significantly lower/higher fair value measurement.
The following table presents quantitative information about recurring Level 3 fair value measurement inputs for installment loans:
Contract Terms
(1) Net Premium
0.15%
(2) Discounted Sales
10.00%
The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, were as follows:
5,791
4,734
Unrealized loss
(28)
The total amount of net gains from changes in fair value included in earnings for consumer loans held for sale, at fair value, are presented in the following table:
949
2,990
1,714
5,880
(181)
(6)
(218)
940
2,809
1,708
5,662
Assets measured at fair value on a non-recurring basis are summarized below:
Collateral-dependent loans:
1,198
851
Total collateral-dependent loans*
2,049
Other real estate owned:
The difference between the carrying value and the fair value of collateral-dependent loans measured at fair value is reconciled in a subsequent table of this Footnote.
1,456
906
2,362
Residential real estate
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis:
(Weighted
Average)
Collateral-dependent loans - residential real estate owner occupied
Sales comparison approach
Adjustments determined for differences between comparable sales
0% - 35% (11.1%)
Collateral-dependent loans - commercial real estate
16% (16%)
Other real estate owned - commercial real estate
39% (39%)
0% - 41% (11%)
Collateral-dependent loans are generally measured for loss 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 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 loss 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 review generally results in a partial charge-off of the loan if fair value, less selling costs, are below the loan’s carrying value. Collateral-dependent loans are valued within Level 3 of the fair value hierarchy.
The Provision on collateral-dependent loans follows:
Provision on collateral-dependent loans
Details of other real estate owned carrying value and write downs follows:
Other real estate owned carried at fair value
Total carrying value of other real estate owned
Other real estate owned write-downs during the years ended
Other real estate owned write-downs during the period
The carrying amounts and estimated exit price fair values of all financial instruments follow:
June 30, 2023:
Carrying
Level 1
Level 2
Level 3
Assets:
Available-for-sale debt securities
Held-to-maturity debt securities
Equity securities with readily determinable fair values
4,725,917
Federal Home Loan Bank stock
16,157
2,624
13,533
Mortgage servicing rights
7,995
16,955
Liabilities:
Noninterest-bearing deposits
Transaction deposits
2,489,853
Time deposits
384,521
378,663
516,307
868
December 31, 2022:
4,276,423
13,572
2,462
11,110
8,769
17,592
2,398,853
230,224
223,912
93,044
239
12. MORTGAGE BANKING ACTIVITIES
Mortgage Banking activities primarily include residential mortgage originations and servicing.
Activity for mortgage loans held for sale, at fair value, was as follows:
1,034
13,302
29,393
13,948
61,489
29,890
162,150
Proceeds from the sale of mortgage loans held for sale
(11,483)
(67,759)
(28,113)
(186,971)
3,919
8,491
The following table presents the components of Mortgage Banking income:
Net gain realized on sale of mortgage loans held for sale
2,674
5,407
Net change in fair value recognized on loans held for sale
Net change in fair value recognized on rate lock loan commitments
(222)
187
(1,184)
Net change in fair value recognized on forward contracts
(1,102)
128
293
Net gain recognized
Loan servicing income
884
1,722
1,749
(484)
(580)
(974)
(1,248)
Change in mortgage servicing rights valuation allowance
Net servicing income recognized
304
748
501
Total Mortgage Banking income
Activity for capitalized mortgage servicing rights was as follows:
8,406
9,502
9,196
Additions
485
Amortized to expense
Change in valuation allowance
9,407
Activity in the valuation allowance for capitalized mortgage servicing rights follows:
Beginning valuation allowance
Charge during the period
Ending valuation allowance
Other information relating to mortgage servicing rights follows:
Fair value of mortgage servicing rights portfolio
17,145
Monthly weighted average prepayment rate of unpaid principal balance*
121
Discount rate
10.29
10.21
Weighted average foreclosure rate
Weighted average life in years
7.68
7.54
Rates are applied to individual tranches with similar characteristics.
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 or purchase TBA securities. 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:
Notional
Included in Mortgage loans held for sale:
Included in other assets:
12,896
4,118
Included in other liabilities:
10,057
4,009
13. INTEREST RATE SWAPS
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, 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 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.
A summary of the Bank’s interest rate swaps related to clients is included in the following table:
Bank Position
Interest rate swaps with Bank clients - Assets
Pay variable/receive fixed
42,932
1,224
40,032
1,386
Interest rate swaps with Bank clients - Liabilities
100,126
(6,605)
91,636
(6,742)
Interest rate swaps with Bank clients - Total
143,058
(5,381)
131,668
(5,356)
Offsetting interest rate swaps with institutional swap dealer - Assets
Pay fixed/receive variable
6,605
6,742
Offsetting interest rate swaps with institutional swap dealer - Liabilities
(1,224)
(1,386)
Offsetting interest rate swaps with institutional swap dealer - Total
5,381
5,356
286,116
263,336
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 $4.9 million and $560,000 as of June 30, 2023 and December 31, 2022.
14. EARNINGS PER SHARE
The Company calculates earnings per share under the two-class method. Under the two-class method, earnings available to common shareholders for the period are allocated between Class A Common Stock and Class B Common Stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. The difference in earnings per share between the two classes of common stock results from the 10% per share cash dividend premium paid on Class A Common Stock over that paid on Class B Common Stock.
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:
Class A Shares
Class B Shares
Undistributed net income for basic earnings per share
13,782
17,630
34,559
39,228
Weighted average potential dividends on Class A shares upon exercise of dilutive options
(8)
(21)
Undistributed net income for diluted earnings per share
13,774
17,609
34,520
39,179
Weighted average shares outstanding:
17,726
17,946
17,750
17,968
2,158
2,159
2,163
Effect of dilutive securities on Class A Shares outstanding
71
Weighted average shares outstanding including dilutive securities
19,906
20,169
19,961
20,202
Basic earnings per share:
Class A Common Stock:
Per share dividends distributed
0.75
0.68
Undistributed earnings per share*
0.70
0.89
1.75
1.97
Total basic earnings per share - Class A Common Stock
Class B Common Stock:
0.62
0.64
0.81
1.59
1.79
Total basic earnings per share - Class B Common Stock
Diluted earnings per share:
0.88
1.96
Total diluted earnings per share - Class A Common Stock
0.80
1.78
Total diluted earnings per share - Class B Common Stock
To arrive at undistributed earnings per share, undistributed net income is first prorated 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:
Antidilutive stock options
245,148
187,000
245,898
186,000
Average antidilutive stock options
120,682
184,000
245,565
178,000
15. OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
Available-for-Sale Debt Securities:
Net gains (losses)
Net of tax
The following is a summary of the AOCI balances, net of tax:
Change
(32,934)
578
(32,356)
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
955
988
Total unrealized gain (loss)
December 31, 2021
890
(23,535)
(22,645)
984
991
16. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company’s net revenue and net revenue concentration by reportable segment:
Core Banking
Tax
Republic
Traditional
Mortgage
Core
Refund
Credit
Banking
Lending
Solutions
Company
Net interest income (1)
48,682
2,642
51,385
4,010
9,134
13,144
Noninterest income:
3,516
Mortgage banking income (1)
3,375
Program fees (1)
728
3,011
Increase in cash surrender value of BOLI (1)
Net losses on OREO
1,074
1,101
74
10,330
11,275
5,325
3,051
8,376
Total net revenue
59,012
2,653
995
62,660
9,335
12,185
21,520
84,180
Net-revenue concentration (2)
100
39,158
3,886
43,197
1,638
6,979
8,617
3,355
3,367
3,389
736
7,734
1,809
9,555
17,865
21,014
46,892
3,898
1,962
52,752
19,503
10,128
29,631
82,383
36
98,789
4,729
103,640
35,775
17,756
53,531
6,804
6,381
89
1,435
5,545
Death benefits in excess of cash surrender value of life insurance (1)
1,852
1,896
65
17,984
1,751
19,757
16,965
5,610
22,575
116,773
4,751
1,873
123,397
52,740
23,366
76,106
199,503
75,306
8,401
84,064
17,042
13,875
30,917
6,574
6,599
6,401
1,463
6,276
871
951
217
14,976
4,500
19,501
35,801
42,077
90,282
8,426
4,857
103,565
52,843
20,151
72,994
176,559
The following represents information for significant revenue streams subject to ASC 606:
Service charges on deposit accounts – 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, direct deposit to the taxpayer’s personal bank account, or loaded to a prepaid card.
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 writedowns 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 writedowns 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.
Contract termination fee – During the first quarter of 2022, RB&T provided Green Dot a notice of termination for the May 2021 Purchase Agreement for the sale of substantially all of RB&T’s TRS assets and operations to Green Dot. As a result of this contract termination, Green Dot paid RB&T a contract termination fee of $5.0 million during the same quarter.
Legal settlement – During the second quarter of 2022, Green Dot paid Republic Bank $13 million in settlement of a lawsuit.
17. SEGMENT INFORMATION
Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.
The nature of segment operations and the primary drivers of net revenue 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 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
Tax Refund Solutions
TRS offers tax-related credit products and facilitates the receipt and payment of federal and state tax refunds through Refund Transfer 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.
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 generally the same as those described in the summary of significant accounting policies in the Company’s 2022 Annual Report on Form 10-K. Republic evaluates segment performance using operating income. The Company allocates goodwill to the Traditional Banking segment. Republic generally allocates income taxes based on income before income tax expense unless reasonable and specific segment allocations can be made. The Company makes transactions among reportable segments at carrying value.
63
Segment information follows:
Net interest income
Provision for expected credit loss expense
(219)
Other noninterest income
10,368
10,526
42,153
1,008
2,322
45,483
3,143
2,907
6,050
Income (loss) before income tax expense
14,999
1,443
(1,327)
15,115
6,411
4,982
11,393
Income tax expense (benefit)
2,941
322
(292)
2,971
1,094
2,485
Net income (loss)
12,058
1,121
(1,035)
12,144
5,020
3,888
8,908
Period-end assets
5,271,050
540,106
16,147
5,827,303
415,428
127,048
542,476
Net interest margin
3.77
2.28
3.65
4.46
Net-revenue concentration*
(88)
360
7,792
179
7,971
38,317
1,035
2,832
42,184
3,533
1,939
5,472
Income before income tax expense
8,429
3,097
(870)
10,656
15,610
4,756
20,366
Income tax expense
1,652
692
(191)
2,153
3,465
1,057
4,522
6,777
2,405
(679)
8,503
12,145
3,699
15,844
4,997,734
596,031
22,342
5,616,107
382,156
114,213
496,369
6,112,476
3.06
2.69
3.02
3.55
* Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.
21,589
18,050
244
18,359
83,005
1,976
4,876
89,857
8,791
5,328
14,119
28,924
(3,003)
28,359
22,360
11,903
34,263
6,023
545
(661)
5,907
4,932
2,639
7,571
22,901
1,893
(2,342)
22,452
17,428
9,264
26,692
3.92
2.39
3.81
5.48
466
(169)
8,272
15,081
76,544
1,987
5,522
84,053
8,678
3,506
12,184
13,272
7,074
(665)
19,681
35,893
11,817
47,710
2,120
1,596
(146)
8,371
2,753
11,124
11,152
5,478
(519)
16,111
27,522
9,064
36,586
2.98
2.89
2.97
3.94
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. 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. In May 2023, the Company’s Board of Directors voted to dissolve the Captive. The dissolution of the Captive is expected to occur during the second half of 2023.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I Item 1 “Financial Statements.”
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements, except as required by applicable law.
Broadly speaking, forward-looking statements include:
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:
For disclosure regarding the impact to the Company’s financial statements of ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods.
A summary of the Company's significant accounting policies is set forth in Part II “Item 8. Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the year ended December 31, 2022.
Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.
Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.
Republic believes its critical accounting policies and estimates relate to its ACLL and Provision.
ACLL and Provision — As of June 30, 2023, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.
Management’s evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast.
Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix or term, delinquency level, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on the U.S. national unemployment rate and CRE values. Subsequent to the one-year forecasts, loss rates are assumed to immediately revert back to long-term historical averages.
The ACLL is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company’s reported earnings.
BUSINESS SEGMENT COMPOSITION
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2023, Republic had 45 banking centers with locations as follows:
The Bank’s principal lending activities consist of the following:
Retail Mortgage Lending — Through its retail banking centers and its online Consumer Direct channel, the Bank originates single-family, residential real estate loans and HELOCs. In addition, the Bank originates HEALs through its retail banking centers. Such loans are generally collateralized by owner-occupied, residential real estate properties. For those loans originated through the Bank’s retail banking centers, the collateral is predominately located in the Bank’s market footprint, while loans originated through its Consumer Direct channel are generally secured by owner-occupied collateral located outside of the Bank’s market footprint.
Commercial Lending — The Bank conducts commercial lending and commercial leasing activities primarily through Corporate Banking, Commercial Banking, Business Banking, Republic Bank Finance, and Retail Banking channels.
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In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. Clients are generally located within the Bank’s market footprint or in areas nearby the market footprint.
Construction and Land Development Lending — The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots.
Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank’s markets.
Aircraft Lending — Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. Loans range between $200,000 and $4,000,000 in size and have terms up to 20 years. The aircraft loan program is open to all fifty states. The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank’s other Traditional Banking activities generally consist of the following:
Private Banking — The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank’s Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele.
Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank’s Treasury Management department. Treasury Management officers work closely with commercial and retail officers to support the cash management needs of Bank clients.
Correspondent Lending — The Bank began acquiring single family, first lien mortgage loans for investment through its Correspondent Lending channel during the first quarter of 2023. Correspondent Lending generally involves the Bank acquiring, primarily from its Warehouse clients, closed loans that meet the Bank’s specifications. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium. Premiums on loans held for investment acquired through the Correspondent Lending channel will be amortized into interest income on the level-yield method over the expected life of the loan. Loans acquired through the Correspondent Lending channel are generally made to borrowers outside of the Bank’s historical market footprint.
Internet Banking — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services — The Bank also provides title insurance and other financial institution related products and services.
Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote 17 “Segment Information” of Part I Item 1 “Financial Statements.”
(II) Warehouse
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
69
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. Advances for Reverse mortgage loans and construction loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual advance during the time the advance remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
See additional detail regarding the Warehouse under Footnote 17 “Segment Information” of Part I Item 1 “Financial Statements.”
(III) Mortgage Banking segment
Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term, single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and 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.
See additional detail regarding the Mortgage Banking segment under Footnote 12 “Mortgage Banking Activities” and Footnote 17 “Segment Information” of Part I Item 1 “Financial Statements.”
(IV) Tax Refund Solutions segment
Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). The majority of all the business generated by the TRS business occurs during the first half of each year. During the second half of each year, TRS generates limited revenue and incurs costs preparing for the next year’s tax season. TRS also originated $98 million of ERAs during December 2022 related to tax returns that were anticipated to be filed during the first quarter 2023 tax filing season.
The ERA credit product is also a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. Unlike the RA product described immediately above, however, which is originated in conjunction with the filing of the taxpayer’s federal tax return, an ERA is originated prior to the filing of the taxpayer’s federal tax return and prior to the taxpayer receiving their year-end taxable income documentation, e.g., W-2. As such, the Company generally uses paystub information to estimate the tax refund and underwrite the ERA. The repayment of the ERA is incumbent upon the taxpayer client returning to the Bank’s Tax Provider for the filing of their federal tax return in order for the tax refund to potentially be received by the Bank from the federal government to pay off the advance. The ERA product related to the first quarter 2023 tax filing season had the following features:
The Company reports fees paid for the RAs, including ERAs, as interest income on loans. RAs that were originated related to the first quarter 2022 tax season were repaid, on average, within 32 days after the taxpayer’s tax return was submitted to the applicable taxing authority. RAs do not have a contractual due date but the Company considered a RA, related to the first quarter 2022 tax season, delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. In 2023, the Company also considered a RA, related to the first quarter 2023 tax season, delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. For the ERA product originated in December of 2022 and January 2023, the Company considered it delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management’s annual analysis of tax return processing times. Provisions on RAs are estimated when advances are made. Unpaid RAs, including ERAs, related to the first quarter tax season of a given year are charged-off by June 30th of that year, with RAs collected during the second half of that year recorded as recoveries of previously charged-off loans, unless they were covered under a loss guaranty arrangement. Any RAs subject to a loss guaranty arrangement that are recovered during the second half of the year are distributed to the guarantor.
See additional detail regarding the RA product under Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Cancelled Sale Transaction - As previously disclosed, Green Dot Corporation paid RB&T a contract termination fee of $5.0 million during the first quarter of 2022 and a legal settlement of $13.0 million during the second quarter of 2022 related to the cancelled Sale Transaction.
(V) Republic Credit Solutions segment
OVERVIEW (Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022)
Total Company net income for the second quarter of 2023 was $21.1 million, a decrease of $3.3 million from the same period in 2022. Diluted EPS also decreased to $1.07 for the second quarter of 2023 compared to $1.22 for the same period in 2022. The decrease in net income primarily reflected the following by reportable segment:
Traditional Banking segment
Mortgage Banking segment
RESULTS OF OPERATIONS (Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022)
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.
A large amount of the Company’s financial instruments tracks closely with, or is primarily indexed to, either the FFTR, Prime, or LIBOR. These rates trended lower beginning in the first quarter of 2020 with the onset of the COVID pandemic, as the FOMC reduced the FFTR to approximately 25 basis points. During 2022 inflation rose to levels not seen in approximately 40 years. In response, the FOMC began executing a quantitative tightening program by reducing its balance sheet, selling certain types of bonds in the market, and repeatedly increasing the FFTR. The FOMC’s increases to the FFTR during 2022 and the first three months of 2023 included the following:
Table 1 — Increases to the Federal Funds Target Rate since January 1, 2022
Increase to
Date
the FFTR
after Increase
March 17, 2022
0.25
0.50
May 5, 2022
1.00
June 16, 2022
July 27, 2022
September 21, 2022
3.25
November 2, 2022
4.00
December 15, 2022
4.50
February 2, 2023
4.75
March 23, 2023
5.00
May 4, 2023
5.25
The FOMC’s actions and signals continued to place upward pressure on short-term market interest rates throughout the second half of 2022 and the first six months of 2023. While long-term interest rates initially rose in tandem with the increases to the FFTR through the middle part of 2022, they generally moved lower than short-term rates during the second half of 2022 and maintained a relative lower level into 2023 as the market generally began to anticipate a recession to take place in 2023. As a result of the increase in short-term interest rates and the moderation of long-term interest rates, the yield curve has been inverted for several months, with short-term rates generally higher than long-term rates on the yield curve. Further monetary tightening by the FOMC in the future will likely cause short-term interest rates to continue to increase. At this time, the future of long-term market interest rates remains uncertain. Increases in short-term market interest rates are expected to impact the various business segments of the Company differently and will be discussed in further detail in the sections below.
Total Company net interest income was $64.5 million during the second quarter of 2023 and represented an increase of $12.7 million, or 25%, from the second quarter of 2022. The Total Company net interest margin increased to 4.46% during the second quarter of 2023 compared to 3.55% for the same period in 2022.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
Net interest income and NIM within the Traditional Bank were substantially higher from the second quarter of 2022 to the second quarter of 2023 as the increase in yield for its interest-earning assets substantially outpaced the increased cost of its interest-bearing liabilities on a year-over-year basis. Overall, the Traditional Bank’s net interest income increased $9.5 million, or 24%, and its NIM expanded 71 basis points from the second quarter of 2022 to 3.77% for the second quarter of 2023. Driving this change in net interest income and NIM between the second quarter of 2022 and the second quarter of 2023 were the following:
As previously disclosed, short-term interest rates have risen dramatically since March of 2022 as a result of FOMC monetary actions. Short-term rates could further increase during the third quarter of 2023 as a result of continued monetary tightening by the FOMC. Over the past 18 months, increases in short-term interest rates were generally favorable to the Traditional Bank’s net interest income and net interest margin primarily as a result of the substantial amount of immediately-repricing, interest-earning cash it maintained on its balance sheet and its ability to sustain a low cost of deposits in relation to the rising FFTR. During the third quarter of 2022, however, the Traditional Bank began to use its excess cash to fund a decline in deposit balances. This trend of declining interest-earning cash to fund decreasing deposit balances continued into the second quarter of 2023. In addition, during the first quarter of 2023, the cost of the Traditional Bank’s interest-bearing deposits began to increase more significantly during the latter part of the quarter due to customer pricing pressures. This trend of increasing deposit costs continued throughout the second quarter of 2023.
As a result of the declining cash balances and the additional customer pricing pressures, the Bank began to experience a diminishing benefit to its net interest income and net interest margin with additional increases in the FFTR during the first quarter of 2023 which continued into the second quarter of 2023. Management believes the Traditional Bank will continue to experience net interest margin compression on a linked quarter basis during the remainder of 2023 as a result of the negative impact of 1) lower interest-earning cash and low-cost deposit balances; 2) larger, higher-costing average balances of FHLB borrowings; and 3) a continuing rise in the cost of interest-bearing deposits in order to maintain client balances. Additional variables which may also impact the Traditional Bank’s net interest income and net interest margin in the future include, but are not limited to, the actual steepness and shape of the yield curve, future demand for the Traditional Bank’s financial products, and the Traditional Bank’s overall future liquidity needs.
For additional discussion of the factors impacting interest-earning cash and deposit balances as well as deposit betas, see sections titled “Cash and Cash Equivalents” and “Deposits” in the “COMPARISON OF FINANCIAL CONDITION” of this document.
Net interest income within Warehouse decreased $1.2 million, or 32%, from the second quarter of 2022 to the second quarter of 2023, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $579 million during the second quarter of 2022 to $463 million for the second quarter of 2023, as home-mortgage refinancing dipped from a significantly higher volume in early 2022. Driving this decrease in average outstanding balances was a decline in committed lines-of-credit to $1.0 billion as June 30, 2023 from $1.4 billion as of June 30, 2022. Concurrent with the decline in committed lines of credit, the average usage rates for Warehouse lines decreased to 47% during the second quarter of 2023 from 41% for the first quarter of 2022.
The Warehouse net interest margin compressed 41 basis points from 2.69% during the second quarter of 2022 to 2.28% during the second quarter of 2023. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company’s internal FTP methodology, generally rose in tandem with the increase in short-term interest rates since rates began rising in March 2022, while its yield increases were delayed until the adjustable rates on its clients’ lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited the Warehouse’s net interest margin substantially during 2020 and 2021 when
market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during the first quarter of 2022.
Additional increases in long-term market interest rates will likely lead to a continued reduction in average outstanding balances driven by a decline in demand from Warehouse clients, as higher long-term interest rates generally drive lower demand for Warehouse borrowings. In addition, because the yield on Warehouse lines of credit are generally ties to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, driving down the yield Warehouse earns on its lines of credits.
TRS’s net interest income increased $2.4 million for the second quarter of 2023 compared to the same period in 2022, driven primarily by an increase interest income on TRS’s prepaid card balances as a function of the Company’s FTP methodology and a rise in interest rates.
The prepaid card product component of TRS drove a $3.3 million increase to net interest income for the segment. This increase was generally driven by a higher crediting rate applied through the Company’s internal FTP. The prepaid card FTP credit yield was 4.52% for average prepaid card-related balances of $362 million during the first quarter of 2023 compared to 0.83% for average prepaid card-related balances of $377 million during the first quarter of 2022.
RCS’s net interest income increased $2.2 million, or 31%, from the second quarter of 2022 to the second quarter of 2023. The increase was driven primarily by an increase in fee income from RCS’s LOC II product.
RCS’s LOC loan fees, which are recorded as interest income on loans, increased to $8.4 million during the second quarter of 2023 compared to $6.4 million during the same period in 2022. The Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase. It began to ramp up origination volume for the product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year revenue.
Overall customer demand for the RCS segment’s products is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact origination volume for its various consumer loan products. A rising interest rate environment, however, likely will impact the Company’s internal FTP cost allocated to this segment. As a result, the impact of rising interest rates to RCS during 2023 will be negative to the segment’s financial results, although the exact amount of the negative impact will depend on the internal FTP cost assigned as well as the overall volume and mix of loans it generates.
The following table presents the average balance sheets for the three-month periods ended June 30, 2023 and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
Table 2 — Total Company Average Balance Sheets and Interest Rates
Interest-earning assets:
Federal funds sold and other interest-earning deposits
114,368
1,558
5.45
813,956
Investment securities, including FHLB stock (1)
774,829
5,296
2.73
691,427
2,766
1.60
TRS Refund Advance loans (2)
28,203
0.57
12,680
81
2.56
RCS LOC products (2)
32,876
8,417
102.41
27,119
6,364
93.87
Other RPG loans (3) (6)
100,960
1,948
7.72
91,007
1,387
6.10
Outstanding Warehouse lines of credit (4) (6)
462,755
8,520
7.36
578,676
5,074
3.51
All other Core Bank loans (5) (6)
4,279,373
53,275
4.98
3,629,950
35,592
Total interest-earning assets
5,793,364
5.46
5,844,815
3.62
(96,720)
(72,037)
Noninterest-earning assets:
Noninterest-earning cash and cash equivalents
113,865
172,382
33,967
34,322
102,599
100,152
Other assets (1)
210,350
164,091
Total assets
6,157,425
6,243,725
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts
1,481,583
2,564
0.69
1,698,754
169
0.04
836,763
4,740
788,534
0.09
287,102
1,900
233,644
574
Reciprocal money market and time deposits
186,707
1,550
3.32
59,009
0.23
Wholesale brokered deposits
36,578
462
5.05
Total interest-bearing deposits
2,828,733
2,779,941
0.14
SSUARs and other short-term borrowings
Federal Home Loan Bank advances and other long-term borrowings
256,000
4.90
1.88
Total interest-bearing liabilities
3,202,585
1.81
3,094,329
Noninterest-bearing liabilities and Stockholders’ equity:
1,927,486
2,196,794
132,687
100,062
Stockholders’ equity
894,667
852,540
Total liabilities and stockholders’ equity
Net interest spread
3.48
78
Table 3 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 3 — Total Company Volume/Rate Variance Analysis
Compared to
Total Net
Increase / (Decrease) Due to
Volume
Interest income:
(80)
(2,461)
Investment securities, including FHLB stock
2,530
2,162
TRS Refund Advance loans
(41)
(93)
RCS LOC products
616
Other RPG loans
561
675
(114)
Outstanding Warehouse lines of credit
3,446
(1,189)
4,635
All other Core Bank loans
17,683
6,729
10,954
Net change in interest income
26,152
5,611
20,541
Interest expense:
2,395
2,419
4,572
4,561
1,326
1,516
1,305
(46)
3,041
2,676
Net change in interest expense
13,437
3,448
9,989
Net change in net interest income
12,715
10,552
79
Total Company Provision was a net charge of $6.1 million for the second quarter of 2023 compared to a net charge of $3.7 million for the same period in 2022.
The following were the most significant components comprising the Company’s Provision by reportable segment:
The Traditional Banking Provision during the second quarter of 2023 was a net charge of $1.9 million compared to a net charge of $146,000 for the second quarter of 2022. An analysis of the Provision for the second quarter of 2023 compared to the same period in 2022 follows:
As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.26% as of June 30, 2023 compared to 1.29% as of December 31, 2022 and 1.35% as of June 30, 2022. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of June 30, 2023.
See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.
Warehouse recorded a net charge to the Provision of $202,000 for the second quarter of 2023 compared to a net credit of $234,000 for the same period in 2022. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $81 million during the second quarter of 2023 compared to a decrease of $93 million during the second quarter of 2022.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of June 30, 2023, December 31, 2022, and June 30, 2022. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of June 30, 2023.
TRS recorded a net credit to the Provision of $219,000 during the second quarter of 2023 compared to a net charge of $360,000 for the same period in 2022. Substantially all TRS Provision in both periods was related to its RA product.
RAs related to the first quarter 2023 tax filing season were only originated during December of 2022 and the first two months of 2023. RAs related to the first quarter 2022 tax filing season were only originated during the first two months of 2022. As is the case each year as of March 31st, the Allowance related to RAs is an estimate with that estimate finalized during the second quarter when all uncollected RAs are ultimately charged off as of June 30th. The final charge-off figures posted during the second quarter of a calendar year can be meaningfully different (higher or lower) than its March 31st estimate based on actual paydowns received during the second
quarter. RAs collected during the second half of a year are recorded as recoveries of previously charged-off loans, unless they were covered under a loss guaranty arrangement. Any RAs subject to a loss guaranty arrangement that are recovered during the second half of the year are distributed to the guarantor.
TRS’s incurred loss rate for RAs as of June 30, 2022 was 2.85% of total originations and it finished 2022 with a RA loss rate of 2.20% of total RAs originated. As of June 30, 2023, TRS’s incurred loss rate related to RAs that were associated with the first quarter 2023 tax filing season was 3.09% of the $835 million of the total loans originated during December 2022 and the first two months of 2023. In-line with its customary June 30th charge-off policy for RA loans, the Company completely charged-off all remaining unpaid RAs as of June 30, 2023, with approximately $1.0 million of the RAs expected to be recovered during the third quarter of 2023 under a loan-loss guaranty.
For factors affecting the comparison of the TRS results of operations for the second quarter of 2023 and the second quarter of 2022, see section titled “OVERVIEW (Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022) - Tax Refund Solutions.”
Table 4 — Refund Advance Performance
2023 Tax Season
2022 Tax Season
2023/2022 Change
RAs originated during the tax season
(a)
834,552
523,345
RA net charge-offs (recoveries) recorded ($):
RA net losses recognized for the six months ended June 30,
(b)
25,823
16,944
Provision expense recorded during the six months ended June 30,
(c)
25,798
17,483
Second quarter Provision true-up for three months ended June 30,
(d)
(539)
RA net charge-offs (recoveries) recorded (%):
(b)/(a)
3.09
0.24
(c)/(a)
2.67
0.42
(d)/(a)
-
0.18
(0.18)
As illustrated in Table 5 below, RCS recorded a net charge to the Provision of $4.3 million during the second quarter of 2023 compared to a net charge to the Provision of $3.4 million for the same period in 2022. The increase in the Provision was driven primarily by a $638,000 increase in net charge-offs and a $221,000 increase in general formula reserves for RCS’s LOC product. Overall, net charge-offs and general formula reserves for RCS’s LOC II product increased $726,000 and $509,000 driven by a $6.2 million, or 146%, increase in outstanding spot balances from the second quarter of 2022 to the second quarter of 2023. Partially offsetting the increase in Provision related to the RCS LOC II product, net charge-offs and general formula reserves for RCS’s LOC I product decreased $88,000 and $288,000 for the second quarter of 2023 compared to second quarter of 2022.
While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 12.88% as of June 30, 2023, 13.73% as of December 31, 2022, and 14.41% as of June 30, 2022. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of June 30, 2023.
The following table presents net charges to the RCS Provision by product:
Table 5 — RCS Provision by Product
Three Months Ended Jun. 30,
$ Change
% Change
Product:
Lines of credit
4,285
3,428
857
Healthcare receivables
863
Table 6 — Summary of Loan and Lease Loss Experience
ACLL at beginning of period
CBank Fair Value Adjustment
Charge-offs:
(230)
Other TRS loans
Total charge-offs
Recoveries:
Total recoveries
Net loan recoveries (charge-offs)
(28,674)
(10,872)
Provision - Core Banking
Provision - RPG
Total Provision
ACLL at end of period
ACLL to total loans
1.43
1.48
ACLL to nonperforming loans
412
398
Net loan charge-offs (recoveries) to average loans
2.34
Credit Quality Ratios - Core Banking:
1.15
1.20
336
317
83
Table 7 — Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category
Net Loan Charge-Offs (Recoveries) to Average Loans
(0.01)
(0.02)
(0.20)
0.45
70.38
67.77
(0.31)
(0.13)
0.55
Refund Advances*
364.01
280.08
9.91
(303.76)
2.36
18.73
10.46
2.37
* All loss rates above are based on net charge-offs as a function of average outstanding portfolio balances. Refund Advances are originated during the first two months of each year, with all RAs charged-off by June 30th of each year. Due to their relatively short life, RA net charge-offs are typically analyzed by the Company as a percentage of total RA originations, not as a percentage of average outstanding balances.
The Company’s net charge-offs to total average loans increased from 1.00% during the second quarter of 2022 to net charge-offs to total average loans of 2.37% during the second quarter of 2023. The 137 basis-point increase was driven primarily by net charge-offs within the Company’s TRS operations.
From the second quarter of 2022 to the second quarter of 2023, TRS experienced a $14.3 million increase in net RA charge-offs due to the $523 million increase in year-over-year tax-season origination volume.
From the second quarter of 2022 to the second quarter of 2023, RCS experienced a $607,000 increase in net charge-offs primarily driven by an increase in net charge-offs within RCS’s LOC II product. Net charge-offs within this product increased $726,000 from the second quarter of 2022 to the second quarter of 2023. This product was first piloted during the first quarter of 2021. RCS began to ramp up origination volume for the RCS LOC II product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year net charge-offs in the product.
During the second quarters of 2023 and 2022, the Company’s Core Bank net charge-offs to average Core Bank loans remained near zero.
Noninterest Income
Total Company noninterest income decreased $10.9 million during the second quarter of 2023 compared to the same period in 2022.
The following were the most significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking’s noninterest income increased $2.6 million, or 34%, for the second quarter of 2023 compared to the same period in 2022, primarily driven by a $1.7 million death benefit payment received during the second quarter of 2023 in excess of the cash surrender value of a BOLI policy.
The Traditional Bank also earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months ended June 30, 2023 and 2022 were $1.8 million and $1.7 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended June 30, 2023 and 2022 were $316,000 and $308,000.
A decrease in Mortgage banking income for the second quarter of 2023 was generally caused by substantially higher long-term market interest rates, which led to a significant slowdown in the origination of mortgage loans to be sold into the secondary market. For the second quarter of 2023, the 30-year mortgage rate was hovering near 7.0% for the entire quarter. As a result, the Core Bank sold $12 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold of 2.60% during the second quarter of 2023 compared to sales of $68 million with comparable cash-gain-as-a-percent-of-loans-sold of 2.85% during the second quarter of 2022 when mortgage rates were notably lower.
With the FOMC continuing its quantitative tightening program during 2023, management believes it is likely that the Core Bank’s mortgage origination volume will continue to be negatively impacted by higher interest rates causing additional declines in mortgage banking income throughout 2023.
TRS’s noninterest income decreased $12.5 million during the second quarter of 2023 compared to the same period in 2022, primarily driven by the $13 million legal settlement it received during the second quarter of 2022.
RCS’s noninterest income decreased $98,000, or 3%, during the second quarter of 2023 compared to the same period in 2022, with program fees representing the entirety of RCS’s noninterest income. The decrease in RCS program fees primarily reflected lower sales volume and corresponding gains from RCS’s installment loan product which were substantially offset by higher sales volume and gains from RCS’s LOC II product.
Proceeds from the sale of RCS's installment loan product totaled $261 million during the second quarter of 2023, a 3% decrease from the same period in 2022. Conversely, RCS sold approximately $106 million of balances for the LOC II product during the second quarter of 2023, an increase of 153% over the second quarter of 2022. The decrease in the RCS installment product volume was deliberately driven while a new credit model remained under testing during the second quarter of 2023. Related to the increase in the LOC II volume, RCS began to ramp up origination volume for this product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year net program revenue.
The following table presents RCS program fees by product:
Table 8 — RCS Program Fees by Product
2,150
1,630
520
Installment loans*
813
(668)
The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees.
Noninterest Expense
Total Company noninterest expense increased $3.9 million, or 8%, during the second quarter of 2023 compared to the same period in 2022.
The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking noninterest expense increased $3.8 million, or 10%, for the second quarter of 2023 compared to the same period in 2022. The following primarily drove the change in noninterest expense:
Noninterest expense at the Mortgage Banking segment decreased $510,000, or 18%, during the second quarter of 2023 compared to the same period in 2022, primarily due to a $281,000 reduction in overhead salaries allocated to the Mortgage Banking segment and a $146,000 reduction in mortgage commissions, with both reductions resulting from the previously discussed slowdown in mortgage origination volume.
Noninterest expense at the RCS segment increased $968,000, or 50%, during the second quarter of 2023 compared to the same period in 2022. Approximately $745,000 of this increase was concentrated within the LOC II product and was a result of a year-over-year increase in marketing activity for the product.
OVERVIEW (Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022)
Total Company net income for the first six months of 2023 was $49.1 million, a $3.6 million, or 7%, decrease from the same period in 2022. Diluted EPS decreased to $2.50 for the first six months of 2023 compared to $2.64 for the same period in 2022. The decrease in net income primarily reflected the following:
RESULTS OF OPERATIONS (Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022)
A large amount of the Company’s financial instruments tracks closely with, or is primarily indexed to, either the FFTR or Prime, or LIBOR. These rates trended lower beginning in the first quarter of 2020 with the onset of the COVID pandemic, as the FOMC reduced the FFTR to approximately 25 basis points. During 2022 inflation rose to levels not seen in approximately 40 years. In response, the FOMC began executing a quantitative tightening program by reducing its balance sheet, selling certain types of bonds in the market, and repeatedly increasing the FFTR. The FOMC’s increases to the FFTR during 2022 and the first three months of 2023 included the following:
Table 9 — Increases to the Federal Funds Target Rate since January 1, 2022
Total Company net interest income was $157.2 million during the first six months of 2023 and represented an increase of $42.2 million from the first six months of 2022. Total Company net interest margin expanded to 5.48% during the first six months of 2022 compared to 3.94% for the same period in 2022.
The Traditional Banking’s net interest income increased $23.5 million, or 31%, for the first six months of 2023 compared to the same period in 2022. Traditional Banking’s net interest margin was 3.92% for the first six months of 2023, an increase of 94 basis points from the same period in 2022.
The increase in the Traditional Bank’s net interest income during the first six months of 2023 was primarily attributable to the following factors:
Net interest income within Warehouse decreased $3.7 million, or 44%, from the first six months of 2022 to the first six months of 2023, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $582 million during the first six months of 2022 to $397 million for the first six months of 2023, driven largely by the sharp rise in long-term interest rates during 2022, which depressed mortgage-refinancing demand and resulted in a sharp drop in Warehouse line usage.
In addition, the Warehouse net interest margin decreased 50 basis points from 2.89% during the first six months of 2022 to 2.39% during the first six months of 2023. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company’s internal FTP methodology, generally rose in tandem with the increase in short-term interest rates since rates began rising in March 2022, while its yield increases were delayed until the adjustable rates on its clients’ lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited the Warehouse net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during the first quarter of 2022.
Committed Warehouse lines-of-credit decreased from $1.4 billion as of June 30, 2022 to $1.0 billion as of June 30, 2023, while average usage rates for Warehouse lines were 40% and 42%, respectively, during the first six months of 2023 and 2022.
Additional increases in long-term market interest rates will likely lead to a continued reduction in average outstanding balances driven by a decline in demand from Warehouse clients, as higher long-term interest rates generally drive lower demand for Warehouse borrowings. In addition, because the yield on Warehouse lines of credit are generally tied to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, driving down the yield Warehouse earns on its lines of credits.
Net interest income within the TRS segment was up $18.7 million from the first six months of 2022 to the first six months of 2023. Net interest income at TRS includes income from its prepaid card products as well as the income associated with its tax-related credit products.
The prepaid card product component of TRS drove a $6.3 million increase to net interest income for the segment. This increase was generally driven by a higher crediting rate applied through the Company’s internal FTP. The prepaid card FTP credit yield was 4.28% for average prepaid card-related balances of $359 million during the first six months of 2023 compared to 0.61% for average prepaid card-related balances of $375 million during the first six months of 2022.
Related to the segment’s tax-related products, net interest income increased $12.5 million for the first six months of 2023 compared to the first six months of 2022. Loan-related interest and fees increased $17.0 million for the period and was driven primarily by a $426 million increase in RA origination volume, most of which resulted from a new contract with a large national tax preparation provider. This increase in loan revenue was partially offset by a $4.5 million increase to the segment’s net cost of funds as applied through its internal FTP.
See additional detail regarding the RA product under Footnote 5“Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
RCS’s net interest income increased $3.9 million, or 28%, from the first six months of 2022 to the first six months of 2023. The increase was driven primarily by an increase in fee income from RCS’s LOC II product.
RCS’s LOC II loan fees, which are recorded as interest income on loans, increased to $7.7 million during the first six months of 2023 compared to $3.3 million during the same period in 2022. The Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase. It began to ramp up origination volume for the product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year revenue.
Overall customer demand for the RCS segment’s products is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact origination volume for its various consumer loan products. A rising interest rate environment, however, likely will impact the Company’s internal FTP cost allocated to this segment. As a result, the impact of rising interest rates to RCS during 2023 will be negative to the segment’s financial results, although the exact amount of the negative impact will depend on the internal FTP cost assigned, as well as the overall volume and mix of loans it generates.
The following table presents the average balance sheets for the six-month periods ended June 30, 2023 and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
Table 11 — Total Company Average Balance Sheets and Interest Rates
177,439
4,259
4.80
837,757
2,067
0.49
774,006
10,342
649,040
4,877
1.50
138,180
31,445
45.51
48,420
13,525
55.87
31,986
16,378
26,701
12,621
94.54
121,353
4,574
105,879
3,372
6.37
396,603
14,240
7.18
581,581
9,953
3.42
4,097,391
98,172
4.79
3,584,718
70,597
5,736,958
6.25
5,834,096
4.01
Allowance for credit loss
(89,995)
(70,670)
204,382
262,772
33,104
34,888
102,303
99,844
198,327
172,388
6,185,079
6,333,318
1,562,729
4,306
1,695,456
266
792,936
6,846
1.73
793,709
256,644
2,759
2.15
247,596
115,674
1,721
66,826
18,390
5.02
2,746,373
1.17
2,803,587
0.13
250,702
4.57
21,657
3,157,221
1.41
3,122,507
2,007,877
2,254,194
133,002
106,320
886,979
850,297
Total liabilities and stock-holders’ equity
4.84
3.88
Table 12 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 12 — Total Company Volume/Rate Variance Analysis
2,192
(2,807)
4,999
5,465
1,084
4,381
17,920
20,849
(2,929)
3,757
2,644
1,202
1,529
(327)
4,287
(3,946)
8,233
27,575
10,355
17,220
62,398
29,708
32,690
4,040
(23)
4,063
6,585
6,586
1,544
1,639
101
1,538
345
396
5,593
4,421
1,172
20,208
4,955
15,253
42,190
24,753
17,437
Total Company Provision was a net charge of $32.9 million for the first six months of 2023 compared to a net charge of $12.9 million for the same period in 2022.
The Traditional Banking Provision during the first six months of 2023 was a net charge of $4.8 million compared to a net charge of $466,000 for the first six months of 2022. An analysis of the Provision for the first six months of 2023 compared to the same period in 2022 follows:
Warehouse recorded a net charge to the Provision of $337,000 for the first six months of 2023 compared to a net credit of $635,000 for the same period in 2022. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $136 million during the first six months of 2023 compared to a decrease of $254 million during the first six months of 2022.
95
TRS recorded a net charge to the Provision of $21.6 million during the first six months of 2023 compared to a net charge of $8.3 million for the same period in 2022. Substantially all TRS Provision in both periods was related to its RA product.
TRS recorded a charge to the Provision for RA loans of $21.6 million, or 2.92% of its $737 million in RAs originated during the first six months of 2022 compared to a charge to the Provision of $8.9 million, or 2.85% of its $311 million of RAs originated during the first six months of 2022. The increase in Provision for the first six months of 2023 was primarily due to the increased volume from the previously mentioned new contract with a large national tax preparation provider, which generated approximately $462 million in new RA volume related to the first quarter 2023 tax filing season.
With all unpaid RAs charged off as of June 30, 2023, any payments received for unguaranteed RAs during the third and fourth quarter of 2023 will represent recovery credits directly to income.
As illustrated in Table 13 below, RCS recorded a net charge to the Provision of $6.1 million during the first six months of 2023 compared to a net charge to the Provision of $4.8 million for the same period in 2022. The increase in the Provision was driven primarily by a $1.2 million increase in net charge-offs and a $620,000 Allowance build for RCS’s LOC II product. Net charge-offs for RCS’s LOC II product were $2.5 million for the first six months of 2023 compared to $1.3 million of net charge-offs during the first six months of 2022. As previously disclosed in the quarterly discussion, this product was first piloted during the first quarter of 2021. RCS began to ramp up origination volume for the RCS LOC II product during early 2022 and has steadily increased its volume since then leading to corresponding higher year-over-year net charge-offs in the product.
Table 13 — RCS Provision by Product
Six Months Ended Jun. 30,
6,111
4,831
1,280
Hospital receivables
1,307
Table 14 — Summary of Loan and Lease Loss Experience
CBank Initial Recognition of ACLL
(555)
195
Net loan charge-offs
(31,332)
(13,026)
Net loan charge-offs to average loans
1.31
0.60
303
97
Table 15 — Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category
(0.05)
(0.11)
0.39
82.64
79.18
(0.06)
0.12
35.70
71.16
(10.54)
9.74
9.09
21.68
19.16
1.32
The Company’s net charge-offs to average total Company loans increased from 0.60% during the first six months of 2022 to 1.32% during the first six months of 2023, with net charge-offs increasing $18.3 million and average total Company loans increasing $536 million, or 12%. As discussed in more detail above, the increase in net charge-offs was primarily driven by an $18.2 million increase in net charge-offs within the Company’s TRS and RCS operations.
During the first six months of 2023 and 2022, the Company’s Core Bank net charge-offs to average Core Bank loans remained near zero.
98
Total Company noninterest income decreased $19.2 million during the first six months of 2023 compared to the same period in 2022.
Traditional Banking’s noninterest income increased $3.0 million, or 20%, for the first six months of 2023 compared to the same period in 2022, driven primarily by a $1.7 million death benefit payment received during the second quarter of 2023 in excess of the cash surrender value of a BOLI policy.
The Traditional Bank also earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the six months ended June 30, 2023 and 2022 were $3.5 million and $3.2 million. The total daily overdraft charges, net of refunds, included in interest income for the six months ended June 30, 2023 and 2022 were $610,000 and $597,000.
A decrease in Mortgage banking income for the first six months of 2023 was generally caused by substantially higher market long-term interest rates, which led to a significant slowdown in the origination of mortgage loans to be sold into the secondary market. For the first six months of 2023, the 30-year mortgage rate was hovering near 7.0% for the entire period. As a result, the Bank sold $28 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold of 2.19% during the first six months of 2023. During the first two months of 2022, however, long-term interest rates were closer to historical lows, driving secondary market loan sales of $187 million with comparable cash-gain-as-a-percent-of-loans-sold of 2.23%. With the FOMC continuing its quantitative tightening program during the second half of 2023, management believes it is likely that the Core Bank’s mortgage origination volume will continue to be negatively impacted by higher interest rates causing additional declines in mortgage banking income throughout 2023.
TRS’s noninterest income decreased $18.8 million, or 53%, during the first six months of 2023 compared to the same period in 2022. Green Dot paid RB&T a total of $18 million in nonrecurring payments during the first six months of 2022 related to the now-cancelled TRS Purchase Agreement. These nonrecurring payments included the following:
Regarding TRS’s RT product, net RT revenue decreased 4% from $16.0 million during the first six months of 2022 to $15.3 million during the same period in 2023. RT revenue for the first quarter of 2023 was negatively impacted by a general decline in overall RT demand across the industry.
RCS’s noninterest income decreased $666,000, or 11%, during the first six months of 2023 compared to the same period in 2022, with program fees representing the substantial majority of RCS’s noninterest income. The decrease in RCS program fees primarily reflected lower sales volume and corresponding gains from RCS’s installment loan product which were substantially offset by higher sales volume and gains from RCS’s LOC II product.
Proceeds from the sale of RCS's installment loan product totaled $472 million during the first six months of 2023, a 10% decrease from the same period in 2022. Conversely, RCS sold approximately $183 million of balances for the LOC II product during the first six months of 2023, an increase of 163% over the first six months of 2022. The decrease in the RCS installment product volume was purposely driven while a new credit model was being tested and modified. Related to the increase in the LOC II volume, RCS began to ramp up origination volume for this product during early 2022 and has steadily increased its volume since then leading to corresponding higher year-over-year net program revenue.
Table 16 — RCS Program Fees by Product
3,892
2,818
(2)
(1,803)
(54)
(731)
(12)
Total Company noninterest expense increased $7.7 million, or 8%, during the first six months of 2023 compared to the same period in 2022.
Traditional Banking noninterest expense increased $6.5 million for the first six months of 2023 compared to the same period in 2022. The following primarily drove the change in noninterest expense:
Noninterest expense at the Mortgage Banking segment decreased $646,000, or 12%, during the first six months of 2023 compared to the same period in 2022, primarily due to a $304,000 reduction in overhead salaries allocated to the Mortgage Banking segment and a $149,000 reduction in mortgage commissions, with both reductions resulting from the previously discussed slowdown in mortgage origination volume.
The Company records a credit offset to salary expense for each loan it originates and recognizes the cost of that credit as an adjustment to the loan’s yield over its estimated life. The amount of credit benefit to salary expense during a given period is determined by the overall loan origination volume during that period.
Noninterest expense at the RCS segment increased $1.8 million, or 52%, during the first six months of 2023 compared to the same period in 2022. Approximately $867,000 of this increase was concentrated within the LOC II product and was a result of a year-over-year increase in marketing activity for the product. Approximately $532,000 of the increase was within Salaries and Benefits and was primarily the result of annual merit increases.
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 2023 AND DECEMBER 31, 2022
Cash and Cash Equivalents
Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Republic had $242 million in cash and cash equivalents as of June 30, 2023 compared to $314 million as of December 31, 2022. Comparing average balances for the second quarters of 2023 and 2022, the Company had average interest-earning cash and cash equivalent balances of $114 million for the second quarter of 2023 compared to $814 million for the second quarter of 2022. The decline in average interest-earning cash balances from period to period was driven generally by a decrease in average deposits and an increase in average loan balances.
For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This cash earned a weighted-average yield of 4.82% during the first six months of 2023 with a spot balance yield of 5.15% on June 30, 2023. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.
Investment Securities
Table 17 — Purchases of Investment Securities
Purchase
Yield to
Maturity
Life
Purchases by Class for the Three Months Ended March 31, 2023
Corporate (acquired as a part of the CBank acquisition)
2,017
6.05
2.60
yrs
U.S. Government Agencies
5.38
Mortgage-backed securities - residential (acquired as a part of the CBank acquisition)
14,442
4.56
9.10
66,459
Purchases by Class for the Three Months Ended June 30, 2023
15,000
5.75
2.91
Total Purchases for the Six Months Ended June 30, 2023
81,459
5.32
3.75
Republic’s investment portfolio increased $19 million from December 31, 2022 to June 30, 2023, driven by $40 million in portfolio purchases, $16 million of investments acquired as part of the CBank merger, and a $20 million increase in FHLB stock. These increases were offsets by portfolio declines of $40 million from calls and maturities of debt securities, $18 million in paydowns on mortgage-backed securities, and a $1 million increase in the portfolio market value.
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Table 18 — Loan Portfolio Composition
175,324
29,032
127,582
25,604
65,372
69,299
660
28,727
14,016
1,661
(2,554)
5,483
876
539,526
136,000
675,526
(97,505)
(51,574)
10,893
(138,186)
537,340
(1,789)
535,551
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans increased by $537 million, or 12%, during the first six months of 2022 to $5.1 billion as of June 30, 2023. The most significant components comprising the change in loans by reportable segment follow:
Period-end balances for Traditional Banking loans increased $540 million, or 14%, from December 31, 2022 to June 30, 2023. The following primarily drove the change in loan balances during the first six months of 2023:
103
Outstanding Warehouse period-end balances increased $136 million from December 31, 2022 to June 30, 2023. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the first quarter of 2023 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 39% during 2022 to a high of 66% during 2020.
As previously discussed, additional increases in long-term market interest rates will likely lead to a continued reduction in average outstanding balances driven by a decline in demand from Warehouse clients, as higher long-term interest rates generally drive lower demand for Warehouse borrowings. In addition, because the yield on Warehouse lines of credit are generally tied to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, driving down the yield Warehouse earns on its lines of credits.
Outstanding TRS loans decreased $98 million from December 31, 2022 to June 30, 2023 primarily reflecting the substantial paydown of ERAs originated during December 2022. In addition, TRS also received substantial paydowns of commercial loans made during the fourth quarter of 2022 to third-party tax-related businesses for their cash flow needs for the first quarter tax season. RAs, including ERAs, are only made during the December of the previous year and the first two months of each year, with all unpaid RAs charged off by June 30th of each year.
As of June 30, 2023, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.
The Company’s ACLL increased $2 million from $70 million as of December 31, 2022 to $72 million as of June 30, 2023. As a percent of total loans, the total Company’s ACLL increased to 1.43% as of June 30, 2023 compared to 1.56% as of December 31, 2022. An analysis of the ACL by reportable segment follows:
The Traditional Banking ACLL increased approximately $324,000 to $56 million as of June 30, 2023, generally driven primarily by formula reserves tied to loan growth during the first six months of 2022 partially offset by the $1.5 million release of COVID-related reserves. The release of these reserves coincided with the federal government’s declaration of the official end to the COVID pandemic in May of 2023.
The Warehouse ACLL decreased to approximately $1.3 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing June 30, 2023 to December 31, 2022. As of June 30, 2023, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first six months of 2022.
The TRS ACLL decreased $4 million from $4 million as of December 31, 2022 to $0 as of June 30, 2023, with this decrease driven by the charge-off of all unpaid ERAs originated during December 2022.
The RCS ACLL increased $482,000 to $15 million as of June 30, 2023, with this increase driven by an increase in the RCS LOC II spot balance and a change in the RCS loan mix as the outstanding healthcare receivable spot balance increased and the RCS LOC I spot balance decreased.
RCS maintained an ACLL for two distinct credit products offered as of June 30, 2023, including its line-of-credit products and its healthcare-receivables products. As of June 30, 2023, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 51.91% for its line-of-credit products. The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.
Table 19 — Management’s Allocation of the Allowance for Credit Losses on Loans
Percent of
Loans to
ACLL to
Loans*
Loan Class
Loan Class*
0.91
1.45
2.68
0.90
0.97
1.03
1.05
1.87
1.91
6.44
100.00
1.27
1.29
21.57
1.26
12.88
13.73
12.86
7.27
1.56
* Values of less than 50 basis points are rounded down to zero.
Asset Quality
Classified and Special Mention Loans
The Bank applies credit quality indicators, or ratings, to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard,” and PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans decreased approximately $9 million during the first six months of 2023, driven primarily by commercial-purpose loans repaid or upgraded to a Pass rating during the first six months of 2022.
See Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.
Table 20 — Classified and Special Mention Loans
Loss
16,727
17,010
(283)
PCD - Substandard
Total Classified Loans
115
60,801
69,246
(8,445)
PCD - Special Mention
486
718
(232)
Total Special Mention Loans
(8,677)
Total Classified and Special Mention Loans
79,910
88,472
(8,562)
Nonperforming Loans
Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately $0 million and $2 million as of June 30, 2023 and December 31, 2022.
Nonperforming loans to total loans decreased to 0.35% at June 30, 2023 from 0.36% at December 31, 2022, as the total balance of nonperforming loans increased by $1 million, or 6%, while total loans increased $536 million, or 12%, during the first six months of 2023. As presented in Tables 21 and 22 below, the decrease in nonperforming loans during 2023, including the nonaccrual loan component, was primarily driven by the refinancing of $8 million of these loans to another financial institution.
The ACLL to total nonaccrual loans decreased to 412% as of June 30, 2023 from 432% as of December 31, 2022, as the total ACLL increased $2 million and the balance of nonaccrual loans increased by $1 million, or 9%. The driver of the increase in ACLL was primarily RAs originated through the Company’s TRS segment, which was partially offset by loan growth in the Traditional Banking segment during the second quarter.
Table 21 — Nonperforming Loans and Nonperforming Assets Summary
Nonaccrual loans to total loans
ACLL to nonaccrual loans
426
452
1.21
Loans on nonaccrual status include collateral-dependent loans. See Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans.
Table 22 — Nonperforming Loan Composition
1.33
1.47
0.02
0.65
0.46
33.55
0.29
Table 23 — Stratification of Nonperforming Loans
Number of Nonperforming Loans and Recorded Investment
> $100 &
No.
<= $100
<= $500
> $500
7,652
2,359
212
715
905
593
166
5,426
8,457
3,074
3,621
134
4,650
7,353
1,385
180
769
711
172
5,509
7,899
2,154
222
2,910
Table 24 — Roll-forward of Nonperforming Loans
Nonperforming loans at the beginning of the period
16,610
16,966
20,552
Loans added to nonperforming status during the period that remained nonperforming at the end of the period
3,432
5,267
2,324
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)
(1,917)
(1,381)
(3,193)
(5,633)
Principal balance paydowns of loans nonperforming at both period ends
(392)
(699)
(680)
(1,028)
Net change in principal balance of other loans nonperforming at both period ends*
(229)
(208)
Nonperforming loans at the end of the period
16,210
Includes relatively small consumer portfolios, e.g., RCS loans.
Table 25 — Detail of Loans Removed from Nonperforming Status
Loans charged off
Loans transferred to OREO
Loan payoffs and paydowns
(1,463)
(1,518)
(5,429)
Loans returned to accrual status
(454)
(1,675)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period
Based on the Bank’s review as of June 30, 2023, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.
Total Company delinquent loans to total loans decreased to 0.32% as of June 30, 2023 from 0.34% as of December 31, 2022. Core Bank delinquent loans to total Core Bank loans decreased to 0.12% as of June 30, 2023 from 0.14% as of December 31, 2022. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of June 30, 2023 and December 31, 2022 were on nonaccrual status.
Table 26 — Delinquent Loan Composition*
0.48
0.19
19.97
22.04
0.16
0.85
7.03
8.46
8.53
8.45
3.58
Total delinquent loans
* Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due.
Table 27 — Roll-forward of Delinquent Loans
Delinquent loans at the beginning of the period
36,124
16,215
13,465
Loans added to delinquency status during the period and remained in delinquency status at the end of the period
2,761
4,588
2,348
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below)
(2,410)
(1,944)
(4,684)
(4,104)
Principal balance paydowns of loans delinquent at both period ends
(344)
(348)
Net change in principal balance of other loans delinquent at both period ends*
(20,511)
(4,190)
803
Delinquent loans at the end of period
11,451
Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 28 — Detail of Loans Removed from Delinquent Status
Refund Advances paid off or charged off
(1,389)
(601)
(1,629)
(3,676)
Loans paid current
(1,021)
(1,342)
(3,054)
(427)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period
Collateral-Dependent Loans and Loan Modifications
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs, if appropriate. The Bank’s policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected.
A loan modification (formerly a TDR prior to the adoption of ASU 2022-02) is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank’s loan modifications involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan’s interest rate, and/or extending the maturity date of the debt. Nonaccrual loans modified as loan modifications remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as loan modifications are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. With the adoption of ASU 2022-02 in 2023, all loan modifications will now be recognized as collateral-dependent. As of June 30, 2023 there were $1.3 million collateral-dependent loan modifications.
Table 29 — Collateral-Dependent Loans and Troubled Debt Restructurings
Cashflow-dependent TDRs
5,761
Collateral-dependent TDRs
6,265
Total TDRs
Collateral-dependent loans (which are not TDRs)
14,186
Total recorded investment in TDRs and collateral-dependent loans
26,212
See Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans and TDRs.
Table 30 — Deposit Composition
(174,339)
(13)
143,818
(33,806)
140,984
(4,413)
36,181
56,729
65,800
889
238,987
(58,950)
180,037
6,310
(10,697)
5,089
11,399
191,436
Total deposits increased $191 million from December 31, 2022 to $4.7 billion as of June 30, 2023. Total Core Bank deposits increased by $180 million with the CBank acquisition resulting in $191 million of this growth. Core Bank legacy deposits, which excludes the deposits assumed from the CBank acquisition, decreased $11 million, or 0.3%, from December 31, 2022. Within the Core Bank’s legacy deposits, interest-bearing deposits increased $99 million and noninterest-bearing deposits decreased $110 million.
As it relates to the decrease of $110 million in Core Bank legacy noninterest-bearing deposits, Management believes two factors generally drove this overall decline. The first is a general decline in liquidity among both businesses and consumers as the excess liquidity created during the COVID pandemic continued to wane. Second, Management believes that the substantial increase in market interest rates over the past year has caused the difference between what a client can earn for an interest-bearing deposit versus the client’s lack of a financial return for a noninterest-bearing deposit to become large enough to cause some clients to pursue other opportunities for their cash both inside and outside the Bank.
Related to the $99 million increase in Core Bank legacy interest-bearing deposits, all of this increased occurred during the second quarter of 2023 as Core Bank legacy interest-bearing deposits were down $122 million for the first quarter of 2023. The substantial majority of this increase was in the Bank’s CDARs and ICS product types.
CDARs accounts represent reciprocal, term certificate-of-deposit accounts and ICS accounts represent liquid money market accounts in which:
These balances grew $184 million for the first six months of 2023 with $123 million of this growth occurring during the second quarter when the Bank significantly increased its offering rates to, in general, well-above 4% in order to combat deposit run-off. In
addition to the higher offering rates available through these two products, CDARs and ICS accounts are also attractive to clients because they offer clients the ability to receive full FDIC insurance for their deposit balances up to $50 million per client.
Management believes the higher offering rates it is paying for its interest-bearing deposits as of June 30, 2023 will continue to raise the Traditional Bank's overall cost of funds into the second half of 2023 and cause further contraction to its net interest margin on a linked-quarter basis. This strategy is subject to change depending upon several factors including, but not limited to, the Bank’s current and projected overall liquidity positions, its clients’ demand for its loans and deposit products, the Bank’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank’s control.
SSUARs decreased $125 million, or 58%, during the first six months of 2023 to $92 million as of June 30, 2023. SSUARs generally represent large customer relationships deposited into the Bank that require security collateral above the $250,000 FDIC insurance limit of the Bank. Due to the size of the underlying relationships, large fluctuations in the underlying account balances from period to period are common.
While the Bank has changed its pricing strategy with deposits in order to retain and attract funds, it has not generally changed its pricing strategy with SSUARs. As a result, its SSUAR balances have continued to decline during the first six months of 2023. At this time, management is not contemplating a change in its pricing strategy for SSUARs, and as a result, a further decline in outstanding balances is possible. The Bank’s SSUAR pricing strategy, however, is subject to change depending upon several factors including, but not limited to, the Bank’s current and projected overall liquidity positions, its clients’ demand for its loans and deposit products, the Bank’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.
Federal Home Loan Bank Advances
As of June 30, 2023, the Company’s $520 million of total FHLB advances had a weighted-average maturity of 0.68 years and a weighted-average cost of 4.88%. The Bank held $70 million of long-term FHLB advances as of June 30, 2023 compared to $20 million of long-term FHLB advances as of December 31, 2022. Approximately $450 million of these borrowings were overnight in nature as of June 30, 2023 compared to $75 million as of December 31, 2022. The Company has utilized FHLB advances over the past year to fund its deposit outflow and overall loan growth. During the second quarter of 2023, the Bank extended the maturity for $50 million of these borrowings due to the inverted yield curve and the more attractive cost for longer term borrowings as compared to the cost of overnight borrowings. Overall, these extended term borrowings had a weighted average maturity of 5 years and a weighted average cost of 4.17%.
Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.
Interest Rate Swaps
The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets, primarily in the form of cash, cash equivalents, and unencumbered investment securities. Funding and cash flows can also be realized through deposit product promotions, the sale of AFS debt securities, principal paydowns on loans and mortgage-backed securities, and proceeds realized from loans held for sale.
See Footnote 13 “Interest Rate Swaps” of Part I Item 1 “Financial Statements” for additional discussion regarding the Bank’s interest rate swaps.
113
Liquidity
Table 31 — Liquid Assets and Borrowing Capacity
The Company’s liquid assets and borrowing capacity included the following:
Unencumbered debt securities
515,603
438,052
Total liquid assets
757,570
751,741
Available borrowing capacity with the FHLB
542,656
899,362
Available borrowing capacity through unsecured credit lines
125,000
Total available borrowing capacity
667,656
1,024,362
Total liquid assets and available borrowing capacity
1,425,226
1,776,103
The Company had a loan to deposit ratio (excluding wholesale brokered deposits) of 107% as of June 30, 2023 and 99% as of December 31, 2022. Republic’s banking centers and its website, www.republicbank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were cancelled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.
As noted in the sections above titled “Deposits” and “Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings”, the Bank implemented a general strategy during 2022 and most of the first quarter of 2023 to maintain a low beta for its client-related interest-bearing liabilities as part of its overall strategy to increase its net interest margin and net interest income. As a result of this strategy, however, the Bank did experience a decline in both personal and business deposit balances and SSUAR balances as some clients moved their funds to more attractive offerings outside of the Bank. In response to this deposit outflow, during the second quarter of 2023 the Bank began marketing some deposit products, such as money market accounts and short-term certificates of deposit, with higher offering rates. This strategy appears to have generally reversed the outflow of deposits during late May and June of 2023. These higher offering rates also raised the Traditional Bank's overall cost of funds meaningfully during the second quarter of 2023 and caused contraction to its net interest margin on a linked-quarter basis. Management is unsure if these higher offering rates will continue to prevent future deposit outflows or if the Bank may be required to raise its offering rates more in order to prevent future deposit outflows. The Bank’s overall deposit and SSUAR pricing strategies are subject to change depending upon several factors including, but not limited to, the Bank’s current and projected overall liquidity positions, its clients’ demand for its loans and deposit products, the Bank’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.
As of June 30, 2023, the Bank had approximately $723 million in deposits from 166 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. Total uninsured deposits for the Bank were $1.7 billion, or 36%, of total deposits as of June 30, 2023. The 20 largest non-sweep deposit relationships represented approximately $233 million, or 5%, of the Company’s total deposit balances as of June 30, 2023. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.
The Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other
purposes, as required by law. As of June 30, 2023 and December 31, 2022, these pledged investment securities had a fair value of $89 million and $218 million.
Total stockholders’ equity increased from $857 million as of December 31, 2022 to $887 million as of June 30, 2023. The increase in stockholders’ equity was primarily attributable to net income earned during 2023 reduced primarily by cash dividends declared.
Common Stock — The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.
Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. As of July 1, 2023, RB&T could, without prior approval, declare dividends of approximately $116 million. Any payment of dividends in the future will depend, in large part, on the Company’s earnings, capital requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors.
Regulatory Capital Requirements — The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings, and other factors.
Banking regulators have categorized the Bank as well capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 10.0% Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 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 of 2.5% composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements.
Republic continues to exceed the regulatory requirements for Total Risk-Based Capital, Common Equity Tier I Risk-Based Capital, Tier I Risk Based-Capital, and Tier I Leverage Capital. Republic and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the Capital Conservation Buffer. Republic’s average stockholders’ equity to average assets ratio was 14.34% as of June 30, 2023 and 13.41% as of December 31, 2022. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
Table 32 — Capital Ratios (1)
Ratio
Total capital to risk-weighted assets
947,620
16.39
941,865
17.92
906,748
15.69
904,592
17.23
Common equity tier 1 capital to risk-weighted assets
878,533
15.20
877,735
16.70
837,661
14.50
840,462
16.01
Tier 1 (core) capital to risk-weighted assets
Tier 1 leverage capital to average assets
14.36
14.81
13.49
14.09
Asset/Liability Management and Market Risk
Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards, and achieve acceptable net interest income based on the Bank’s risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank’s overall earnings and balance sheet.
The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances, and other factors.
The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank’s loans and deposits and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.
As of June 30, 2023, a dynamic simulation model was run for interest rate changes from “Down 200” basis points to “Up 300” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning July 1, 2023 and ending June 30, 2024 based on instantaneous movements in interest rates from Down 200 to Up 300 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.
Table 33 — Bank Interest Rate Sensitivity
Change in Rates
-200
-100
+100
+200
+300
Basis Points
% Change from base net interest income as of June 30, 2023
7.2
2.0
(0.9)
(1.7)
(2.3)
% Change from base net interest income as of December 31, 2022
(2.8)
(0.6)
1.8
3.7
5.7
Notable changes for the Bank’s interest rate sensitivity projections from December 31, 2022 to June 30, 2023 occurred in all the scenarios. In general, the period-to-period declines in the up-rate scenarios were generally tied to three main factors. First, the Company’s average interest-earning cash balances further declined from December to June. As a result, the benefit the Company expects to receive from rising short-term interest rates, as a result of its immediately repricing interest-earning cash, decreased. Second, the Company increased its assumed deposit betas from December to June in anticipation of a more competitive deposit gathering and retention environment. These higher deposit betas resulted in higher projected costs for the Company’s interest-bearing deposits in a rising rate environment. Third, net interest income is projected to decline in the up-rate scenarios due to the increased amount of immediately repricing overnight borrowings on the Company’s balance sheet as of June 30, 2023 as compared to December 31, 2022.
Conversely in the down rate scenarios, the Company’s interest rate risk position notably improved. This improvement was generally tied to three factors. The first factor is a notable increase above current levels for mortgage banking income as refinance activity is assumed to increase with a decline in interest rates. Second, net interest income is expected to improve due to the assumed benefit for interest rate floors related to loans, which are projected to take effect with a substantial drop in interest rates. Third, net interest income is projected to improve in the down rate scenarios due to the increased amount of immediately repricing overnight borrowings on the Company’s balance sheet as of June 30, 2023 as compared to December 31, 2022.
For further discussion of interest-bearing deposit betas, see section titled “Deposits” in this Form 10-Q.
LIBOR Exposure
In July 2017, the Financial Conduct Authority (“FCA”), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, in November 2020, the FCA announced that many tenors of LIBOR would continue to be published through June 2023. In compliance with regulatory guidance, the Bank discontinued referencing LIBOR for new financial instruments during 2021 and chose SOFR to be its primary alternative reference rate for most transaction types upon the discontinuance or unavailability of LIBOR.
Regarding its legacy assets that reference LIBOR, the Bank has previously disclosed that the underlying contracts for these assets may not include adequate “fallback” language to use alternative indexes and margins when LIBOR ceased. However, on March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Law”). The LIBOR Law provides for a statutory transition to a replacement rate selected by the Board of Governors of the Federal Reserve System (the “FRS Board”) based on the SOFR for contracts referencing LIBOR that contain no or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute.
On December 16, 2022, under the LIBOR Law, the FRS Board issued final regulations (the “LIBOR Regulations”) that included the selection of an FRS Board-selected benchmark replacement rate based on SOFR and incorporated an applicable tenor spread adjustment (“Selected Benchmark Rate”). The Selected Benchmark Rate replaced LIBOR in certain financial contracts after June 30, 2023. Substantially all of the Company’s financial instruments transitioned to the Selected Benchmark as of July 1, 2023.
For additional discussion regarding the Bank’s net interest income, see the sections titled “Net Interest Income” in this section of the filing under “RESULTS OF OPERATIONS (Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022) and “RESULTS OF OPERATIONS (Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022.”
Item 3.Quantitative and Qualitative Disclosures about Market Risk.
Information required by this item is included under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by Republic Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were not effective as of the end of the period covered by this report because of material weaknesses in our internal control over financial reporting, as described in Management’s Report on Internal Control over Financial Reporting in “Item 9A. Controls and Procedures” in its Annual Report on Form 10-K for the year ended December 31, 2022.
In addition, other than the measures described below taken in response to the material weaknesses, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Material Weakness Remediation Efforts
The Company has commenced the implementation of some remediation measures with respect to the material weaknesses as outlined in its Annual Report on Form 10-K for the year ended December 31, 2022. As part of its remediation efforts for its material weaknesses, Management has completed the following:
In addition, the Company continues the planning process for those remediation measures that have not yet been implemented. Management cannot determine when all its remediation plans will be fully completed, and Management cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.
Item 1.Legal Proceedings.
In the ordinary course of operations, Republic and the Bank are defendants in various legal proceedings. There is no proceeding, pending, or threatened litigation in which Republic and the Bank are a defendant, to the knowledge of management, in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Republic or the Bank.
Item 1A.Risk Factors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the additional risk factor information described below, there have been no material changes in the Company’s risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of its Annual Report on Form 10-K for the year ended December 31, 2022. You should carefully consider the risk factors discussed below and in Republic’s 2022 Form 10-K, which could materially affect the Company’s business, financial condition and results of operations in the future.
Recent negative developments in the banking industry could adversely affect our current and projected business operations and our financial condition and results of operations. Recent bank failures and their related negative media attention have generated significant market trading volatility among publicly traded bank holding companies and, in particular, bank holding companies for regional, and community banks. These developments have negatively impacted customer confidence in regional and community banks, which could prompt customers to maintain their deposits with larger financial institutions. Further, competition for deposits has increased in recent periods, and the cost of funding has similarly increased, putting pressure on our net interest margin. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings.
The proportion of our deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk and earnings risks in times of financial distress. A significant factor in the two recent bank failures that occurred during the first quarter of 2023 appears to have been the proportion of the deposits held by each institution that exceeded FDIC insurance limits. In these two failures, the estimated percentage of uninsured deposits to total deposits, as previously disclosed, were at, or approaching, 90%. In response to these failures, many large depositors across the industry have withdrawn deposits in excess of applicable deposit insurance limits and deposited these funds in other financial institutions and, in many instances, moved these funds into money market mutual funds or other similar securities accounts in an effort to diversify the risk of further bank failure(s).
Uninsured deposits historically have been less stable than insured deposits. As a result, in the event of financial distress, uninsured depositors historically have been more likely to withdraw their deposits. The Company estimates that 36% of its total deposits as of June 30, 2023, were uninsured as they were above the FDIC’s insurance limit. If a significant portion of these uninsured deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, RB&T may be unable to obtain funding at favorable terms, which may have an adverse effect on our net interest margin. Moreover, obtaining adequate funding to meet our deposit obligations may be more challenging during periods of elevated prevailing interest rates, such as the present period. Our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Further, interest rates paid for borrowings generally exceed the interest rates paid on deposits. This spread may be exacerbated by higher prevailing interest rates.
We may experience additional increases in FDIC insurance assessments. The FDIC deposit insurance fund has recently incurred losses with the resolution of bank failures during the first quarter of 2023. As a result, the FDIC issued a notice of proposed rulemaking for a special assessment in May 2023. It is possible that our regular deposit insurance assessment rates, which were already expected to increase significantly during 2023 over 2022, will further increase should the FDIC alter its assessment rate schedule or calculation methodology for financial institutions as a result of these recent bank failures. Although we cannot predict the specific timing and terms of any special assessment or any other increase in our deposit insurance assessment rates, any increase in our assessment fees could have a materially adverse effect on our results of operations and financial condition.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Details of Republic’s Class A Common Stock purchases during the second quarter of 2023 are included in the following table:
Total Number of
Maximum Number
Shares Purchased
of Shares that May
as Part of Publicly
Yet Be Purchased
Average Price
Announced Plans
Under the Plan
Period
Paid Per Share
or Programs
April 1 - April 30
3,900
38.22
486,100
May 1 - May 31
69,847
40.26
416,253
June 1 - June 30
82,066
44.92
334,187
155,813
42.66
The Company repurchased 155,813 shares of its Class A Common Stock during the second quarter of 2023. In addition, in connection with employee stock awards, there were 432 shares withheld upon exercise of stock options to satisfy the withholding taxes. On October 25, 2022, the Board of Directors of Republic Bancorp, Inc. increased the Company’s existing authorization to purchase shares of its Class A Common Stock to 500,000 shares. The repurchase program will remain effective until the total number of shares authorized is repurchased or until Republic’s Board of Directors terminates the program. As of June 30, 2023, the Company had 334,187 shares which could be repurchased under its current share repurchase programs.
During the second quarter of 2023, there were 2,833 shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock by stockholders of Republic in accordance with the share-for-share conversion option of the Class B Common Stock. The exemption from registration of newly issued Class A Common Stock relies upon Section (3)(a)(9) of the Securities Act of 1933.
There were no equity securities of the registrant sold without registration during the quarter covered by this report.
Item 5.Other Information.
Rule 10b5-1 Trading Plans
During the three months ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K.
Item 6.Exhibits.
The following exhibits are filed or furnished as a part of this report:
Exhibit Number
Description of Exhibit
31.1
Certification of Principal Executive Officer pursuant to the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002
32*
Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following financial statements from the Company’s quarterly report on Form 10-Q were formatted in iXBRL(Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, (ii) Consolidated Statements of Income and Comprehensive Income for the Three and Six Months ended June 30, 2023 and 2022, (iii) Consolidated Statements of Stockholders’ Equity for the Three and Six
Months ended June 30, 2023 and 2022, (iv) Consolidated Statements of Cash Flows for the Six Months ended June 30, 2023 and 2022 and (v) Notes to Consolidated Financial Statements
Cover Page Interactive Data File formatted in iXBRL and contained in Exhibit 101.
This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Principal Executive Officer:
Date: August 4, 2023
/s/ Steven E. Trager
By: Steven E. Trager
Executive Chair and Chief Executive Officer
Principal Financial Officer:
/s/ Kevin Sipes
By: Kevin Sipes
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer