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, 2022
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 of 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, 2022 was 17,580,806 and 2,160,924.
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.
68
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
117
Item 4.
Controls and Procedures.
PART II — OTHER INFORMATION
Legal Proceedings.
Item 1A.
Risk Factors.
118
Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6.
Exhibits.
119
SIGNATURES
120
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
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
EA
Easy Advance
Economic Aid Act
Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
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
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
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)
June 30,
December 31,
2022
2021
ASSETS
Cash and cash equivalents
$
795,143
756,971
Available-for-sale debt securities, at fair value (amortized cost of $651,048 in 2022 and $492,626 in 2021, allowance for credit losses of $30 in 2022 and $0 in 2021)
622,145
495,126
Held-to-maturity debt securities (fair value of $32,978 in 2022 and $44,764 in 2021, allowance for credit losses of $50 in 2022 and $47 in 2021)
32,962
44,299
Equity securities with readily determinable fair value
189
2,620
Mortgage loans held for sale, at fair value
8,491
29,393
Consumer loans held for sale, at fair value
17,459
19,747
Consumer loans held for sale, at the lower of cost or fair value
13,777
2,937
Loans (loans carried at fair value of $45 in 2022 and $170 in 2021)
4,362,233
4,496,562
Allowance for credit losses
(64,449)
(64,577)
Loans, net
4,297,784
4,431,985
Federal Home Loan Bank stock, at cost
10,311
Premises and equipment, net
33,886
36,073
Right-of-use assets
41,364
38,825
Goodwill
16,300
Other real estate owned
1,687
1,792
Bank owned life insurance
100,396
99,161
Other assets and accrued interest receivable
120,582
108,092
TOTAL ASSETS
6,112,476
6,093,632
LIABILITIES
Deposits:
Noninterest-bearing
2,094,436
1,990,781
Interest-bearing
2,733,093
2,849,637
Total deposits
4,827,529
4,840,418
Securities sold under agreements to repurchase and other short-term borrowings
303,315
290,967
Operating lease liabilities
42,163
39,672
Federal Home Loan Bank advances
20,000
25,000
Other liabilities and accrued interest payable
77,295
63,343
Total liabilities
5,270,302
5,259,400
Commitments and contingent liabilities (Footnote 9)
—
STOCKHOLDERS’ EQUITY
Preferred stock, no par value
Class A Common Stock and Class B Common Stock, no par value
4,663
4,702
Additional paid in capital
140,516
139,956
Retained earnings
718,649
687,700
Accumulated other comprehensive (loss) income
(21,654)
1,874
Total stockholders’ equity
842,174
834,232
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
47,916
49,640
108,931
117,112
Taxable investment securities
2,688
1,858
4,747
3,810
Federal Home Loan Bank stock and other
1,716
317
2,197
536
Total interest income
52,320
51,815
115,875
121,458
INTEREST EXPENSE:
Deposits
945
1,324
1,824
2,889
49
8
77
17
94
10
130
41
Subordinated note
169
341
Total interest expense
1,088
1,511
2,031
3,288
NET INTEREST INCOME
51,232
50,304
113,844
118,170
Provision for expected credit loss expense for on-balance sheet exposures (loans and investment securities)
3,705
(4,323)
12,931
10,939
NET INTEREST INCOME AFTER PROVISION
47,527
54,627
100,913
107,231
NONINTEREST INCOME:
Service charges on deposit accounts
3,363
3,071
6,589
5,944
Net refund transfer fees
3,950
5,923
16,001
18,644
Mortgage banking income
1,763
4,182
4,420
11,375
Interchange fee income
3,461
3,481
6,531
6,508
Program fees
3,885
3,342
7,739
5,551
Increase in cash surrender value of bank owned life insurance
623
600
1,235
990
Net losses on other real estate owned
(52)
(44)
(105)
(55)
Contract termination fee
5,000
Legal settlement
13,000
Other
573
1,093
1,157
1,712
Total noninterest income
30,566
21,648
61,567
50,669
NONINTEREST EXPENSE:
Salaries and employee benefits
28,896
27,410
58,208
56,747
Technology, equipment, and communication
7,229
7,444
14,443
14,511
Occupancy
3,224
3,251
6,664
6,810
Marketing and development
1,720
1,094
3,068
1,866
FDIC insurance expense
399
418
818
864
Interchange related expense
1,264
1,288
2,381
2,432
Legal and professional fees
804
1,466
2,169
2,680
4,117
3,343
8,475
7,685
Total noninterest expense
47,653
45,714
96,226
93,595
INCOME BEFORE INCOME TAX EXPENSE
30,440
30,561
66,254
64,305
INCOME TAX EXPENSE
6,539
6,639
14,427
14,330
NET INCOME
23,901
23,922
51,827
49,975
BASIC EARNINGS PER SHARE:
Class A Common Stock
1.20
1.16
2.60
2.42
Class B Common Stock
1.09
1.05
2.37
2.20
DILUTED EARNINGS PER SHARE:
2.59
2.41
2.36
2.19
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Net income
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized losses on AFS debt securities
(10,133)
(614)
(31,382)
(2,643)
Unrealized gain (loss) on AFS debt security for which a portion of OTTI has been recognized in earnings
(15)
34
9
Total other comprehensive loss before income tax
(10,148)
(580)
(31,373)
(2,594)
Tax effect
2,537
145
7,845
648
Total other comprehensive loss, net of tax
(7,611)
(435)
(23,528)
(1,946)
COMPREHENSIVE INCOME
16,290
23,487
28,299
48,029
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended June 30, 2022
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, 2022
17,834
2,165
4,703
140,795
708,874
(14,043)
840,329
Net change in AOCI
Dividends declared on Common Stock:
Class A Shares ($0.341 per share)
(6,047)
Class B Shares ($0.310 per share)
(670)
Stock options exercised, net of shares withheld
88
90
Conversion of Class B to Class A Common Shares
(4)
Repurchase of Class A Common Stock
(215)
(43)
(1,384)
(7,409)
(8,836)
Net change in notes receivable on Class A Common Stock
(42)
Deferred compensation - Class A Common Stock:
Directors
82
Designated key employees
178
Employee stock purchase plan - Class A Common Stock
1
163
164
Stock-based awards - Class A Common Stock:
Performance stock units
38
Restricted stock
447
Stock options
151
Balance, June 30, 2022
17,629
2,161
Three Months Ended June 30, 2021
Balance, April 1, 2021
18,628
2,198
4,884
143,563
682,264
6,998
837,709
Class A Shares ($0.308 per share)
(5,680)
Class B Shares ($0.280 per share)
(608)
12
(54)
(49)
32
(32)
(255)
(51)
(1,614)
(9,096)
(10,761)
95
167
162
33
409
411
Balance, June 30, 2021
18,421
2,166
4,841
142,884
690,802
6,563
845,090
7
Six Months Ended June 30, 2022
Balance, January 1, 2022
17,816
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
610
307
Six Months Ended June 30, 2021
Balance, January 1, 2021
18,697
2,199
4,899
143,637
666,278
8,509
823,323
Class A Shares ($0.616 per share)
(11,423)
Class B Shares ($0.560 per share)
(1,224)
28
13
(155)
(142)
(33)
(362)
(75)
(2,350)
(12,804)
(15,229)
50
209
303
316
318
65
14
519
521
290
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
1,496
2,489
Net accretion on loans and amortization of core deposit intangible and operating lease components
(2,220)
(10,894)
Unrealized and realized losses on equity securities with readily determinable fair value
190
482
Depreciation of premises and equipment
4,029
4,515
Amortization of mortgage servicing rights
1,248
1,735
Recovery of mortgage servicing rights
(500)
Provision for on-balance sheet exposures
Provision for off-balance sheet exposures
48
Net gain on sale of mortgage loans held for sale
(3,919)
(11,009)
Origination of mortgage loans held for sale
(162,150)
(354,764)
Proceeds from sale of mortgage loans held for sale
186,971
380,239
Net gain on sale of consumer loans held for sale
(6,265)
(4,121)
Origination of consumer loans held for sale
(527,996)
(304,045)
Proceeds from sale of consumer loans held for sale
525,709
288,510
Net gain realized on sale of other real estate owned
Writedowns of other real estate owned
105
Deferred compensation expense - Class A Common Stock
568
512
Stock-based awards and ESPP expense - Class A Common Stock
1,042
923
Net gain on sale of bank premises and equipment
(399)
(1,235)
(990)
Net change in other assets and liabilities:
Accrued interest receivable
2,450
Accrued interest payable
(131)
Other assets
1,718
1,728
Other liabilities
9,889
(2,352)
Net cash provided by operating activities
93,994
55,291
INVESTING ACTIVITIES:
Purchases of available-for-sale debt securities
(189,820)
(111,664)
Proceeds from calls, maturities and paydowns of equity and available-for-sale debt securities
33,340
108,201
Proceeds from calls, maturities and paydowns of held-to-maturity debt securities
11,330
7,162
Net change in outstanding warehouse lines of credit
253,872
122,641
Net change in other loans
(130,331)
135,473
Proceeds from redemption of Federal Home Loan Bank stock
5,727
Proceeds from sales of other real estate owned
611
Proceeds from sale of bank premises and equipment
637
Purchase of bank owned life insurance
(30,000)
Investments in low-income housing tax partnerships
(5,509)
(7,684)
Net purchases of premises and equipment
(1,842)
(3,923)
Net cash (used in) provided by investing activities
(28,960)
227,181
FINANCING ACTIVITIES:
Net change in deposits
(12,889)
284,397
Net change in securities sold under agreements to repurchase and other short-term borrowings
12,348
(68,131)
Payments of Federal Home Loan Bank advances
(25,000)
(235,000)
Proceeds from Federal Home Loan Bank advances
Net proceeds from Class A Common Stock purchased through employee stock purchase plan
278
272
Net proceeds from option exercises and equity awards vested - Class A Common Stock
Cash dividends paid
(12,805)
(12,219)
Net cash used in financing activities
(26,862)
(21,052)
NET CHANGE IN CASH AND CASH EQUIVALENTS
38,172
261,420
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
485,587
CASH AND CASH EQUIVALENTS AT END OF PERIOD
747,007
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for:
Interest
2,028
3,419
Income taxes
8,677
13,466
SUPPLEMENTAL NONCASH DISCLOSURES:
Mortgage servicing rights capitalized
1,459
2,475
Transfers from loans to real estate acquired in settlement of loans
64
Unfunded commitments in low-income-housing investments
10,100
Right-of-use assets recorded
4,956
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –JUNE 30, 2022 and 2021 AND DECEMBER 31, 2021 (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.
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 months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.
As of June 30, 2022, 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.
Traditional Banking segment — The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of June 30, 2022, Republic had 42 full-service banking centers with locations as follows:
●
Kentucky — 28
Metropolitan Louisville — 18
Central Kentucky — 7
Georgetown — 1
Lexington — 5
Shelbyville — 1
Northern Kentucky — 3
Covington — 1
Crestview Hills — 1
Florence — 1
Southern Indiana — 3
Floyds Knobs — 1
Jeffersonville — 1
New Albany — 1
Metropolitan Tampa, Florida — 7
Metropolitan Cincinnati, Ohio — 2
Metropolitan Nashville, Tennessee — 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. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
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 for loans generated in states within its footprint and generally sells servicing for loans generated in states outside of its footprint. 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.
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”). Substantially all of the business generated by the TRS segment occurs in the first half of the year. The TRS segment traditionally operates at a loss during the second half of the year, during which time the segment incurs costs preparing for the upcoming year’s tax season.
RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. The EA product had the following features during 2022 and 2021:
The Company reports fees paid for the EA product as interest income on loans. During 2021, EAs were repaid, on average, within 32 days after the taxpayer’s tax return was submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considered an EA delinquent in 2022 and 2021 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 EAs are estimated when advances are made. Unpaid EAs are charged-off by June 30th of each year, with EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans unless such recovery is subject to guarantor reimbursement under a loan-loss guaranty.
Related to the overall credit losses on EAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s EA approval model is based primarily on the prior-year’s tax refund payment patterns. Because the substantial majority of the EA 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.
Settlement of Lawsuit Against Green Dot - 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.
As previously disclosed in the Company’s prior SEC filings, 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 million to the Bank, which was in addition to a $5 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 submitted to the Delaware Court of Chancery a stipulation of dismissal of the Lawsuit, which was effective to dismiss the Lawsuit when filed.
Republic Payment Solutions division — RPS is currently managed and operated within the TRS segment. The RPS division offers general-purpose reloadable prepaid cards as an issuing bank through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees. Additionally, the Company’s portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “Interchange fee income.”
Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans 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 participation interests are 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 participation interests are 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.
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.”
Recently Adopted Accounting Standards
The following ASUs were adopted by the Company during the six months ended June 30, 2022:
ASU. No.
Topic
Nature of Update
Date Adopted
Method of Adoption
Financial Statement Impact
2020-06
Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas.
January 1, 2022
Prospectively
Immaterial
2021-04
Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) How an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) How an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) How an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange.
The following not-yet-effective ASUs were issued since the Company’s most recently filed Form 10-K and are considered relevant to the Company’s financial statements.
Date Adoption
Adoption
Expected
Required
Method
Financial 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 writeoffs 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 4 in this section of the filing)
January 1, 2023
The Company is currently analyzing the impact of this ASU on its financial statements.
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
15
2. 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, 2022 (in thousands)
Cost
Gains
Losses
Credit Losses
Value
U.S. Treasury securities and U.S. Government agencies
400,771
(17,680)
383,092
Private label mortgage-backed security
1,156
1,322
2,478
Mortgage-backed securities - residential
210,571
83
(12,384)
198,270
Collateralized mortgage obligations
24,838
(341)
24,545
Corporate bonds
10,000
(34)
(30)
9,936
Trust preferred security
3,712
112
3,824
Total available-for-sale debt securities
651,048
1,566
(30,439)
December 31, 2021 (in thousands)
239,880
473
(2,894)
237,459
1,418
1,313
2,731
207,697
3,525
(473)
210,749
29,947
377
30,294
46
10,046
3,684
3,847
492,626
5,897
(3,397)
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
29
7,772
70
(20)
7,822
24,966
(92)
24,882
(50)
Obligations of state and political subdivisions
245
Total held-to-maturity debt securities
33,012
78
(112)
32,978
9,080
158
9,238
34,975
263
(6)
35,232
(47)
248
44,346
424
44,764
Sales of Available-for-Sale Debt Securities
During the three and six months ended June 30, 2022 and 2021, there were no material gains or losses on sales or calls of AFS debt securities.
16
Debt Securities by Contractual Maturity
The amortized cost and fair value of debt securities by contractual maturity as of June 30, 2022 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
61,344
61,128
Due from one year to five years
349,427
331,900
25,091
25,007
Due from five years to ten years
Due beyond ten years
Total debt securities
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, 2022 and December 31, 2021, aggregated by investment category and length of time in a continuous unrealized loss position:
Less than 12 months
12 months or more
Fair Value
Available-for-sale debt securities:
296,890
(12,582)
64,902
(5,098)
361,792
193,002
16,226
506,118
(25,307)
571,020
(30,405)
177,138
(2,622)
9,728
(272)
186,866
84,937
4,495
266,570
(3,125)
276,298
As of June 30, 2022, the Bank’s security portfolio consisted of 179 securities, 127 of which were in an unrealized loss position.
As of December 31, 2021, the Bank’s security portfolio consisted of 173 securities, 29 of which were in an unrealized loss position.
As of June 30, 2022 and December 31, 2021, 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 $2.5 million as of June 30, 2022. 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 10 “Fair Value” in this section of the filing.
Mortgage-Backed Securities and Collateralized Mortgage Obligations
As of June 30, 2022, with the exception of the $2.5 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, 2022 and December 31, 2021, there were gross unrealized losses of $12.7 million and $503,000 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.
Trust Preferred Security
During 2015, the Parent Company purchased a $3 million floating rate TRUP at a price of 68% of par. The coupon on this security is based on the 3-month LIBOR rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.
Rollforward of the Allowance for Credit Losses on Debt Securities
The table below presents a rollforward for the three months ended June 30, 2022 and 2021 of the ACLS on AFS and HTM debt securities:
ACLS Rollforward
Three Months Ended June 30,
Beginning
Charge-
Ending
Balance
offs
Recoveries
Available-for-Sale Securities:
Corporate Bonds
30
Held-to-Maturity Securities:
103
56
80
Six Months Ended June 30,
47
(122)
The Company increased the ACLS on its AFS and HTM corporate bonds during the three and six months ended June 30, 2022 based on increased PD and LGD estimates on these bonds.
There were no HTM debt securities on nonaccrual or past due over 89 days as of June 30, 2022 and December 31, 2021. All of the Company’s HTM corporate bonds were rated investment grade as of June 30, 2022 and December 31, 2021.
There were no HTM debt securities considered collateral dependent as of June 30, 2022 and December 31, 2021.
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 $1 million as of June 30, 2022 and December 31, 2021. Accrued interest receivable on HTM debt securities totaled $118,000 and $89,000 as of June 30, 2022 and December 31, 2021.
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, 2022
December 31, 2021
Carrying amount
415,244
319,650
Fair value
319,808
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
170
Community Reinvestment Act mutual fund
2,500
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
25
191
(97)
Total equity securities with readily determinable fair value
(72)
207
19
(444)
(209)
(38)
(190)
(482)
3. LOANS HELD FOR SALE
In the ordinary course of business, the Bank originates for sale mortgage loans and consumer loans. Mortgage loans originated for sale are primarily originated and sold into the secondary market through the Bank’s Mortgage Banking segment, while consumer loans originated for sale are originated and sold through the RCS segment.
Mortgage Loans Held for Sale, at Fair Value
See additional detail regarding mortgage loans originated for sale, at fair value under Footnote 11 “Mortgage Banking Activities” of this section of the filing.
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 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
11,709
3,970
3,298
98,704
49,607
195,436
68,697
Proceeds from the sale of consumer loans held for sale
(94,435)
(41,974)
(201,083)
(60,904)
1,481
1,417
3,359
1,929
Balance, end of period
13,020
Consumer Loans Held for Sale, at the Lower of Cost or Fair Value
RCS originates for sale 90% to 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:
3,026
11,701
1,478
184,078
137,164
332,560
235,348
(174,994)
(138,852)
(324,626)
(227,606)
1,667
1,399
2,906
2,192
11,412
20
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio follows:
Traditional Banking:
Residential real estate:
Owner occupied
832,137
820,731
Nonowner occupied
313,534
306,323
Commercial real estate
1,569,119
1,456,009
Construction & land development
137,452
129,337
Commercial & industrial
394,175
340,363
Paycheck Protection Program
14,657
56,014
Lease financing receivables
11,345
8,637
Aircraft
159,958
142,894
Home equity
214,069
210,578
Consumer:
Credit cards
15,419
14,510
Overdrafts
901
683
Automobile loans
9,579
14,448
Other consumer
1,245
1,432
Total Traditional Banking
3,673,590
3,501,959
Warehouse lines of credit*
596,678
850,550
Total Core Banking
4,270,268
4,352,509
Republic Processing Group*:
Tax Refund Solutions:
Easy Advances
Other TRS loans
149
50,987
Republic Credit Solutions
91,816
93,066
Total Republic Processing Group
91,965
144,053
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
4,364,937
4,498,671
Unearned income
(679)
(542)
Unamortized premiums
111
116
Unaccreted discounts
(574)
(641)
PPP net unamortized deferred origination (fees) and costs
(303)
(1,203)
Other net unamortized deferred origination (fees) and costs
(1,259)
161
Carrying value of loans
21
The CARES Act was enacted in March 2020 and provided for the SBA’s PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cashflow needs during the COVID pandemic. The Economic Aid Act was enacted in December 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As of June 30, 2022, net PPP loans of $15 million remained on the Traditional Bank’s balance sheet compared to $56 million as of December 31, 2021. PPP fees recognized by the Company for the first six months of 2022 and 2021 were $1.0 million and $9.4 million. PPP fees recognized by the Company for the years ended December 31, 2021 and 2020 were $17.5 million and $8.6 million.
22
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, 2022 remain unchanged from those defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Regarding origination year, loan extensions and renewals are generally considered originated in the year extended or renewed unless the loan is classified as a TDR. Loan extensions and renewals classified as 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, 2022
2020
2019
Prior
Cost Basis
to Term
Residential real estate owner occupied:
Risk Rating
Pass or not rated
95,596
201,218
200,132
78,397
235,958
811,301
Special Mention
7,681
7,870
Substandard
1,089
1,356
10,517
12,966
Doubtful
201,222
201,221
79,942
254,156
Residential real estate nonowner occupied:
45,525
98,419
58,325
36,582
68,566
5,863
313,280
126
128
98,457
68,782
Commercial real estate:
252,650
439,645
228,470
145,692
315,211
24,040
104,446
1,510,154
13,043
2,406
23,495
15,431
250
55,949
3,016
253,974
452,688
230,876
169,187
333,658
24,290
Construction and land development:
50,812
76,293
5,013
770
2,744
1,820
Commercial and industrial:
53,046
91,908
26,068
46,155
52,459
104,097
2,824
376,557
591
14,083
693
1,831
300
17,498
53,637
105,991
46,968
54,290
104,397
Paycheck Protection Program:
12,207
Lease financing receivables:
4,423
2,283
617
2,231
1,791
Aircraft:
32,905
59,236
39,231
20,316
8,270
Home equity:
212,580
348
1,141
23
Term Loans Amortized Cost Basis by Origination Year (Continued)
828
682
280
3,430
6,065
15,522
26,807
324
337
3,443
6,389
27,144
Warehouse:
TRS:
RCS:
4,438
3,319
2,049
1,198
27,648
52,806
91,458
358
53,164
Grand Total:
540,223
985,210
562,635
334,771
718,712
1,007,692
113,133
4,262,376
1,915
27,126
24,377
25,069
898
81,791
1,489
13,947
1,499
18,066
Grand Total
542,138
1,012,378
566,130
360,637
757,728
1,010,089
As of December 31, 2021
2018
218,981
213,010
89,186
50,301
226,852
798,330
301
8,209
8,543
45
870
679
1,189
11,075
13,858
219,327
213,880
89,865
51,523
246,136
107,041
65,786
44,376
29,292
55,872
3,729
306,096
132
56,099
472,095
256,039
153,224
94,212
286,223
25,188
80,211
1,367,192
20,059
2,399
29,639
11,207
18,778
82,082
266
2,453
3,905
6,735
492,154
258,549
183,129
107,872
308,906
88,743
30,593
2,599
1,155
1,925
125,143
524
3,670
4,194
31,117
6,269
105,148
34,361
54,524
18,110
44,972
60,454
2,541
320,110
15,015
1,921
785
1,956
350
20,061
179
192
120,163
36,295
55,488
18,144
46,928
60,804
24
40,607
15,407
2,638
839
2,641
1,255
65,886
43,301
22,933
9,119
1,655
208,429
279
1,870
978
417
4,694
4,326
5,768
14,613
30,796
61
194
277
4,716
4,387
5,962
31,073
5,524
3,409
1,642
869
3,699
77,544
92,687
379
77,923
1,107,641
663,162
375,819
208,648
626,424
1,289,690
86,481
4,357,865
35,375
4,844
34,094
11,274
29,075
629
115,291
994
1,146
3,703
15,269
2,249
23,406
1,143,061
669,000
411,059
223,625
670,768
1,292,568
The following table presents the activity in the ACLL by portfolio class:
ACLL Rollforward
8,358
62
8,445
9,489
(530)
8,977
2,746
(14)
2,733
2,532
2,551
24,624
(284)
24,341
23,801
(506)
23,307
3,893
(302)
3,591
3,593
(294)
3,299
3,412
3,768
2,718
1,395
109
104
(7)
97
378
400
265
4,044
(40)
4,113
4,615
(344)
4,305
944
59
(31)
930
949
716
315
(194)
281
(111)
74
717
122
334
(66)
273
241
200
533
(57)
(17)
467
49,616
106
(245)
49,727
49,387
(161)
166
49,362
Warehouse lines of credit
1,725
(234)
1,491
(65)
2,100
51,341
(128)
51,218
51,552
(95)
51,462
Republic Processing Group:
8,315
564
(11,505)
2,626
16,019
(5,793)
(10,256)
55
(204)
(153)
302
11,945
3,433
(2,411)
264
13,231
7,755
1,592
(597)
79
8,829
20,315
3,793
(14,069)
3,192
23,784
(4,181)
(10,883)
71,656
3,665
(14,314)
3,442
64,449
75,336
(4,276)
(11,044)
275
60,291
26
8,647
(269)
67
9,715
(783)
2,700
31
2,466
84
23,769
570
23,606
(428)
4,128
(537)
3,274
3,487
2,797
1,309
91
(9)
43
253
4,111
(110)
4,990
(726)
934
(70)
39
929
86
(90)
503
(408)
123
587
208
(249)
171
186
(68)
(144)
314
(113)
577
(109)
49,407
433
(508)
395
49,699
(798)
421
2,126
(635)
2,407
(307)
51,533
(202)
52,106
(267)
8,879
10,226
96
(607)
664
(115)
12,948
4,828
(5,084)
539
8,803
1,217
(1,362)
13,044
13,100
(16,742)
3,829
8,961
11,328
(11,669)
64,577
12,898
(17,250)
4,224
61,067
11,061
(12,467)
630
The cumulative loss rate used as the basis for the estimate of the Company’s ACLL as of June 30, 2022 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 2022, 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., TDRs.
For its CRE loan pool, the Company employed a one-year forecast of CRE vacancy rates through March 31, 2021 but discontinued use of this forecast during the second quarter of 2021 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.
27
Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans, nonperforming assets, and select credit quality ratios follows:
(dollars in thousands)
Loans on nonaccrual status*
16,168
20,504
Loans past due 90-days-or-more and still on accrual**
Total nonperforming loans
16,210
20,552
Total nonperforming assets
17,897
22,344
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans
0.37
%
0.46
Nonperforming assets to total loans (including OREO)
0.41
0.50
Nonperforming assets to total assets
0.29
Credit Quality Ratios - Core Bank:
0.38
0.47
0.42
0.51
0.32
0.40
*
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*
11,538
12,039
3,228
6,557
1,016
1,700
36
222
* Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.
Interest Income
Loans with
Loans without
Recognized
Loans
on Nonaccrual Loans*
11,520
154
257
37
644
146
Consumer
247
258
52
3,294
12,874
1,100
* Includes interest income for loans on nonaccrual as of the beginning of the period that were paid off during the period.
June 30, 2021
1,944
10,095
414
4,105
2,452
51
66
100
6,097
14,407
232
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include both 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. TDRs on nonaccrual status are reviewed for return to accrual status on an individual basis, with additional consideration given to performance under the modified terms.
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
1,340
796
333
2,469
829,668
313,493
2,142
1,566,977
321
393,854
150
213,919
15,395
196
199
702
9,573
1,563
1,135
2,654
5,352
3,668,238
4,264,916
4,914
1,143
6,099
85,717
85,866
6,477
2,278
2,696
11,451
4,350,782
Delinquency ratio***
0.15
0.05
0.06
0.26
* 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.
606
383
1,599
819,132
5,292
1,450,717
340,342
35
210,264
14,480
160
14,439
1,431
832
432
6,166
7,430
3,494,529
4,345,079
5,010
6,035
87,031
138,018
5,842
1,410
6,213
13,465
4,483,097
0.13
0.03
0.14
0.30
* All loans past due 90-days-or-more, excluding smaller balance consumer loans, were on nonaccrual status.
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
14,050
14,798
3,020
6,736
1,246
1,976
274
18,444
401
23,605
466
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.
Troubled Debt Restructurings
A TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of their debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Bank’s internal underwriting policy.
The majority of the Bank’s commercial-related and construction TDRs involve a restructuring of financing terms, such as a reduction in the payment amount to require only interest and escrow (if required) and/or extending the maturity date of the debt. The substantial majority of the Bank’s residential real estate TDR concessions involve reducing the client’s loan payment through a rate reduction for a set period based on the borrower’s ability to service the modified loan payment. Retail loans may also be classified as TDRs due to legal modifications, such as bankruptcies.
Nonaccrual loans modified as TDRs typically remain on nonaccrual status and continue to be reported as nonperforming loans for a minimum of six consecutive months. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. As of June 30, 2022 and December 31, 2021, $5 million and $6 million of TDRs were on nonaccrual status.
Detail of TDRs differentiated by loan type and accrual status follows:
Troubled Debt
Restructurings on
Nonaccrual Status
Accrual Status
Restructurings
Number of
Recorded
June 30, 2022 (dollars in thousands)
Investment
Residential real estate
3,102
75
7,046
139
10,148
883
3,025
2,446
2,448
438
Total troubled debt restructurings
5,258
2,523
8,354
2,590
13,612
December 31, 2021 (dollars in thousands)
63
3,179
89
7,856
152
11,035
2,575
1,239
3,814
2,269
479
2,270
491
5,811
2,361
9,575
2,429
15,386
The Bank considers a TDR to be performing to its modified terms if the loan is in accrual status and not past due 30-days-or-more as of the reporting date. A summary of the categories of TDR loan modifications outstanding and respective performance under modified terms as of June 30, 2022 and December 31, 2021 follows:
Performing to
Not Performing to
Modified Terms
Residential real estate loans (including home equity loans):
Rate reduction
71
6,541
6,868
Principal deferral
558
157
715
Legal modification
2,344
221
57
2,565
Total residential TDRs
125
9,443
705
Commercial related and construction/land development loans:
2,143
Total commercial TDRs
884
Consumer loans:
2,444
420
Total consumer TDRs
10,765
2,847
Interest only payments
7,461
7,764
729
442
2,542
137
10,290
745
919
477
2,464
2,941
1,396
3,860
2,266
470
2,413
12,177
3,209
As of June 30, 2022 and December 31, 2021, 79% and 79% of the Bank’s TDR balances were performing according to their modified terms. The Bank had provided $2 million and $2 million of specific ACLL allocations to clients whose loan terms have been modified in TDRs as of June 30, 2022 and December 31, 2021. The Bank had no commitments to lend any additional material amounts to its existing TDR relationships as of June 30, 2022 or December 31, 2021.
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2022 and 2021 that were modified during the three months ended June 30, 2022 and 2021 follows:
489
492
494
136
June 30, 2021 (dollars in thousands)
226
276
242
292
286
287
291
330
The tables above are inclusive of loans that were TDRs at the end of previous periods and were re-modified, e.g., a maturity date extension during the current period.
As of June 30, 2022 and 2021, 82% and 85% of the Bank’s TDR balances that occurred during the second quarters of 2022 and 2021 were performing according to their modified terms. The Bank provided approximately $36,000 and $18,000 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the second quarters of 2022 and 2021.
There was no significant change between the pre and post modification loan balances for the three months ending June 30, 2022 and 2021.
A summary of the categories of TDR loan modifications by respective performance as of June 30, 2022 and 2021 that were modified during the six months ended June 30, 2022 and 2021 follows:
528
554
497
605
255
534
440
695
589
69
72
597
767
As of June 30, 2022 and 2021, 92% and 67% of the Bank’s TDR balances that occurred during the first six months of 2022 and 2021 were performing according to their modified terms. The Bank provided approximately $36,000 and $35,000 in specific ACLL allocations to clients whose loan terms were modified in TDRs during the first six months of 2022 and 2021.
There was no significant change between the pre and post modification loan balances for the six months ending June 30, 2022 and 2021.
The following table presents loans by class modified as troubled debt restructurings within the previous 12 months of June 30, 2022 and 2021 and for which there was a payment default during the three and/or six months ended June 30, 2022 and 2021.
121
293
127
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
751
508
The Company’s TRS segment offered its EA product during the first two months of 2022 and 2021. During the first quarter of each year, the Company bases its estimated Provision for EAs on the current year’s EA delinquency information and prior years’ tax refund payment patterns subsequent to the first quarter. Unpaid EAs are charged-off by June 30th of each year, with EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans unless such recovery is subject to guarantor reimbursement under a loan-loss guaranty.
Information regarding EAs follows:
Easy Advances originated
311,207
250,045
Net charge (credit) to the Provision for Easy Advances
Provision to total Easy Advances originated
2.85
4.09
Easy Advances net charge-offs
Easy Advances net charge-offs (recoveries) to total Easy Advances originated
5. DEPOSITS
The composition of the deposit portfolio follows:
Core Bank:
Demand
1,338,061
1,381,522
Money market accounts
775,560
789,876
Savings
331,508
311,624
Individual retirement accounts (1)
41,305
43,724
Time deposits, $250 and over (1)
51,976
81,050
Other certificates of deposit (1)
132,536
154,174
Reciprocal money market and time deposits (1)
52,862
77,950
Total Core Bank interest-bearing deposits
2,723,808
2,839,920
Total Core Bank noninterest-bearing deposits
1,676,974
1,579,173
Total Core Bank deposits
4,400,782
4,419,093
9,285
9,717
Total RPG interest-bearing deposits
Brokered prepaid card deposits
319,455
320,907
Other noninterest-bearing deposits
98,007
90,701
Total RPG noninterest-bearing deposits
417,462
411,608
Total RPG deposits
426,747
421,325
6. 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, 2022 and December 31, 2021, 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
0.09
0.04
Fair value of securities pledged:
304,203
108,813
Mortgage backed securities - residential
42,422
167,561
1,190
33,441
Total securities pledged
347,815
309,815
Average outstanding balance during the period
294,388
169,888
297,263
181,216
Average interest rate during the period
0.07
0.02
Maximum outstanding at any month end during the period
174,928
200,704
7. 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, 2022, the Company was under 45 separate and distinct operating lease contracts to lease the land and/or buildings for 37 of its offices, with 12 such operating leases contracted with a related party of the Company. As of June 30, 2022, 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 one new third-party office lease, renewed one of its existing related-party leases, and extended four of its third-party leases during the first six months of 2022, with a related total right-of-use asset value of $5.0 million connected to this 2022 activity.
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, 2022 and 2021:
Operating lease expense:
Related Party:
Variable lease expense
1,269
1,218
2,535
2,438
Fixed lease expense
92
Third Party:
220
197
393
349
342
684
Total operating lease expense
1,895
3,737
3,583
Other information concerning operating leases:
Cash paid for amounts included in the measurement of operating lease liabilities
1,707
1,799
3,597
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, 2022 and December 31, 2021:
Weighted average remaining term in years
8.39
7.57
Weighted average discount rate
2.64
3.05
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, 2022:
Year (dollars in thousands)
Related Party
Third Party
2,123
3,432
2023
4,274
6,703
2024
4,189
1,928
6,117
2025
4,053
5,449
2026
4,124
5,224
Thereafter
16,375
4,313
20,688
Total undiscounted cash flows
35,138
12,475
47,613
Discount applied to cash flows
(3,398)
(2,052)
(5,450)
Total discounted cash flows reported as operating lease liabilities
31,740
10,423
8. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances were as follows:
Overnight advances
Fixed interest rate advances
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, 2022 and December 31, 2021, Republic had available borrowing capacity of $905 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, 2022 and December 31, 2021.
Aggregate future principal payments on FHLB advances based on contractual maturity and the weighted average cost of such advances are detailed below:
Weighted
Average
Principal
Rate
2027
1.89
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:
32,597
0.16
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
1,036,228
1,041,461
Home equity lines of credit
193,447
186,396
9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
COVID Pandemic
COVID was declared a pandemic by the World Health Organization on March 11, 2020. Since March 2020, jurisdictions within and outside the U.S. have imposed economic and social restrictions on the population, in general, and non-essential businesses to slow the spread of COVID. These restrictions, in combination with the public’s response to them, have disrupted supply chains and effectively suspended or curtailed economic activity for many industries across the U.S. and the world. Industries within the Company’s market footprint have been impacted by these supply chain disruptions as well as the corresponding inflationary pressures driven by them in combination with on-going governmental stimulus programs.
The future potential financial impact of the COVID pandemic is still unknown at this time. This pandemic and the public’s response to it could cause the Company to experience a material adverse impact on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, MSRs, deferred tax assets, or counterparty risk derivatives.
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
865,822
565,950
Unused home equity lines of credit
368,820
348,681
Unused loan commitments - other
828,583
828,229
Standby letters of credit
10,951
11,305
FHLB letter of credit
643
Total commitments
2,074,819
1,754,808
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 rollforward of the ACLC for the three and six months ended June 30, 2022 and 2021:
ACLC Rollforward
Loan Commitments
140
256
213
654
661
(124)
581
1,040
60
1,015
(81)
173
651
737
(156)
1,052
989
The Company increased its ACLC during the three and six months ended June 30, 2022 based on an increase in total unused commitments.
44
10. 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 2 “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, 2022. 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.
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.
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, 2022 is presented net of any applicable ACL.
Fair Value Measurements at
June 30, 2022 Using:
Quoted Prices in
Significant
Active Markets
for Identical
Observable
Unobservable
Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial assets:
230,771
152,321
385,072
6,302
Equity securities with readily determinable fair value:
Mortgage loans held for sale
Consumer loans held for sale
Consumer loans held for investment
Rate lock loan commitments
Mandatory forward contracts
359
Interest rate swap agreements
4,501
Financial liabilities:
December 31, 2021 Using:
70,112
167,347
418,436
6,578
1,404
5,786
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, 2022 and 2021.
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):
2,602
2,863
2,957
Total gains or losses included in earnings:
Net change in unrealized gain
Principal paydowns
(73)
(262)
(182)
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
4.5% - 5.4%
(2) Probability of default
1.8% - 9.3%
(3) Loss severity
50% - 75%
4.5% - 5.7%
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
3,650
3,800
Discount accretion
85
(126)
3,700
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, 2022 and December 31, 2021.
The aggregate fair value, contractual balance, and unrealized gain were as follows:
Aggregate fair value
Contractual balance
8,363
28,668
Unrealized gain
725
The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2022 and 2021 for mortgage loans held for sale are presented in the following table:
Interest income
153
549
Change in fair value
(143)
(1,154)
Total included in earnings
262
(3)
(240)
(605)
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, 2022 and December 31, 2021.
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%
1.4%
5.00%
The aggregate fair value, contractual balance, and unrealized gain on consumer loans held for sale, at fair value, were as follows:
17,563
19,633
(104)
114
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:
2,990
1,397
5,880
1,968
(181)
(218)
2,809
1,460
5,662
2,046
Assets measured at fair value on a non-recurring basis are summarized below:
Collateral-dependent loans:
1,345
Total collateral-dependent loans*
3,820
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.
1,626
2,841
4,845
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% - 41% (11%)
Collateral-dependent loans - commercial real estate
12% - 13% (12%)
Other real estate owned - commercial real estate
37% (37%)
0% - 51% (10%)
Collateral-dependent loans - home equity
2%-4% (3%)
33% (33%)
53
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.
Collateral-dependent loans are as follows:
Carrying amount of loans measured at fair value
4,024
4,928
Estimated selling costs considered in carrying amount
714
842
Valuation allowance
(918)
(925)
Total fair value
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
Other real estate owned carried at cost
Total carrying value of other real estate owned
Other real estate owned write-downs during the period
54
The carrying amounts and estimated exit price fair values of all financial instruments follow:
June 30, 2022:
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
4,165,381
Federal Home Loan Bank stock
9,872
Mortgage servicing rights
9,407
16,568
Liabilities:
Noninterest-bearing deposits
Transaction deposits
2,499,250
Time deposits
233,843
230,849
21,766
December 31, 2021:
4,445,244
9,877
9,196
11,540
2,553,423
296,214
298,236
159
11. 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:
13,302
63,636
46,867
61,489
141,177
162,150
354,764
Proceeds from the sale of mortgage loans held for sale
(67,759)
(176,424)
(186,971)
(380,239)
4,012
3,919
11,009
32,401
The following table presents the components of Mortgage Banking income:
Net gain realized on sale of mortgage loans held for sale
2,674
5,711
5,407
13,756
Net change in fair value recognized on loans held for sale
Net change in fair value recognized on rate lock loan commitments
(222)
299
(1,184)
(2,338)
Net change in fair value recognized on forward contracts
(1,102)
(1,855)
Net gain recognized
Loan servicing income
808
1,749
1,601
(738)
(1,248)
(1,735)
Change in mortgage servicing rights valuation allowance
500
Net servicing income recognized
304
501
366
Total Mortgage Banking income
Activity for capitalized mortgage servicing rights was as follows:
9,502
7,711
7,095
Additions
485
1,262
Amortized to expense
Change in valuation allowance
8,335
Activity in the valuation allowance for capitalized mortgage servicing rights follows:
Beginning valuation allowance
Charge during the period
(100)
Ending valuation allowance
Other information relating to mortgage servicing rights follows:
Fair value of mortgage servicing rights portfolio
Monthly weighted average prepayment rate of unpaid principal balance*
Discount rate
10.17
10.15
Weighted average foreclosure rate
0.19
Weighted average life in years
7.55
5.93
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. 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 lock loan 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:
28,072
56,736
29,812
70,812
58
12. 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 to meet client needs, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the 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
22,009
595
107,502
Interest rate swaps with Bank clients - Liabilities
93,757
(4,501)
16,423
(298)
Interest rate swaps with Bank clients - Total
115,766
(3,906)
123,925
5,488
Offsetting interest rate swaps with institutional swap dealer
Pay fixed/receive variable
3,906
(5,488)
231,532
247,850
The Bank is required to pledge securities as collateral when the Bank is in a net loss position for all swaps with dealer counterparties when such net loss positions exceed $250,000. The fair value of cash or investment securities pledged as collateral by the Bank to cover such net loss positions totaled $0 and $6.8 million as of June 30, 2022 and December 31, 2021.
13. 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
17,184
17,634
38,358
37,328
Weighted average potential dividends on Class A shares upon exercise of dilutive options
(21)
Undistributed net income for diluted earnings per share
17,163
17,617
38,309
37,288
Weighted average shares outstanding:
17,946
18,712
17,968
18,761
2,182
2,163
2,190
Effect of dilutive securities on Class A Shares outstanding
Weighted average shares outstanding including dilutive securities
20,169
20,949
20,202
21,016
Basic earnings per share:
Class A Common Stock:
Per share dividends distributed
0.34
0.31
0.68
0.62
Undistributed earnings per share*
0.86
0.85
1.92
1.80
Total basic earnings per share - Class A Common Stock
Class B Common Stock:
0.28
0.56
0.78
0.77
1.75
1.64
Total basic earnings per share - Class B Common Stock
Diluted earnings per share:
1.91
1.79
Total diluted earnings per share - Class A Common Stock
1.74
1.63
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
187,000
149,000
186,000
169,000
Average antidilutive stock options
184,000
178,000
166,000
14. OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
Available-for-Sale Debt Securities:
Net losses
Net of tax
The following is a summary of the AOCI balances, net of tax:
Change
Unrealized gain (loss) on AFS debt securities
890
(23,535)
(22,645)
Unrealized gain on AFS debt security for which a portion of OTTI has been recognized in earnings
984
991
Total unrealized gain (loss)
December 31, 2020
Unrealized gain on AFS debt securities
7,571
(1,982)
5,589
938
974
15. 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)
39,158
3,886
43,197
1,638
6,397
8,035
Noninterest income:
3,355
3,367
Mortgage banking income (1)
3,389
Program fees (1)
736
3,149
Increase in cash surrender value of BOLI (1)
Net losses on OREO
416
462
7,731
1,809
9,552
17,865
21,014
Total net revenue
46,889
3,898
1,962
52,749
19,503
9,546
29,049
81,798
Net-revenue concentration (2)
38,278
6,324
44,742
4,939
5,562
3,061
3,075
5,921
2,627
986
1,036
7,972
4,232
12,218
6,803
9,430
46,250
6,338
4,372
56,960
7,426
7,566
14,992
71,952
75,306
8,401
84,064
17,042
12,738
29,780
6,574
6,599
(10)
6,401
1,463
6,276
860
940
217
14,965
4,500
19,490
35,801
42,077
90,271
8,426
4,857
103,554
52,843
19,014
71,857
175,411
79,380
13,096
93,025
15,299
9,846
25,145
5,926
5,954
18,642
6,336
172
1,611
3,940
1,557
1,635
14,756
11,453
26,237
20,492
24,432
94,136
13,124
12,002
119,262
35,791
13,786
49,577
168,839
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 printed at a tax office, 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 fulfillment 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 quarter.
Legal settlement – During the second quarter of 2022, Green Dot paid Republic Bank $13 million in settlement of a lawsuit.
16. 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 2021 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.
Segment information follows:
Net interest income
Provision for expected credit loss expense
(88)
360
Other noninterest income
7,789
7,968
38,314
1,035
2,832
42,181
3,533
1,939
5,472
Income (loss) before income tax expense
8,429
3,097
(870)
10,656
15,610
4,174
19,784
Income tax expense (benefit)
1,647
692
(191)
2,148
3,465
926
4,391
Net income (loss)
6,782
2,405
8,508
12,145
3,248
15,393
Period-end assets
4,997,734
596,031
22,342
5,616,107
382,156
114,213
496,369
Net interest margin
3.06
2.69
3.02
3.51
Net-revenue concentration*
(77)
(5,773)
7,970
8,034
8,201
36,939
1,066
3,006
41,011
3,697
1,006
Income before income tax expense
9,388
5,337
1,366
16,091
4,968
14,470
Income tax expense
1,555
1,227
3,083
2,326
1,230
3,556
7,833
4,110
1,065
13,008
7,176
3,738
10,914
4,774,765
840,083
46,816
5,661,664
389,999
131,647
521,646
6,183,310
2.97
3.48
3.03
3.33
* Net revenue represents net interest income plus total noninterest income. Net-revenue concentration equals segment-level net revenue divided by total Company net revenue.
(169)
8,272
15,070
76,533
1,987
5,522
84,042
8,678
3,506
12,184
13,272
7,074
(665)
19,681
35,893
10,680
46,573
2,119
1,596
(146)
3,569
8,371
2,487
10,858
11,153
5,478
(519)
16,112
27,522
8,193
35,715
2.98
2.89
3.90
(82)
(389)
10,111
14,754
14,860
239
15,099
74,267
2,094
6,127
82,488
8,999
2,108
11,107
19,951
11,337
5,875
37,163
16,681
10,461
27,142
3,680
2,661
1,293
7,634
4,096
2,600
6,696
16,271
8,676
4,582
29,529
12,585
7,861
20,446
3.21
3.45
3.24
3.98
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.
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 fiscal year ended December 31, 2021.
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, 2022, 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, 2022, Republic had 42 full-service 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 activities primarily through Corporate Banking, Commercial Banking, Business Banking, and Retail Banking channels.
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. 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 — In October 2017, the Bank created an Aircraft Lending division. Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. Loans range between $55,000 and $3,000,000 in size and have terms up to 20 years. The aircraft loan program is open to all states, except for Alaska and Hawaii.
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.
Digital Experience — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com. The Bank 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 16 “Segment Information” of Part I Item 1 “Financial Statements.”
(II) Warehouse Lending segment
The Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Reverse mortgage loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual loan during the time the loan remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.
See additional detail regarding the Warehouse Lending segment under Footnote 16 “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 for loans generated in states within its footprint and generally sells servicing for loans generated in states outside of its footprint. 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 11 “Mortgage Banking Activities” and Footnote 16 “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”). Substantially all of 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.
In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the EAs product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material
negative impact on the performance of the EA product offering and therefore on the Company’s financial condition and results of operations.
See additional detail regarding the EA product under Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
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. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company’s overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
(V) Republic Credit Solutions segment
73
OVERVIEW (Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021)
Total Company net income for the second quarter of 2022 was $23.9 million, equaling net income for the same period in 2021. Diluted EPS increased to $1.20 for the second quarter of 2022 compared to $1.16 for the same period in 2021. The consistent net income primarily reflected the following:
Compared to the second quarter of 2022, the second quarter of 2021 was significantly and positively impacted by significantly lower than expected losses on EA loans, strong fee income from the PPP, and higher demand for mortgage refinancing, driving strong mortgage banking income.
The following are general highlights by reportable segment:
Traditional Banking segment
Mortgage Banking segment
TRS had multiple factors during 2021 and 2022 that impacted and will continue to impact its 2022 performance and the comparability of that performance to the same periods in 2021. By year, these factors discussed below include, but may not be limited to, the following:
As it relates to factors impacting 2021, the processing season with the IRS started approximately two weeks later than normal. As a result, RT funding volume and loan repayments from the IRS lagged normal funding patterns in non-COVID-impacted years and effectively pushed RT revenue and loan recovery activity later into the 2021 calendar year. In addition, government stimulus programs during 2021 negatively impacted demand for TRS EA and RT products.
Conversely, the timing of the IRS tax season during the second quarter of 2022 was more in-line with non-COVID seasons than the second quarter of 2021. As a result, the Company believes that it likely received an unusually high percentage of its funded RT volume in the second quarter of 2021 as compared to 2022, and that it likely received an unusually high percentage of its EA loan repayments in the second quarter of 2021 as compared to 2022. This estimated timing, if correct, generally provided less favorable second quarter 2022 results for TRS as compared to the second quarter of 2021, and will likely provide for less favorable quarterly comparisons throughout the remainder of 2022 as compared to 2021.
In addition to the more normal timing of the tax season in 2022 as compared to 2021, the 2022 tax season was also favorably impacted by a contractual change with one of the Company’s large Tax Providers. As a result of the amended contract, TRS provides this tax provider a revenue share, while this tax provider covers certain overhead costs of the program and furnishes to RB&T a loan loss guaranty for EAs originated through this provider. Through this specific provider, TRS originated $172 million of EAs during the first quarter of 2022 as compared to $135 million originated during the first quarter of 2021. The net cost of the revenue share to the provider from RB&T was approximately $275,000 for the $172 million of EA volume.
Negatively impacting the second quarter 2022 tax season as compared to the second quarter of 2021 was a loss of RT and EA volume by RB&T to Green Dot from certain third-party Tax Providers following the execution of the TRS Purchase Agreement. While TRS was able to partially offset this lost volume through higher volume from other existing relationships, the loss of volume to Green Dot had a negative impact to the overall results of TRS for 2022 and may continue to have a negative impact to the overall results of TRS well into the future if TRS is unable to win this business back through its normal solicitation process.
As a net result of all the factors in the preceding paragraphs and excluding the receipt of a nonrecurring $13 million legal settlement payment, TRS experienced a significant net decrease to its second quarter 2022 tax results as compared to the first quarter of 2021. Management believes TRS’s results of operations, and more specifically RT revenue and net recoveries for previously charged-off EAs for the remainder of 2022, will likely be negative as compared to the same periods in 2021.
RESULTS OF OPERATIONS (Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021)
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 track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These rates trended lower with the onset of the COVID pandemic, as the FOMC reduced the FFTR to approximately 25 basis points during 2020. With the rise of inflation during the latter half of 2021 and a steep inflationary rise during the first half of 2022, representing inflationary levels not seen in approximately 40 years, 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 increases to the FFTR included a 25-basis-point increase in March 2022, another 50-basis-point increase in May 2022, and another 75-basis-point increase in June 2022 (the highest one-time increase in 28 years). The FOMC also increased the FFTR by another 75 basis points in July 2022. Along with these increases, the FOMC continued to signal that additional 2022 FFTR increases are likely.
The FOMC’s actions and signals continued to place upward pressure on long-term market interest rates for bonds and loans during the second quarter of 2022. Further monetary tightening by the Federal Reserve in the future will likely cause both short-term and long-term market interest rates to increase during the remainder of 2022. Increases in 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 $51.2 million during the second quarter of 2022 and represented an increase of $928,000, or 2%, from the second quarter of 2021. Total Company net interest margin increased to 3.51% during the second quarter of 2022 compared to 3.33% for the same period in 2021.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
The Traditional Banking’s net interest income increased $880,000, or 2%, for the second quarter of 2022 compared to the same period in 2021. Traditional Banking’s net interest margin was 3.06% for the second quarter of 2022, an increase of nine basis points from the same period in 2021.
The increase in the Traditional Bank’s net interest income and net interest margin during the second quarter of 2022 was primarily attributable to the following factors:
Table 1 — Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
The Company earns fees and a coupon interest rate of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believes Traditional Bank net interest income excluding PPP fees and coupon interest is a more appropriate measure to analyze the performance of the Traditional Bank’s net interest income and net interest margin. The following table reconciles Traditional Bank net interest income and net interest margin to Traditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure.
Interest-Earning Assets
Net Interest Margin
Three Months Ended Jun. 30,
$ Change
% Change
Traditional Banking - GAAP
880
5,121,492
5,149,602
(28,110)
(1)
Less: Impact of PPP fees and interest
(4,415)
(96)
16,668
349,643
(332,975)
(0.16)
Traditional Banking ex PPP fees and interest - non-GAAP
38,991
33,696
5,295
5,104,824
4,799,959
304,865
2.81
0.25
As previously disclosed, both short-term and long-term market interest rates are expected to continue increasing during the remainder of 2022 as a result of expected monetary tightening by the FOMC. Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Traditional Bank’s net interest income and net interest margin in the near term, while decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Traditional Bank’s net interest income and net interest margin in the near term.
Increases in market interest rates, however, could have a negative impact on net interest income and net interest margin if the Traditional Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Traditional Bank’s net interest income and net interest margin. Variables which may impact the Traditional Bank’s net interest income and net interest margin in the future include, but are not limited to, the actual steepness of the yield curve, future demand for the Traditional Bank’s financial products and the Traditional Bank’s overall future liquidity needs.
Net interest income within the Warehouse segment decreased $2.4 million, or 39%, from the second quarter of 2021 to the second quarter of 2022, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $727 million during the second quarter of 2021 to $579 million for the second quarter of 2022, as home-mortgage refinancing dipped from historically high volume in early 2021. The Warehouse net interest margin compressed 79 basis points from 3.48% during the second quarter of 2021 to 2.69% during the second quarter of 2022, as competitive forces began driving down the contractual interest rates on the Company’s Warehouse lines during the third quarter of 2021.
In general, the decline in net interest income within Warehouse Lending was driven largely by a sharp rise in long-term interest rates during the first half of 2022, which led to a decrease in mortgage refinancing demand, a sharp drop in Warehouse line usage, and an overall decrease in outstanding Warehouse balances. In addition, Warehouse’s net interest margin was negatively impacted during the second quarter of 2022, as many adjustable rate Warehouse lines remained below their interest rate floors. These interest rate floors, which benefitted Warehouse’s net interest margin significantly during 2020 and 2021 when market rates declined to historical lows, negatively impacted its net interest margin during the first half of 2022, as its cost of funding rose while its loan yield remained relatively stable. The negative impact of these floors is expected to diminish in the near term as interest rates on many Warehouse lines are expected to begin exceeding their floors during the third quarter of 2022, assuming projected FFTR increases, currently projected by the financial markets, come to fruition.
Committed Warehouse lines-of-credit remained at $1.4 billion from June 30, 2021 to June 30, 2022, while average usage rates for Warehouse lines were 41% and 51%, respectively, during the second quarters of 2022 and 2021.
Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to Warehouse’s net interest income and net interest margin in the near term, however, the benefit of an increase in rates could be partially or entirely offset by a 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, a lower demand for Warehouse
borrowings could cause additional competitive pricing pressures for the industry, driving down the yield Warehouse earns on its lines of credits.
TRS’s net interest income increased $1.0 million for the second quarter of 2022 compared to the same period in 2021, driven by an increase in outstanding commercial loan balances and an increase in interest income on TRS’s prepaid card balances as a function of the Company’s FTP methodology and a rise in interest rates. For factors affecting the comparison of the TRS results of operations for the second quarter of 2022 and the second quarter of 2021, see section titled “OVERVIEW (Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021) - Tax Refund Solutions.”
RCS’s net interest income increased $1.5 million, or 30%, from the second quarter of 2021 to the second quarter of 2022. The increase was driven primarily by an increase in fee income from RCS’s LOC products partially offset by a decrease in interest income from RCS’s hospital receivables.
RCS’s LOC loan fees, which are recorded as interest income on loans, increased to $5.8 million during the second quarter of 2022 compared to $3.8 million during the same period in 2021. Interest income on RCS’s LOC I product increased $1.1 million, driven by a $6 million increase in average outstanding balances for this product from the second quarter of 2021 to the second quarter of 2022. Interest income on RCS’s LOC II product increased $855,000, as the Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase.
Interest income from RCS’s hospital receivables decreased $385,000 from the second quarter of 2021 to the second quarter of 2022 resulting from a $38 million decrease in average receivables from period to period.
Overall product demand for the RCS segment is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact demand 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 2022 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.
Table 2 — Total Company Average Balance Sheets and Interest Rates
Interest-earning assets:
Federal funds sold and other interest-earning deposits
813,956
0.80
938,728
0.11
Investment securities, including FHLB stock (1)
691,427
2,766
1.60
562,509
1,913
1.36
TRS Easy Advance loans (2)
12,680
81
2.56
17,220
294
6.83
RCS LOC products (2)
27,119
5,782
85.28
16,462
3,837
93.23
Other RPG loans (3) (7)
91,007
1,387
6.10
105,217
4.52
Outstanding Warehouse lines of credit (4) (7)
578,676
5,074
727,091
6,824
3.75
Paycheck Protection Program loans (5) (7)
4.01
5.24
All other Core Bank loans (6) (7)
3,613,282
35,425
3.92
3,331,114
32,913
3.95
Total interest-earning assets
5,844,815
3.58
6,047,984
3.43
(72,037)
(74,258)
Noninterest-earning assets:
Noninterest-earning cash and cash equivalents
172,382
144,327
34,322
39,119
100,152
97,257
Other assets (1)
164,090
186,133
Total assets
6,243,724
6,440,562
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts
1,698,754
168
1,599,721
93
788,534
773,838
233,644
575
0.98
303,468
1.23
Reciprocal money market and time deposits
59,009
0.23
319,509
206
Brokered deposits
23,632
Total interest-bearing deposits
2,779,941
3,020,168
0.18
SSUARs and other short-term borrowings
1.88
41,240
Total interest-bearing liabilities
3,094,329
3,256,296
Noninterest-bearing liabilities and Stockholders’ equity:
2,197,300
2,226,070
100,937
108,891
Stockholders’ equity
851,158
849,305
Total liabilities and stockholders’ equity
Net interest spread
3.44
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:
1,376
(39)
1,415
Investment securities, including FHLB stock
853
371
TRS Easy Advance loans*
(213)
RCS LOC products
1,945
2,297
(352)
Other RPG loans
(176)
373
Outstanding Warehouse lines of credit
(1,750)
(1,324)
(426)
Paycheck Protection Program loans
(3,540)
(875)
All other Core Bank loans
2,512
2,768
(256)
Net change in interest income
505
527
(22)
Interest expense:
(355)
(164)
(172)
(152)
(2)
87
Net change in interest expense
(423)
Net change in net interest income
928
1,027
(99)
* Since interest income for Easy Advances is composed entirely of loan fees and EAs are only offered during the first two months of each year, volume and rate measurements for this product are based on total EAs originated instead of average EA balances during the period. EA originations totaled $311 million and $250 million for the three months ended June 30, 2022 and 2021. The unannualized EA yield as a function of total EA originations was 0.03% and 0.12% for the three months ended June 30, 2022 and 2021.
Total Company Provision was a net charge of $3.7 million for the second quarter of 2022 compared to a net credit of $4.3 million for the same period in 2021.
The following were the most significant components comprising the Company’s Provision by reportable segment:
The Traditional Banking Provision during the second quarter of 2022 was a net charge of $146,000 compared to a net credit of $77,000 for the second quarter of 2021. An analysis of the Provision for the second quarter of 2022 compared to the same period in 2021 follows:
As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.35% as of June 30, 2022 compared to 1.41% as of December 31, 2021 and 1.37% as of June 30, 2021. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of June 30, 2022.
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 credit to the Provision of $234,000 for the second quarter of 2022 compared to a net credit of $65,000 for the same period in 2021. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $93 million during the second quarter of 2022 compared to a decrease of $26 million during the second quarter of 2021.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of June 30, 2022, December 31, 2021, and June 30, 2021. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of June 30, 2022.
The TRS Provision swung from a net credit of $5.8 million during the second quarter of 2021 to a net charge of $360,000 during the second quarter of 2022. While the overall net total Provision for TRS is a positive benefit on a year-to-date basis, the later timing of payments received during 2021 versus 2022 resulted in a large credit to the Provision during the second quarter of 2021 versus a minimal additional expense to the Provision during the second quarter of 2022. EAs are originated only during the first two months of each year, with losses on those originations initially estimated during the same origination period. All unpaid EAs are charged off by June 30th of each year, with first quarter loss estimates trued-up to actual charge-offs incurred through a second quarter Provision charge or credit. EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans unless such recovery is subject to guarantor reimbursement under a loan-loss guaranty.
During the second quarter of 2022, TRS trued-up its first quarter EA loss estimate with a charge to the Provision of $564,000, increasing its weighted average net EA loss rate from an estimated 2.67% as of March 31, 2022 to 2.85% as of June 30, 2022. During the second quarter of 2021, TRS trued-up its first quarter EA loss estimate with a credit to the Provision of $5.8 million, decreasing its weighted average net EA loss rate from 6.41% as of March 31, 2021 to 4.09% as of June 30, 2021. The significant true-up credit to the Provision during the second quarter of 2021 resulted primarily from a higher volume of loan payments received by the Company during the second quarter, exceeding the conservative estimates originally made by the Company during the first quarter of 2021 when the tax season experienced a two-week delay to its start.
For the 2022 and 2021 tax seasons, the following table presents information regarding EA originations, actual charge-offs, first quarter Provision estimates, and second quarter Provision true-ups:
2022 Tax Season
2021 Tax Season
2022/2021 Change
EAs originated during the first two months of the year
(a)
61,162
Actual EA losses incurred compared to loss estimates ($):
Actual losses recognized for the first six months ended June 30,
(b)
(1,347)
First quarter Provision estimate made during three months ended March 31,
(c)
(7,704)
Second quarter Provision true-up for three months ended June 30,
(d)
6,357
EA actual losses incurred compared to loss estimates (%):
(b)/(a)
(1.24)
(c)/(a)
2.67
6.41
(3.74)
(d)/(a)
(2.32)
2.50
In-line with its customary June 30th charge-off policy for EA loans, with approximately $2.6 million of the EA loans having been recovered during the second quarter of 2022 under a loan-loss guaranty, the Company completely charged-off all remaining unpaid EAs as of June 30, 2022. EA payments received after June 30th will be credited as a direct recovery to the Provision in the period it is received unless such payment is subject to guarantor reimbursement under the previously mentioned loan-loss guaranty.
For factors affecting the comparison of the TRS results of operations for the second quarter of 2022 and the second quarter of 2021, see section titled “OVERVIEW (Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021) - Tax Refund Solutions.”
As illustrated in Table 4 below, RCS recorded a net charge to the Provision of $3.4 million during the second quarter of 2022 compared to a net charge to the Provision of $1.6 million for the same period in 2021. The increase in the Provision was driven primarily by a $1.6 million increase in net charge-offs on RCS’s line-of-credit products. Net charge-offs for RCS’s LOC I product increased to $1.5 million for the second quarter of 2022 from $520,000 during the second quarter of 2021, with government stimulus programs generally driving down usage of this product during the second quarter of 2021. Net charge-offs for RCS’s LOC II product were $621,000 for the second quarter of 2022 compared to no net charge-offs during the second quarter of 2021.
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 14.41% as of June 30, 2022, 13.91% as of December 31, 2021, and 7.68% as of June 30, 2021. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of June 30, 2022.
The following table presents net charges to the RCS Provision by product:
Table 4 — RCS Provision by Product
Product:
Lines of credit
3,428
1,581
1,847
Hospital receivables
1,841
Table 5 — Summary of Loan and Lease Loss Experience
ACLL at beginning of period
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net loan recoveries (charge-offs)
(10,872)
(10,769)
Provision - Core Banking
Provision - RPG
Total Provision
ACLL at end of period
ACLL to total loans
1.48
1.32
ACLL to nonperforming loans
398
270
Net loan charge-offs (recoveries) to average loans
1.00
0.95
Credit Quality Ratios - Core Banking:
238
Table 6 — Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category
Net Loan Charge-Offs (Recoveries) to Average Loans
(0.01)
(0.20)
(0.06)
0.22
0.59
67.77
26.81
(0.13)
(0.09)
0.55
0.75
Easy Advances*
280.08
237.36
(303.76)
12.02
10.46
8.35
* All loss rates above are based on net charge-offs as a function of average outstanding portfolio balances. Easy Advances are originated during the first two months of each year, with all EAs charged-off by June 30th of each year. Due to their relatively short life, EA net charge-offs are typically analyzed by the Company as a percentage of total EA originations, not as a percentage of average outstanding balances.
The Company’s net charge-offs to average total Company loans increased from 0.95% during the second quarter of 2021 to 1.00 % during the second quarter of 2022, with net charge-offs increasing $103,000 and average total Company loans decreasing $207 million, or 5%. The increase in net charge-offs was primarily driven by a $103,000 increase in net charge-offs within the Company’s RPG operations, which has historically conducted higher-risk lending activities than the Company’s Core Banking operations.
From the second quarter of 2021 to the second quarter of 2022, RPG experienced a $1.7 million decrease in net charge-offs within its TRS segment, as TRS amended one of its existing Tax Provider contracts to place a cap on loan losses from EAs originated through this Tax Provider. For factors affecting the comparison of the TRS results of operations for the second quarter of 2022 and the second quarter of 2021, see section titled “OVERVIEW (Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021) - Tax Refund Solutions.”
From the second quarter of 2021 to the second quarter of 2022, RPG experienced a $1.6 million increase in net charge-offs within its RCS segment. Net charge-offs for RCS’s LOC I product increased to $1.5 million for the second quarter of 2022 from $520,000 for the second quarter of 2021, with government stimulus programs generally driving down usage of this product during the second quarter of 2021. Net charge-offs for RCS’s LOC II product were $621,000 for the second quarter of 2022 compared to no net charge-offs for the second quarter of 2021, with this product first piloted during the first quarter of 2021.
During the second quarters of 2022 and 2021, the Company’s Core Bank net charge-offs to average Core Bank loans remained near zero.
Noninterest Income
Total Company noninterest income increased $8.9 million during the second quarter of 2022 compared to the same period in 2021.
The following were the most significant components comprising the total Company’s noninterest income by reportable segment:
Traditional Banking’s noninterest income decreased $241,000, or 3%, for the second quarter of 2022 compared to the same period in 2021, driven primarily by the following:
The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months ended June 30, 2022 and 2021 were $1.7 million and $1.3 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended June 30, 2022 and 2021 were $308,000 and $257,000.
A significant rise in long-term interest rates during 2022 led to a significant slowdown in the origination and subsequent sale of mortgage loans into the secondary market. As a result, Mortgage Banking income decreased from $4.2 million during the second quarter of 2021 to $1.8 million for the second quarter of 2022. For the second quarter of 2022, the Bank sold $68 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold during the quarter of 2.85%. During the second quarter of 2021, however, long-term interest rates were closer to historical lows, driving secondary market loan sales of $176 million with comparable cash-gain-as-a-percent-of-loans-sold consistent at 2.85%.
With the FOMC moving forward with its quantitative tightening program during 2022, management believes it is likely that the Core Bank’s mortgage origination volume will continue to be negatively impacted by rising interest rates causing additional declines in mortgage banking income throughout 2022.
TRS’s noninterest income increased $11.1 million, or 163%, during the second quarter of 2022 compared to the same period in 2021. As previously disclosed, Green Dot paid RB&T $13.0 million during the second quarter of 2022 to settle RB&T’s lawsuit against Green Dot.
Regarding TRS’s RT product, net RT revenue decreased $2.0 million, or 33%, from $5.9 million for the second quarter of 2021 to $4.0 million for the same period in 2022. The decrease was primarily driven by an 8% overall decrease in RT volume from the 2021 to the 2022 tax season, with 4% of that decrease driven by the loss of one of TRS’s tax providers following the announcement of the now-cancelled May 2021 Asset Purchase Agreement. Also impacting the decrease in net RT fees from the second quarter of 2021 to the second quarter of 2022 was the previously mentioned two-week delay in the 2021 tax season, which pushed a greater percentage of RT volume into the second quarter of 2021.
RCS’s noninterest income increased $522,000, or 20%, during the second quarter of 2022 compared to the same period in 2021, with program fees representing the entirety of RCS’s noninterest income. The increase in RCS program fees primarily reflected higher sales volume from RCS’s line of credit and installment loan products, as sales volume was negatively impacted during the second quarter of 2021 by federal government stimulus programs implemented to combat the economic impact of the COVID pandemic. Proceeds from the sale of RCS loan products totaled $269 million during the second quarter of 2022, a 49% increase from the same period in 2021.
The following table presents RCS program fees by product:
Table 7 — RCS Program Fees by Product
1,630
1,147
483
(25)
Installment loans*
522
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 $1.9 million, or 4%, during the second quarter of 2022 compared to the same period in 2021.
The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking noninterest expense increased $1.4 million, or 4%, for the second quarter of 2022 compared to the same period in 2021. The following primarily drove the change in noninterest expense:
Noninterest expense at the RCS segment increased $933,000, or 93%, during the second quarter of 2022 compared to the same period in 2021, primarily due to increased marketing of RCS’s LOC II product. The LOC II product was first piloted during the first quarter of 2021.
OVERVIEW (Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021)
Total Company net income for the first six months of 2022 was $51.8 million, a $1.9 million, or 4%, increase from the same period in 2021. Diluted EPS increased to $2.59 for the first six months of 2022 compared to $2.41 for the same period in 2021. The increase in net income primarily reflected the following:
Compared to the first six months of 2022, the first six months of 2021 was significantly and positively impacted by strong fee income from the PPP and higher demand for mortgage refinancing, driving strong mortgage banking income.
Conversely, the timing of the IRS tax season during the first six months of 2022 was more in-line with non-COVID seasons than the first six months of 2021. As a result, the Company believes that it likely received a greater percentage of its funded RT volume in the first six months of 2022 as compared to 2021, and that it likely received a greater percentage of its EA loan repayments in the first six months of 2022 than it did during 2021. This estimated timing, if correct, generally provided more favorable results for TRS during the first six months of 2022 as compared to the first six months of 2021, but will likely provide for less favorable quarterly comparisons throughout the remainder of 2022 as compared to 2021.
In addition to the more normal timing of the tax season in 2022 as compared to 2021, the first six months of 2022 tax season was also favorably impacted by a contractual change with one of the Company’s large Tax Providers. As a result of the amended contract, TRS provides this tax provider a revenue share, while this tax provider covers certain overhead costs of the program and furnishes to RB&T a loan loss guaranty for EAs originated through this provider. Through this specific provider, TRS originated $172 million of EAs during the first six months of 2022 as compared to $135 million originated during the first six months of 2021. The net cost of the revenue share to the provider from RB&T was approximately $275,000 for the $172 million of EA volume. Under the amended contract, during the first six months of 2022 the net benefit to TRS of the covered overhead costs and to the Provision from the loan loss guaranty was approximately $2.8 million.
Negatively impacting the first six months of the 2022 tax season as compared to the first six months of 2021 was a loss of RT and EA volume by RB&T to Green Dot from certain third-party Tax Providers following the execution of the TRS Purchase Agreement. While TRS was able to partially offset this lost volume through higher volume from other existing relationships, the loss of volume to Green Dot will have a negative impact to the overall results of TRS for 2022 and well into the future if TRS is unable to win this business back through its normal solicitation process.
As a net result of all the factors in the preceding paragraphs, TRS experienced a significant net positive improvement to its first six months of 2022 tax results as compared to the first six months of 2021. Because many of these factors may only be timing in nature, management believes TRS’s results of operations, and more specifically RT revenue and net recoveries for previously charged-off EAs for the remainder of 2022, will likely be negative as compared to the same periods in 2021.
RESULTS OF OPERATIONS (Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021)
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.
A large amount of the Company’s financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These rates trended lower with the onset of the COVID pandemic, as the FOMC reduced the FFTR to approximately 25 basis points during 2020. With the rise of inflation during the latter half of 2021 and a steep inflationary rise during the first half of 2022, representing inflationary levels not seen in approximately 40 years, 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 increases to the FFTR included a 25-basis-point increase in March 2022, another 50-basis-point increase in May 2022, and another 75-basis-point increase in June 2022 (the highest one-time increase in 28 years). The FOMC also increased the FFTR by another 75 basis points in July 2022. Along with these increases, the FOMC continued to signal that additional 2022 FFTR increases were likely.
Total Company net interest income was $113.8 million during the first six months of 2022 and represented a decrease of $4.3 million, or 4%, from the first six months of 2021. Total Company net interest margin decreased to 3.90% during the first six months of 2022 compared to 3.98% for the same period in 2021.
The Traditional Banking’s net interest income decreased $4.1 million, or 5%, for the first six months of 2022 compared to the same period in 2021. Traditional Banking’s net interest margin was 2.98% for the first six months of 2022, a decrease of 23 basis points from the same period in 2021.
The decrease in the Traditional Bank’s net interest income and net interest margin during the first six months of 2022 was primarily attributable to the following factors:
Table 8 — Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)
Six Months Ended Jun. 30,
(4,074)
(5)
5,053,387
4,946,416
106,971
(0.23)
1,123
11,280
(10,157)
23,596
357,163
(333,567)
(93)
0.24
(0.21)
74,183
68,100
6,083
5,029,791
4,589,253
440,538
2.95
(0.02)
As previously disclosed, both short-term and long-term market interest rates are expected to continue to increase during 2022 as a result of expected monetary tightening by the FOMC. Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the Traditional Bank’s net interest income and net interest margin in the near term, while decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the Traditional Bank’s net interest income and net interest margin in the near term.
Increases in market interest rates, however, could have a negative impact on net interest income and net interest margin if the Traditional Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact the Traditional Bank’s net interest income and net interest margin. Variables which may impact the Traditional Bank’s net interest income and net interest margin in the future include, but are not limited to, the actual steepness of the yield curve, future demand for the Traditional Bank’s financial products, and the Traditional Bank’s overall future liquidity needs.
Net interest income within the Warehouse segment decreased $4.7 million, or 36%, from the first six months of 2021 to the first six months of 2022, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $758 million during the first six months of 2021 to $582 million for the first six months of 2022, as home-mortgage refinancing dipped from historically high volume in early 2021. The Warehouse net interest margin compressed 56 basis points from 3.45% during the first six months of 2021 to 2.89% during the first six months of 2022, as competitive forces began driving down the contractual interest rates on the Company’s Warehouse lines during the third quarter of 2021.
In general, the decline in net interest income within Warehouse Lending was driven largely by a sharp rise in long-term interest rates during the first half of 2022, which led to a decrease in mortgage refinancing demand, a sharp drop in Warehouse line usage, and an overall decrease in outstanding Warehouse balances. In addition, Warehouse’s net interest margin was negatively impacted during the first six months of 2022, as many adjustable rate Warehouse lines remained below their interest rate floors. These interest rate floors, which benefitted Warehouse’s net interest margin significantly during 2020 and 2021 when market rates declined to historical lows, negatively impacted its net interest margin during the first half of 2022, as its cost of funding rose while its loan yield remained relatively stable. The negative impact of these floors is expected to diminish in the near term as interest rates on many Warehouse lines are expected to begin exceeding their floors during the third quarter of 2022, assuming projected FFTR increases, currently projected by the financial markets, come to fruition.
Committed Warehouse lines-of-credit remained at $1.4 billion from June 30, 2021 to June 30, 2022, while average usage rates for Warehouse lines were 42% and 52%, respectively, during the first six months of 2022 and 2021.
TRS’s net interest income increased $1.7 million for the first six months of 2022 compared to the same period in 2021, driven by an increase in EA fees, an increase in outstanding commercial loan balances, and an increase in interest income on TRS’s prepaid card balances as a function of the Company’s FTP methodology and a rise in interest rates. TRS’s EA product earned $13.5 million in interest income during the first six months of 2022, a $442,000 increase from the first six months of 2021 resulting primarily from a $61 million increase in EA originations from period to period. For factors affecting the comparison of the TRS results of operations for the first six months of 2022 and the first six months of 2021, see section titled “OVERVIEW (Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021) - Tax Refund Solutions.”
RCS’s net interest income increased $2.9 million, or 29%, from the first six months of 2021 to the first six months of 2022. The increase was driven primarily by an increase in fee income from RCS’s LOC products partially offset by a decrease in interest income from RCS’s hospital receivables.
RCS’s LOC loan fees, which are recorded as interest income on loans, increased to $11.5 million during the first six months of 2022 compared to $7.7 million during the same period in 2021.
Interest income on RCS’s LOC I product increased $2.0 million, driven by a $5 million increase in average outstanding balances for this product from the first six months of 2021 to the first six months of 2022. Interest income on RCS’s LOC II product increased $1.8 million, as the Company first piloted this product during the first six months of 2021 with limited outstanding balances during the pilot phase.
Interest income from RCS’s hospital receivables decreased $774,000 from the first six months 2021 to the same period in 2022 resulting from a $36 million decrease in average receivables from period to period.
Table 9 — Total Company Average Balance Sheets and Interest Rates
837,757
2,067
0.49
725,764
649,040
4,877
1.50
563,243
3,930
1.40
48,420
13,525
55.87
53,276
13,083
49.11
26,701
11,484
86.02
16,536
7,686
92.96
105,879
3,372
6.37
122,225
3,984
6.52
581,581
9,953
3.42
758,493
14,194
3.74
9.52
6.32
3,561,122
69,474
3,337,969
66,885
5,834,096
3.97
5,934,669
Allowance for credit loss
(70,670)
(70,390)
262,772
196,793
34,888
39,152
99,844
82,837
172,389
188,785
6,333,319
6,371,846
1,695,456
1,542,685
175
793,709
261
753,198
247,596
1,215
309,155
2,035
66,826
316,493
461
43,369
0.10
2,803,587
2,964,900
21,657
34,033
1.65
3,122,507
3,221,389
0.20
2,255,104
2,186,274
106,603
121,357
849,105
842,826
Total liabilities and stock-holders’ equity
3.84
3.89
Table 10 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 10 — Total Company Volume/Rate Variance Analysis
1,651
1,578
947
2,880
(2,438)
3,798
4,410
(612)
(523)
(89)
(4,241)
(3,103)
(1,138)
(13,997)
3,840
2,589
(1,798)
(5,583)
(5,244)
(339)
(820)
(360)
(460)
(379)
(315)
(64)
(1,257)
(1,009)
(248)
(4,326)
(4,235)
(91)
* Since interest income for Easy Advances is composed entirely of loan fees and EAs are only offered during the first two months of each year, volume and rate measurements for this product are based on total EAs originated instead of average EA balances during the period. EA originations totaled $311 million and $250 million for the six months ended June 30, 2022 and 2021. The unannualized EA yield as a function of total EA originations was 4.35% and 5.23% for the six months ended June 30, 2022 and 2021.
Total Company Provision was a net charge of $12.9 million for the first six months of 2022 compared to a net charge of $10.9 million for the same period in 2021.
The Traditional Banking Provision during the first six months of 2022 was a net charge of $466,000 compared to a net credit of $82,000 for the first six months of 2021. An analysis of the Provision for the first six months of 2022 compared to the same period in 2021 follows:
Warehouse recorded a net credit to the Provision of $635,000 for the first six months of 2022 compared to a net credit of $307,000 for the same period in 2021. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $254 million during the first six months of 2022 compared to a decrease of $123 million during the first six months of 2021.
TRS recorded a net charge to the Provision of $8.3 million during the first six months of 2022 compared to a net charge of $10.1 million for the same period in 2021. Substantially all TRS Provision in both periods was related to its EA product.
TRS recorded a charge to the Provision for EA loans of $8.9 million, or 2.85% of its $311 million in EAs originated during the first six months of 2022 compared to a charge to the Provision of $10.2 million, or 4.09% of its $250 million of EAs originated during the first six months of 2021. The decrease in Provision for the first six months of 2022 was primarily due to the following two factors:
For factors affecting the comparison of the TRS results of operations for the first six months of 2022 and the first six months of 2021, see section titled “OVERVIEW (Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021) - Tax Refund Solutions.”
As illustrated in Table 11 below, RCS recorded a net charge to the Provision of $4.8 million during the first six months of 2022 compared to a net charge to the Provision of $1.2 million for the same period in 2021. The increase in the Provision was driven primarily by a $3.4 million increase in net charge-offs on RCS’s line-of-credit products. Net charge-offs for RCS’s LOC I product increased to $3.2 million for the first six months of 2022 from $1.2 million during the first six months of 2021, with government stimulus programs generally driving down usage of this product during the first six months of 2021. Net charge-offs for RCS’s LOC II product were $1.3 million for the first six months of 2022 compared to no net charge-offs during the first six months of 2021.
Table 11 — RCS Provision by Product
4,831
1,207
3,624
(13)
(130)
3,611
297
Table 12 — Summary of Loan and Lease Loss Experience
(370)
195
243
Net loan charge-offs
(13,026)
(11,837)
Net loan charge-offs to average loans
0.60
0.01
98
Table 13 — Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category
(0.11)
(0.04)
0.39
0.84
79.18
24.51
(0.18)
0.12
71.16
74.92
(10.54)
0.63
9.09
2.18
19.16
15.40
The Company’s net charge-offs to average total Company loans increased from 0.51% during the first six months of 2021 to 0.60 % during the first six months of 2022, with net charge-offs increasing $1.2 million and average total Company loans decreasing $298 million, or 6%. The increase in net charge-offs was primarily driven by a $1.5 million increase in net charge-offs within the Company’s RPG operations, which has historically conducted higher-risk lending activities than the Company’s Core Banking operations.
From the first six months of 2021 to the first six months of 2022, RPG experienced a $3.4 million increase in net charge-offs within its RCS segment. Net charge-offs for RCS’s LOC I product increased to $3.2 million for the first six months of 2022 from $1.2 million for the first six months of 2021, with government stimulus programs generally driving down usage of this product during the first six months of 2021. Net charge-offs for RCS’s LOC II product were $1.3 million for the first six months of 2022 compared to no net charge-offs for the first six months of 2021, with this product first piloted during the first quarter of 2021.
From the first six months of 2021 to the first six months of 2022, RPG experienced a $1.9 million decrease in net charge-offs within its TRS segment, as TRS amended one of its existing Tax Provider contracts to place a cap on loan losses from EAs originated through this Tax Provider. For factors affecting the comparison of the TRS results of operations for the first six months of 2022 and the first six months of 2021, see section titled “OVERVIEW (Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021) - Tax Refund Solutions.”
During the first six months of 2022 and 2021, the Company’s Core Bank net charge-offs to average Core Bank loans remained near zero.
99
Total Company noninterest income increased $10.9 million during the first six months of 2022 compared to the same period in 2021.
Traditional Banking’s noninterest income increased $209,000, or 1%, for the first six months of 2022 compared to the same period in 2021, driven primarily by a $648,000 increase in Service Charges on Deposit Accounts offset by a $399,000 nonrecurring gain on sale of a former banking center recorded during the first six months of 2021.
The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the six months ended June 30, 2022 and 2021 were $3.2 million and $2.5 million. The total daily overdraft charges, net of refunds, included in interest income for the six months ended June 30, 2022 and 2021 were $597,000 and $506,000.
A significant rise in long-term interest rates during the first six months of 2022 led to a significant slowdown in the origination and subsequent sale of mortgage loans into the secondary market. As a result, Mortgage Banking income decreased from $11.4 million during the first six months of 2021 to $4.4 million for the first six months of 2022. For the first six months of 2022, the Bank sold $187 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold during the quarter of 2.23%. During the first six months of 2021, however, long-term interest rates were closer to historical lows, driving secondary market loan sales of $380 million with comparable cash-gain-as-a-percent-of-loans-sold of 3.26%.
TRS’s noninterest income increased $15.3 million, or 75%, during the first six months of 2022 compared to the same period in 2021. 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 14% from $18.6 million during the first six months of 2021 to $16.0 million during the same period in 2022. The decrease was primarily driven by an 8% overall decrease in RT volume from the 2021 to the 2022 tax season, with 4% of that decrease driven by the loss of one of TRS’s tax providers following the announcement of the now-cancelled May 2021 Asset Purchase Agreement.
RCS’s noninterest income increased $2.3 million, or 59%, during the first six months of 2022 compared to the same period in 2021, with program fees representing the entirety of RCS’s noninterest income. The increase in RCS program fees primarily reflected higher sales volume from RCS’s line of credit and installment loan products as sales volume was negatively impacted during the first six months of 2021 by federal government stimulus programs implemented to combat the economic impact of the COVID pandemic. Proceeds from the sale of RCS loan products totaled $526 million during the first six months of 2022, an 82% increase from the same period in 2021.
Table 14 — RCS Program Fees by Product
2,818
1,899
(12)
(11)
1,930
1,429
2,336
Total Company noninterest expense increased $2.6 million, or 3%, during the first six months of 2022 compared to the same period in 2021.
Traditional Banking noninterest expense increased $2.3 million for the first six months of 2022 compared to the same period in 2021. The following primarily drove the change in noninterest expense:
101
Noninterest expense at the TRS segment decreased $321,000, or 4%, during the first six months of 2022 compared to the same period in 2021, primarily due to consulting costs incurred during 2021 connected to the now-cancelled TRS Purchase Agreement.
Noninterest expense at the RCS segment increased $1.4 million, or 66%, during the first six months of 2022 compared to the same period in 2021, primarily due to increased marketing of RCS’s LOC II product. The LOC II product was first piloted during the first quarter of 2021.
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 2022 AND DECEMBER 31, 2021
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 $795 million in cash and cash equivalents as of June 30, 2022 compared to $757 million as of December 31, 2021. Although the Company deployed some of its excess cash through the purchase of long-term investment securities during the fourth quarter of 2021and the first quarter of 2022 as a result of movements in the yield curve, it has maintained an overall general strategy of keeping a large amount of cash on balance sheet for interest rate risk protection. This strategy benefitted the Traditional Bank’s net interest income during the second quarter of 2022 as the FOMC began raising the FFTR.
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, 2022 Compared to Three Months Ended June 30, 2021) and “RESULTS OF OPERATIONS (Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021).
For cash held at the FRB, the Bank earns a yield on amounts exceeding required reserves. This cash earned a weighted-average yield of 0.49% during the first six months of 2022 with a spot balance yield of 1.65% on June 30, 2022. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.
Investment Securities
Table 15 — Purchases of Investment Securities
Purchase
Yield to
Maturity
Life
Purchases by Class for the Three Months Ended March 31, 2022
U.S. Treasury
85,614
1.51
2.5
yrs
U.S. Government Agencies
10,028
1.39
10.0
20,134
1.25
115,776
1.45
4.4
Purchases by Class for the Three Months Ended June 30, 2022
74,043
2.62
2.1
Total Purchases for the Six Months Ended June 30, 2022
189,819
3.5
During the second quarter, management generally targeted purchases of investment securities with maturities of approximately two years. While the Company will likely continue to replace some of its maturing investments with new purchases, it will likely maintain a general policy of limited growth in the total securities portfolio in the near-term as long as its yield on interest-earning cash continues to rise in proportion to future FFTR increases.
The overall timing and amount of any purchases will depend on many factors including, but not limited to, the Company’s overall current and projected liquidity positions, its customers’ demand for its loans and deposit products, the interest rate environment at the time, as well as the anticipated interest rate environment in the near and long term.
102
Table 16 — Loan Portfolio Composition
11,406
7,211
113,110
8,115
53,812
(41,357)
(74)
2,708
17,064
3,491
909
218
(4,869)
(187)
171,631
(253,872)
(82,241)
(50,838)
(1,250)
(52,088)
(36)
(134,329)
(0)
(134,201)
**Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans decreased by $134 million, or 3%, during the first six months of 2022 to $4.4 billion as of June 30, 2022. The most significant components comprising the change in loans by reportable segment follow:
Period-end balances for Traditional Banking loans increased $172 million, or 5%, from December 31, 2021 to June 30, 2022. The following primarily drove the change in loan balances during the first six months of 2022:
The CARES Act was enacted in March 2020 and provided for the SBA’s PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID pandemic. The Economic Aid Act was enacted in December 2020 and provided for a second round of PPP loans. PPP loans are fully backed by the SBA and may be entirely forgiven if the loan client uses loan funds for qualifying reasons. As of June 30, 2022, net PPP loans of $15 million remained on the Traditional Bank’s balance sheet.
Outstanding Warehouse period-end balances decreased $254 million from December 31, 2021 to June 30, 2022. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 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 40% during 2013 to a high of 66% during 2020.
As previously discussed, additional increases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to Warehouse’s client demand, likely leading to a reduction in average outstanding balances as higher long-term interest rates generally drive lower demand for Warehouse borrowings.
Outstanding TRS loans decreased $51 million from December 31, 2021 to June 30, 2022 primarily reflecting a $51 million reduction in other TRS loans. Other TRS loans as of December 31, 2021 were primarily commercial loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first six months of the following year.
As of June 30, 2022, 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 decreased $128,000 from $65 million as of December 31, 2021 to $64 million as of June 30, 2022. As a percent of total loans, the total Company’s ACLL increased to 1.48% as of June 30, 2022 compared to 1.44% as of December 31, 2021. An analysis of the ACL by reportable segment follows:
The Traditional Banking ACLL increased approximately $320,000 to $50 million as of June 30, 2022 driven primarily by formula reserves tied to loan growth during the first six months of 2022 partially offset by reserves released following the payoff or upgrade of loans downgraded during the height of the pandemic.
The Warehouse ACLL decreased to approximately $1.5 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing June 30, 2022 to December 31, 2021. As of June 30, 2022, 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 RCS ACLL increased $283,000 from $13 million as of December 31, 2021 to $13 million as of June 30, 2022.
RCS maintained an ACLL for two distinct credit products offered as of June 30, 2022, including its line-of-credit products and its healthcare-receivables products. As of June 30, 2022, 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 56% for its LOC II product. 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 17 — Management’s Allocation of the Allowance for Credit Losses on Loans
Percent of
Loans to
ACLL to
Loans*
Loan Class
Loan Class*
1.01
0.87
0.88
1.55
2.61
3.19
0.96
1.02
1.95
6.45
6.44
100.00
1.27
1.29
16.06
21.93
1.35
1.41
1.18
14.41
13.91
14.39
9.06
1.44
* 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 $39 million during the first six months of 2022, driven primarily by commercial-purpose loans repaid or upgraded to a Pass rating during the first six months of 2022.
See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.
Table 18 — Classified and Special Mention Loans
Loss
16,471
21,714
(5,243)
(24)
PCD - Substandard
1,595
1,692
Total Classified Loans
(5,340)
(23)
81,034
114,496
(33,462)
(29)
PCD - Special Mention
757
795
Total Special Mention Loans
(33,500)
Total Classified and Special Mention Loans
99,857
138,697
(38,840)
(28)
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 $5 million and $6 million as of June 30, 2022 and December 31, 2021.
Nonperforming loans to total loans decreased to 0.37% at June 30, 2022 from 0.46% at December 31, 2021, as the total balance of nonperforming loans decreased by $4 million, or 21%, while total loans decreased $134 million, or 3%, during the first six months of 2022. As presented in Tables 22 and 23 below, the decrease in nonperforming loans during 2022, including the nonaccrual loan component, was primarily driven by the refinancing of $5 million of these loans to another financial institution.
The ACLL to total nonaccrual loans increased to 399% as of June 30, 2022 from 315% as of December 31, 2021, as the total ACLL decreased $128,000 and the balance of nonaccrual loans decreased by $4 million, or 21%. The driver of the decrease in nonaccrual loans was primarily the refinancing out of the Bank of $5 million of these loans during the first six months of 2022.
Table 19 — Nonperforming Loans and Nonperforming Assets Summary
Nonaccrual loans to total loans
ACLL to nonaccrual loans
251
Loans on nonaccrual status include collateral-dependent loans. See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans.
Table 20 — Nonperforming Loan Composition
1.47
0.21
0.45
0.00
0.81
0.67
17.83
0.44
20,505
107
Table 21 — Stratification of Nonperforming Loans
Number of Nonperforming Loans and Recorded Investment
> $100 &
No.
<= $100
<= $500
> $500
4,669
5,403
176
2,977
185
5,549
6,176
4,443
5,591
5,042
2,140
872
5,685
1,005
5,946
6,734
7,825
233
5,993
108
Table 22 — Rollforward of Nonperforming Loans
Nonperforming loans at the beginning of the period
16,966
22,520
23,595
Loans added to nonperforming status during the period that remained nonperforming at the end of the period
2,324
1,772
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below)
(1,381)
(934)
(5,633)
(2,838)
Principal balance paydowns of loans nonperforming at both period ends
(699)
(490)
(1,028)
(860)
Net change in principal balance of other loans nonperforming at both period ends*
675
Nonperforming loans at the end of the period
Includes relatively small consumer portfolios, e.g. RCS loans.
Table 23 — Detail of Loans Removed from Nonperforming Status
Loans charged off
Loans transferred to OREO
Loans refinanced at other institutions
(752)
(5,429)
(2,650)
Loans returned to accrual status
(188)
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, 2022, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.
Total Company delinquent loans to total loans decreased to 0.26% as of June 30, 2022 from 0.30% as of December 31, 2021. Core Bank delinquent loans to total Core Bank loans decreased to 0.13% as of June 30, 2022 from 0.17% as of December 31, 2021. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of June 30, 2022 and December 31, 2021 were on nonaccrual status.
Table 24 — Delinquent Loan Composition*
0.36
0.08
22.09
24.01
0.17
6.64
6.48
6.63
4.19
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.
110
Table 25 — Rollforward of Delinquent Loans
Delinquent loans at the beginning of the period
16,215
14,986
19,947
Loans added to delinquency status during the period and remained in delinquency status at the end of the period
1,714
2,717
2,348
3,276
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below)
(1,944)
(1,425)
(4,104)
(3,016)
Principal balance paydowns of loans delinquent at both period ends
(348)
Net change in principal balance of other loans delinquent at both period ends*
(4,190)
2,471
(1,435)
Delinquent loans at the end of period
18,718
Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 26 — Detail of Loans Removed from Delinquent Status
Easy Advances paid off or charged off
(601)
(667)
(3,676)
(1,796)
Loans paid current
(1,342)
(756)
(427)
(1,219)
Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period
Collateral-Dependent Loans and Troubled Debt Restructurings
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 TDR is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank’s TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan’s interest rate, and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt.
Table 27 — Collateral-Dependent Loans and Troubled Debt Restructurings
Cashflow-dependent TDRs
5,399
5,960
(561)
Collateral-dependent TDRs
8,213
9,426
(1,213)
Total TDRs
(1,774)
Collateral-dependent loans (which are not TDRs)
10,632
14,645
(4,013)
(27)
Total recorded investment in TDRs and collateral-dependent loans
24,244
30,031
(5,787)
(19)
See Footnote 4 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans and TDRs.
Table 28 — Deposit Composition
(43,461)
(14,316)
19,884
(2,419)
(29,074)
(21,638)
(25,088)
(116,112)
97,801
(18,311)
(432)
(1,452)
7,306
5,854
5,422
Total Company deposits decreased $13 million from December 31, 2021 to $4.8 billion as of June 30, 2022.
Total Core Bank deposits decreased minimally by $18 million with a $116 million decrease interest-bearing deposits offset by a $98 million increase in noninterest-bearing deposits. The net decrease in deposit balances for the first six months of 2022, compares unfavorably to the net growth in deposits for the previous two calendar years when deposit growth generally reached historical highs for the Company. Management believes the Company is more likely to experience slower overall growth in its deposits over the foreseeable future as the excess liquidity in the United States is expected to decline due to the tightening of monetary and fiscal policy by the Federal Government.
Federal Home Loan Bank Advances
The Bank held $20 million of long-term FHLB advances as of June 30, 2022 compared to $25 million of overnight FHLB advances as of December 31, 2021. During the first six months of 2022, the Bank extended the term on $20 million of its FHLB advances in anticipation of increasing long-term interest rates and repaid the remaining $5 million. As of June 30, 2022, the Company’s $20 million of FHLB advances had a weighted average maturity of five years and a weighted average cost of 1.89%.
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 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.
See Footnote 12 “Interest Rate Swaps” of Part I Item 1 “Financial Statements” for additional discussion regarding the Bank’s interest rate swaps.
Liquidity
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 unincumbered 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.
Table 29 — Liquid Assets and Borrowing Capacity
The Company’s liquid assets and borrowing capacity included the following:
Unincumbered debt securities
239,863
219,775
Total liquid assets
1,035,006
976,746
Borrowing capacity with the FHLB
904,785
900,424
Borrowing capacity through unsecured credit lines
125,000
Total borrowing capacity
1,029,785
1,025,424
Total liquid assets and borrowing capacity
2,064,791
2,002,170
The Bank had a loan to deposit ratio (excluding brokered deposits) of 97% as of June 30, 2022 and 99% as of December 31, 2021. 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 of June 30, 2022, the Bank had approximately $1.4 billion in deposits from 234 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. The 20 largest non-sweep deposit relationships represented approximately $523 million, or 11%, of the Company’s total deposit balances as of as of June 30, 2022. 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, 2022 and December 31, 2021, these pledged investment securities had a fair value of $415 million and $320 million.
113
Total stockholders’ equity increased from $834 million as of December 31, 2021 to $842 million as of June 30, 2022. The increase in stockholders’ equity was primarily attributable to net income earned during 2022 reduced primarily by cash dividends declared, repurchases of Class A Common shares, and a $24 million decrease in AOCI.
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, 2022, RB&T could, without prior approval, declare dividends of approximately $135 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 13.41% as of June 30, 2022 and 13.41% as of December 31, 2021. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
Table 30 — Capital Ratios (1)
Ratio
Total capital to risk-weighted assets
910,392
18.07
878,488
17.47
880,873
17.51
861,815
17.14
Common equity tier 1 capital to risk-weighted assets
853,027
16.94
823,504
16.37
823,508
806,831
16.05
Tier 1 (core) capital to risk-weighted assets
Tier 1 leverage capital to average assets
13.69
13.35
13.18
13.10
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 deposit and loan rates and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.
115
As of June 30, 2022, the Company ran a dynamic simulation model for interest rate changes from “Down 100” basis points to “Up 400” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning July 1, 2022 and ending June 30, 2023 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.
Table 31 — Bank Interest Rate Sensitivity
Change in Rates
-100
+100
+200
+300
+400
Basis Points
% Change from base net interest income as of June 30, 2022
(1.8)
1.6
4.0
6.6
9.3
% Change from base net interest income as of December 31, 2021
1.3
(0.6)
0.7
4.7
For the Up-100, Up-200, and Up-300 scenarios, the June 30, 2022 simulation reflected a more positive outcome for the Bank’s net interest income than the comparable December 31, 2021 simulation. For the Down-100 scenario, the December 2021 simulation reflected a more positive outcome than the June 2022 simulation. The Up-400 scenario saw no change in expectation from December to June. For the Up-rate scenarios, the changes in simulation outcomes from December 2021 to June 2022 were primarily due, in general, to a positive impact to interest income for those loans with rates that are no longer below their interest rate floors as of June 2022 compared to December 2021 when the base market interest rates were considerably lower.
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 ceases. However, on March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Law”), which is designed to accomplish the following:
With limited exception, the LIBOR Law generally covers legacy LIBOR contracts with no or inadequate fallback provisions. Additionally, under the LIBOR Law, by September 11, 2022, the Board of Governors of the Federal Reserve System (the “Board”) must issue regulations to give effect to the law, including the selection of a Board-Selected Benchmark Replacement that is based on SOFR and incorporates an applicable tenor spread adjustment and the identification of any related conforming changes.
As of June 30, 2022, the Company had approximately $773 million of legacy assets that reference LIBOR, with short-term Warehouse loans representing $331 million of these assets and commercial and mortgage loans primarily making up the remainder. As of June 30, 2022, of the Bank’s legacy assets that reference LIBOR, approximately $406 million of those assets were scheduled to mature after June 30, 2023. These amounts exclude derivative assets and liabilities on the Company’s consolidated balance sheet. As of June 30, 2022, the notional amount of the Company’s LIBOR-referenced interest rate derivative contracts was approximately $232 million, with $230 million of such notional amount scheduled to mature after June 30, 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, 2022 Compared to Three Months Ended June 30, 2021) and “RESULTS OF OPERATIONS (Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021.”
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.
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 effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the 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.
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
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 fiscal year ended December 31, 2021. You should carefully consider the risk factors discussed in Republic’s 2021 Form 10-K, which could materially affect its business, financial condition, or future results.
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 2022 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
270,328
May 1 - May 31
76,651
43.47
193,677
June 1 - June 30
138,500
46.77
55,177
215,151
45.59
The Company repurchased 215,151 shares of its Class A Common Stock during the second quarter of 2022. On January 27, 2021, the Board of Directors of Republic Bancorp, Inc. increased the Company’s existing authorization to purchase shares of its Class A Common Stock to 1,000,000 shares. On November 17, 2021, the Board of Directors of Republic Bancorp, Inc. increased the Company’s existing authorization to purchase shares of its Class A Common Stock by an additional 250,000 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, 2022, the Company had 55,177 shares which could be repurchased under its current share repurchase programs. On July 20, 2022, the Board of Directors of Republic Bancorp, Inc. increased the Company’s existing authorization to purchase shares of its Class A Common Stock by an additional 200,000 shares.
During the first six months of 2022, there were 4,000 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 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, 2022 and December 31, 2021, (ii) Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021, (iii) Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021, (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 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 5, 2022
/s/ Steven E. Trager
By: Steven E. Trager
Executive Chair (Principal Executive Officer)
Principal Financial Officer:
/s/ Kevin Sipes
By: Kevin Sipes
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer (Principal Financial Officer)