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REPUBLIC BANCORP INC /KY/ – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial statements include the accounts ofRepublic Bancorp, Inc. (the "Parent Company") and its wholly owned subsidiaries,Republic Bank & Trust Company andRepublic Insurance Services, Inc. As used in this filing, the terms "Republic," the "Company," "we," "our," and "us" refer toRepublic 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 inLouisville, Kentucky . The Bank is aKentucky -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 theU.S. The Captive is aNevada -based, wholly owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives for which insurance may not be available or economically feasible. In 2005,Republic Bancorp Capital Trust , an unconsolidated trust subsidiary of Republic, was formed and issued$40 million in TPS. OnSeptember 30, 2021 , as permitted under the terms of RBCT's governing documents, Republic redeemed these securities at the par amount of approximately$40 million , without penalty. Although the TPS were treated as part of Republic'sTier I Capital while outstanding, Republic's capital ratios remained well above "well capitalized" levels following this redemption.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Republic should be read in conjunction with Part II Item 8
"Financial Statements and Supplementary Data."
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:
? the potential impact of inflation on Company operations;
projections of revenue, income, expenses, losses, earnings per share, capital
? expenditures, dividends, capital structure, loan volume, loan growth, deposit
growth, or other financial items;
? descriptions of plans or objectives for future operations, products, or
services;
? descriptions and projections related to management strategies for loans,
deposits, investments, and borrowings;
? forecasts of future economic performance; and
? descriptions of assumptions underlying or relating to any of the foregoing.
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following: ? the impact of inflation on the Company's operations and credit losses;
litigation liabilities, including related costs, expenses, settlements and
? judgments, or the outcome of matters before regulatory agencies, whether
pending or commencing in the future;
? natural disasters impacting the Company's operations;
? changes in political and economic conditions;
? the discontinuation of LIBOR;
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? the magnitude and frequency of changes to the FFTR implemented by the
the FRB;
long-term and short-term interest rate fluctuations and the overall steepness
? of the
interest income and Mortgage Banking operations;
? competitive product and pricing pressures in each of the Company's five
reportable segments;
? equity and fixed income market fluctuations;
? client bankruptcies and loan defaults;
? recession; ? future acquisitions;
? integrations of acquired businesses;
? changes in technology;
? changes in applicable laws and regulations or the interpretation and
enforcement thereof;
? changes in fiscal, monetary, regulatory, and tax policies;
? changes in accounting standards;
? monetary fluctuations;
? changes to the Company's overall internal control environment;
? the ability of the Company to remediate its material weaknesses in its internal
control over financial reporting;
? success in gaining regulatory approvals when required;
? the Company's ability to qualify for future R&D federal tax credits;
? the ability for Tax Providers to successfully market and realize the expected
RA and RT volume anticipated by TRS;
? information security breaches or cyber security attacks involving either the
Company or one of the Company's third-party service providers; and
? other risks and uncertainties reported from time to time in the Company's
filings with the
OnOctober 26, 2022 , Republic, the Bank andCBank entered into theCBank Agreement. Upon completion of the transaction,CBank will be merged with and into RB&T, with RB&T as the survivor of the merger.CBank is headquartered inCincinnati, Ohio . This document contains statements regarding the proposed acquisition transaction that are not statements of historical fact and are considered forward-looking statements within the criteria described above. These statements are likewise subject to various risks and uncertainties that may cause actual results and outcomes of the proposed transaction to differ, possibly materially, from the anticipated results or outcomes expressed or implied in these forward-looking statements. In addition to factors disclosed in reports filed by Republic with theSEC , risks and uncertainties for Republic,CBank and the combined company include, but are not limited to: for the parties to receive all regulatory approvals as provided for in the CBank Agreement, the ability to growCBank loan and deposit balances post-acquisition, unanticipated post-acquisition loan losses for Republic onCBank -originated loans, the ability of Republic to integrate acquired operations including obtaining synergies, integration objectives and anticipated timelines, the ability of Republic to integrate, manage and keep secure our information systems, and other risks and uncertainties reported from time to time in the Company's filings with theSEC , including Part 1 Item 1A "Risk Factors."
Accounting Standards Updates
For disclosure regarding the impact to the Company's financial statements of
ASUs, see Footnote 1 "Summary of Significant Accounting Policies" of Part II
Item 8 "Financial Statements and Supplementary Data."
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Critical Accounting Estimates
Republic's consolidated financial statements and accompanying footnotes have
been prepared in accordance with GAAP. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reported periods.
Management continually evaluates the Company's accounting policies and estimates
that it uses to prepare the consolidated financial statements. In general,
management's estimates and assumptions are based on historical experience,
accounting and regulatory guidance, and information obtained from independent
third-party professionals. Actual results may differ from those estimates made
by management.
Critical accounting policies are those that management believes are the most
important to the portrayal of the Company's financial condition and operating
results and require management to make estimates that are difficult, subjective,
and complex. Most accounting policies are not considered by management to be
critical accounting policies. Several factors are considered in determining
whether or not a policy is critical in the preparation of the financial
statements. These factors include, among other things, whether the estimates
have a significant impact on the financial statements, the nature of the
estimates, the ability to readily validate the estimates with other information
including independent third parties or available pricing, sensitivity of the
estimates to changes in economic conditions and whether alternative methods of
accounting may be utilized under GAAP. Management has discussed each critical
accounting policy and the methodology for the identification and determination
of critical accounting policies with the Company's Audit Committee.
Republic believes its critical accounting policies and estimates relate to the
following:
ACLL and Provision - As ofDecember 31, 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. The Company's CECL method is a "static-pool" method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable, supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use theU.S. national unemployment rate as its primary forecasting tool. For its CRE loan pool, the Company initially employed a one-year forecast of CRE vacancy rates throughMarch 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. 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 theU.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 impact of utilizing the CECL approach to calculate 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. See additional detail regarding the Company's adoption of ASC 326 and the CECL method under Footnote 4 "Loans and Allowance for Credit Losses" of Part II Item 8 "Financial Statements and Supplementary Data." 43
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Management's Evaluation of the ACLL
Management evaluates the ACLL for its Core Banking operations separately from its non-traditional RPG operations. Core Banking operations consist of the Company's Traditional Banking, Warehouse, and Mortgage Banking segments. RPG operations consist of the Company's TRS and RCS segments. Management evaluated the reasonableness of its Core Bank ACLL as ofDecember 31, 2022 and 2021 by evaluating absorption and exhaustion rates that account for CECL life-of-loan considerations and the economic hardship and uncertainty brought about by the COVID-19 pandemic. The absorption rate considered totalCore Bank net loan losses from 2008 to 2013 as a percent of the end-of-year Core Bank ACLL. The exhaustion rate considered how many years of grossCore Bank loan charge-offs the end-of-year Core Bank ACLL could withstand based on average annual netCore Bank loan losses from 2008 to 2013. The years 2008 to 2013 represent a six-year period during which theU.S. unemployment rate rose above 8% and theCore Bank incurred a historically high period of loan losses relative to an average year of loan losses for theCore Bank . Management believesCore Bank losses from 2008 to 2013 are more representative of current economic conditions than more recent years just prior to the onset of the COVID-19 pandemic. As ofDecember 31, 2022 , the weighted average term of theCore Bank loan portfolio was approximately six years. TheCore Bank's absorption rate was 85% and its exhaustion rate was approximately 6.0 years as ofDecember 31, 2022 . Management considers these rates reasonable under current economic conditions. The table below reflects theCore Bank's exhaustion and absorption rates for each of the last three years: Years Ended December 31, 2022 2021 2020 Core Bank:
Exhaustion Rate (end-of-year ACLL / median annual charge-offs from 2008 to 2013) 5.99 Yrs. 6.01 Yrs. 6.07 Yrs.
Absorption Rate (total net charge-offs from 2008 to 2013 / end-of-year ACLL) 85 % 85 % 84 %
Based on management's evaluation, a Core Bank ACLL of$52 million , or 1.21% of totalCore Bank loans, was an adequate estimate of expected losses within the loan portfolio as ofDecember 31, 2022 and resulted in Core Banking Provision for its loans of a net charge of$312,000 during 2022. This compares to an ACLL of$52 million and$50 million as ofDecember 31, 2021 andDecember 31, 2020 with Provisions of a net credit of$319,000 for 2021 and net charge of$16.9 million for 2020. If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, an adjustment to the Core Bank ACLL and the resulting effect on the income statement could be material. The RPG ACLL as ofDecember 31, 2022 primarily related to loans originated and held for investment through the RCS segment. RCS generally originates small-dollar, consumer credit products. In some instances, the Bank originates these products, sells 90% or 95% of the balances within three business days of loan origination, and retains a 5% or 10% interest. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through Core Banking operations, with a significant portion of RCS clients considered subprime or near-prime borrowers. As ofDecember 31, 2022 , management evaluated the ACLL only on its active RCS products that had incurred meaningful losses since their inception, which were its line-of-credit products. Due to the general short-term nature of these products, management utilized its traditional absorption and exhaustion calculations using 2022 net charge-offs with the beginning-of-the-year ACLL. The absorption and exhaustion rates were 69% and 0.88 years, respectively, both of which were considered reasonable. RPG maintained an ACLL for all the loan products held at amortized cost and offered through its RCS segment as ofDecember 31, 2022 , including its line-of-credit products and its healthcare-receivables products. As ofDecember 31, 2022 , the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables portfolios to as high as 54.85% for its line-of-credit portfolios. A lower reserve percentage was provided for RCS's healthcare receivables as ofDecember 31, 2022 , as such receivables have recourse back to the Company's third-party service providers in the transactions. Based on management's 44
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calculation, an ACLL of
adequate estimate of expected losses within the RPG portfolio as of
2022
RPG's TRS segment offered its RA credit product during the first two months of 2022, 2021, and 2020, and its ERA credit product duringDecember 2022 related to the first quarter 2023 tax season. An ACLL for losses on RAs and ERAs is estimated during the limited, short-term period the product is offered. RAs originated during the first two months of 2022, were repaid, on average, within 32 days of origination. Provisions for RA and ERA losses are estimated when advances are made and adjusted to actual net charge-offs as ofJune 30th of each year. The ACLL for ERAs as ofDecember 31, 2022 was$3.8 million for$98 million of ERAs originated duringDecember 2022 . There were no ERAs originated during 2021, and as a result there was no ACLL as ofDecember 31, 2021 for ERAs. There was no ACLL as ofDecember 31, 2022 orDecember 31, 2021 for RAs originated during the first two months of 2022 or 2021, as all RAs originated during the first two months of those years had either been repaid or charged-off byJune 30th of each year. Related to the overall credit losses on RAs and ERAs, the Bank's ability to control losses is highly dependent upon its ability to predict the taxpayer's likelihood to receive the tax refund as claimed on the taxpayer's tax return. Each year, the Bank's RA and ERA approval model is based primarily on the prior-year's tax refund funding patterns. Because much of the loan volume occurs each year before that year's tax refund funding patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management's predictions if tax refund funding patterns change materially between years. In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the RA and ERA product parameters. Further changes in RA and ERA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the RA an ERA and therefore on the Company's financial condition and results of operations.
See additional discussion regarding the RA product under the sections titled:
? Part I Item 1A "Risk Factors"
? Part II Item 8 "Financial Statements and Supplementary Data," Footnote 4 "Loans
and Allowance for Credit Losses"
RPG recorded a net charge of$22.0 million ,$15.1 million , and$14.4 million to the Provision during 2022, 2021, and 2020, with the Provision for each year primarily due to net losses on RAs and growth in short-term, consumer loans originated through the RCS segment. If the number of future charge-offs on RAs and RCS loans differ significantly from assumptions used by management in making its determination, an adjustment to the RPG ACLL and the resulting effect on the income statement could be material.
Cancelled TRS Sale Transaction
OnJune 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 theDelaware Court of Chancery onOctober 5, 2021 .
As previously disclosed in the Company's prior
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, onJune 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. OnJune 6, 2022 , the Bank and Green Dot filed a stipulation of dismissal of the Lawsuit with theDelaware Court of Chancery , which was effective to dismiss the Lawsuit when filed.
See Footnote 1 "Summary of Significant Accounting Policies" of Part II Item 8
"Financial Statements and Supplementary Data" for discussion regarding the
cancelled sale of the TRS business and associated litigation.
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RECENT DEVELOPMENTS
Correction of Prior Period Error
As disclosed in Note 27, "Correction of Prior Period Error," to our consolidated financial statements, the Company identified a prior period accounting error substantially in the form of an immaterial understatement of revenue, solely related to one RCS line of credit product. The financial reporting periods affected by this error include the Company's previously reported audited consolidated financial statements for the fiscal year endedDecember 31, 2021 , and the Company's previously reported interim unaudited consolidated financial statements for each of the quarterly and fiscal year-to-date periods endedJune 30, 2021 ;September 30, 2021 ;March 31, 2022 ;June 30, 2022 ; andSeptember 30, 2022 ; and the unaudited consolidated quarterly financial data for the quarter endingDecember 31, 2021 (collectively the "previously reported financial statements"). The three month period endedDecember 31, 2021 and year endedDecember 31, 2021 also reflected certain immaterial revisions to reclassify certain gains and losses on the sale of the same RCS line of credit product.
These reclassifications impact noninterest income, noninterest expense and
interest income with no impact to net income.
The Company concluded this error was not material, on an individual or aggregate basis, to the Company's previously reported financial statements and correction of the error would not be material to the current year financial statements, including any interim periods. However, the Company corrected this error as a voluntary immaterial revision to the accompanying consolidated financial statements of this Annual Report on Form 10-K, as of and for the fiscal years endedDecember 31, 2022 , and 2021, in the periods in which the error occurred. In addition, the Company expects to present the corrected interim 2022 amounts as a voluntary immaterial revision in its 2023 consolidated interim financial statements on a quarterly basis and a year-to-date basis upon the filing of its Quarterly Reports on Form 10-Q.
As a result, the financial results in the periods presented within the
Management's Discussion and Analysis of Financial Condition and Results of
Operations, set forth below, have been revised to give effect to the correction
of this error.
Bank Acquisition OnOctober 26, 2022 , the Company, RB&T, andCBank entered into theCBank Agreement. Upon completion of the transaction,CBank will be merged with and into RB&T, with RB&T as the survivor of the merger.CBank is headquartered inCincinnati, Ohio . Under the terms of the CBank Agreement, the Company will acquire all ofCBank's outstanding common stock in an all-cash direct merger ofCBank with RB&T, resulting in a total cash payment of approximately$51 million toCBank's existing shareholders. Republic expects to fund the cash payment through existing resources on-hand at RB&T. The completion of the transaction is subject to customary closing conditions, including regulatory approval and approval byCBank's shareholders. The CBank Agreement also contains reciprocal termination provisions in the event the transaction does not receive the required regulatory approvals within six months of the effective date of the CBank Agreement or if certain minimum capital levels are not maintained byCBank as of the closing date. The CBank Agreement was unanimously approved by the Republic, RB&T andCBank boards of directors onOctober 25, 2022 . In connection with entering into the CBank Agreement, Republic entered into customary support agreements with the members ofCBank's board of directors and other shareholders in their capacities as shareholders ofCBank (the "CBank Support Agreements"). Subject to the terms and conditions, and non-termination, of the CBank Support Agreements, each such shareholder agreed, among other things, to vote his or her respective shares of CBank Common Stock in favor of the approval of the CBank Agreement and the transaction contemplated thereby, and against alternative acquisition proposals. The CBank Support Agreements do not prevent the shareholders, in their capacity as directors, from exercising their fiduciary obligations in connection with alternative acquisition proposals. The CBank Agreement provides certain termination rights for both Republic andCBank and further provides that a termination fee of$2,040,000 will be payable byCBank to Republic upon termination of the CBank Agreement under certain circumstances, includingCBank's termination of the CBank Agreement to accept a Superior Proposal (as defined in the CBank Agreement). The CBank Agreement was approved by its shareholders onDecember 13, 2022 . As ofJanuary 31, 2023 ,CBank had approximately$257 million in assets, consisting of approximately$221 million in gross loans, no other real estate owned, approximately$16 million of marketable securities, approximately$14 million in cash and cash equivalents and approximately$6 million in other assets. Also as ofJanuary 31, 2023 ,CBank had approximately$228 million of liabilities, including approximately$209 million in customer deposits and$13 million inFederal Home Loan Bank advances. 46 Table of Contents OVERVIEWTotal Company net income was$91.1 million and Diluted EPS was$4.59 for 2022, compared to net income of$87.6 million and Diluted EPS of$4.28 for 2021. Table 1 below presents Republic's financial performance for the years endedDecember 31, 2022 , 2021, and 2020: Table 1 - Summary Percent Increase/(Decrease) Years EndedDecember 31 , (dollars in thousands, except per share data) 2022 2021
2020 2022/2021 2021/2020
Income before income tax expense$ 116,845 $ 111,442 $ 102,633 5 % 9 % Net income 91,106 87,611 83,246 4 5 Diluted EPS of Class A Common Stock 4.59 4.28
3.99 7 7 ROA 1.48 % 1.39 % 1.38 % 6 1 ROE 10.68 10.37 10.37 3 -
The increase in net income for the
following:
? The benefit of an
? The benefit of a
? A
? A
? An
Additional discussion follows in this section of the filing under "Results of
Operations."
General highlights by reportable segment for the year ended
consisted of the following:
Traditional Banking segment
? Net income increased
? Net interest income increased
? Provision was a net charge of
? Noninterest income increased
? Noninterest expense increased
?
during 2022, driven primarily by strong CRE loan growth.
? Total nonperforming loans to total loans for the Traditional Banking segment
was 0.40% as of
? Delinquent loans to total loans for the Traditional Banking segment was 0.16%
as ofDecember 31, 2022 compared to 0.21% as ofDecember 31, 2021 . 47 Table of Contents Warehouse Lending segment
? Net income decreased
? Net interest income decreased
? The Warehouse Provision was a net credit of
net credit of
? Average committed Warehouse lines decreased to
?
Mortgage Banking segment
? Within the Mortgage Banking segment, mortgage banking income decreased
million, or 69%, from 2021 to 2022.
Overall, Republic's proceeds from sale of secondary market loans totaled
? million during 2022 compared to
cash-gain-as-a-percent-of-loans-sold decreasing to 3.01% from 3.22% from period
to period.
Tax Refund Solutions segment
? Net income increased
? Net interest income increased
? Total RA originations were
compared to
TRS originated
? the anticipated filing of tax returns for the upcoming first quarter 2023 tax
season.
? The TRS Provision was
2021.
Noninterest income was
? 2021. Noninterest income for 2022 included a
contract termination fee and a
payment.
? Net RT revenue decreased
? Noninterest expense was
2021. OnOctober 19, 2022 , TRS entered into a new agreement with a large Tax
Provider, for which TRS had previously only provided RTs. As part of the new
agreement, TRS will be the exclusive provider of RAs and ERAs originated
? through this provider until
management expects to add an additional
volume, including ERAs originated duringDecember 2022 , to its first quarter 2023 tax filing season. 48 Table of Contents TRS had multiple factors during 2021 and 2022 that impacted 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:
2021 Calendar Year
1) The start of the
later than a typical tax season; and
The Company believes stimulus programs from the Federal Government and
2) pandemic-related restrictions during early 2021 negatively impacted demand for
TRS's RT and RA products.
2022 Calendar Year
TRS amended one of its existing third-party contracts to provide for a small
1) revenue share from Republic to the third party, along with a ceiling on loan
losses from the third party to Republic for all RA products originated through
this provider;
2) TRS experienced a loss of RT and RA product volume to Green Dot directly
following the execution of the TRS Purchase Agreement;
Although to a lesser degree than in the 2021 tax season, management believes
3) stimulus programs from the Federal Government during the latter half of 2021
negatively impacted the 2022 tax season;
4) The Bank received a
following the cancellation of the Sales Transaction; and
5) The Bank received a
upon settling its lawsuit against Green Dot.
As it relates to factors impacting 2021, the processing season with theIRS started approximately two weeks later than normal. As a result, RT funding volume and loan repayments from theIRS 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, management believes government stimulus programs during 2021 negatively impacted demand for TRS RA and RT products. In addition to the more normal timing of the tax season in 2022 as compared to 2021, the fiscal year 2022 tax season, in totality, was favorably impacted by a contractual amendment with one of the Company's large Tax Providers. As a result of the amended contract, TRS shares certain revenues with this provider, while this provider absorbs certain overhead costs of the program and furnishes to TRS a loan loss guaranty ceiling as a percentage of RAs originated by this provider. Through this provider, TRS originated$172 million of RAs 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 TRS was approximately$266,000 for the$172 million of RA volume, while the benefit to TRS of the overhead costs eliminated as a result of the new contract was approximately$543,000 and the net benefit to TRS of the loan loss guaranty ceiling for 2022 was approximately$516,000 . Negatively impacting 2022 as compared to 2021 was a loss of RT 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 lost volume to Green Dot from this one provider 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 beyond 2022, 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 as well as the positive impact to non-interest income of the Green Dot settlement, TRS experienced a net positive improvement to its 2022 operating results as compared to 2021. 49 Table of Contents
Republic
? Net income increased
? Net interest income increased
? Overall, RCS recorded a net charge to the Provision of
2022 compared to a net charge of
? Noninterest income increased
? Noninterest expense was
? Total nonperforming loans to total loans for the RCS segment was 0.70% as of
? Delinquent loans to total loans for the RCS segment was 8.53% as of December
31, 2022 compared to 6.48% as of
RESULTS OF OPERATIONS
This section provides a comparative discussion of Republic's Results of Operations for the two-year period endedDecember 31, 2022 , unless otherwise specified. Refer to Results of Operations on pages 53-63 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K") for a discussion of the 2021 versus 2020 results.
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
See the section titled "Asset/Liability Management and Market Risk" in this
section of the filing regarding the Bank's interest rate sensitivity.
A large amount of the Company's financial instruments tracks closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These rates trended lower beginning in the first quarter of 2020 with the onset of the COVID pandemic, as theFOMC reduced the FFTR to approximately 25 basis points. During 2022 inflation rose to levels not seen in approximately 40 years. In response, theFOMC began executing a quantitative tightening program by reducing its balance sheet, selling certain types of bonds in the market, and repeatedly increasing the FFTR. TheFOMC's increases to the FFTR during 2022 included
the
following:
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Table 2 - Increases to the Federal Funds Target Rate during 2022
Increase to FFTR
Date the FFTR after Increase
March 17, 2022 0.25 % 0.50 %
May 5, 2022 0.50 1.00
June 16, 2022 0.75 1.75
July 27, 2022 0.75 2.50
September 21, 2022 0.75 3.25
November 2, 2022 0.75 4.00
December 15, 2022 0.50 4.50
The FOMC's actions and signals continued to place upward pressure on short-term
market interest rates for bonds and loans throughout the second half of 2022.
While long-term interest rates initially rose in tandem with the increases to
the FFTR during the middle part of 2022, they began to decline during the second
half of 2022 as the market generally began to anticipate a recession to take
place in 2023. As a result of the increase in short-term interest rates and the
moderation of long-term interest rates, the yield curve became inverted during
2022 with some short-term rates higher than some long-term rates on the yield
curve. Further monetary tightening by the FOMC in the future will likely cause
short-term interest rates to continue to increase. At this time, the future of
long-term market interest rates remains uncertain. Increases in short-term
market interest rates are expected to impact the various business segments of
the Company differently and will be discussed in further detail in the sections
below.
an increase of
expanded to 4.12% during 2022 compared to 3.79% for 2021.
The following were the most significant components affecting the Company's net
interest income by reportable segment:
Traditional Banking segment
The Traditional Banking's net interest income increased
over 2021. Traditional Banking's net interest margin was 3.38% for 2022, an
increase of 20 basis points from 2021.
The increase in the
primarily attributable to the following factors:
increased
? growth in net interest income was a 44-basis point increase in the Traditional
Bank's net interest margin, excluding PPP loans and related fees and interest.
Driving this increase in net interest margin, excluding PPP-related elements,
was the following:
Increases in the FFTR during 2022 continued to benefit the
high level of interest-earning cash on its balance sheet, as well as its loan
o and investment portfolio yields. As a result, the
interest earning assets, excluding PPP, increased 42 basis points from 2021 to
2022.
o Average non-PPP loans at the
to
interest-bearing deposits as compared to the benefit it received on its
o interest earning cash as a result of the increases to the FFTR. For further
discussion of the Bank's interest-bearing deposits, see section titled Deposits
below in this section of the filing.
? portfolio during 2022 compared to
decrease in PPP fees and interest primarily highlighted the short-term nature
of this program, which was closer to its peak during 2021.
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Table 3 - 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 believesTraditional Bank net interest income excluding PPP fees and coupon interest is a more appropriate measure to analyze the performance of theTraditional Bank's net interest income and net interest margin. The following table reconcilesTraditional Bank net interest income and net interest margin toTraditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure. Net Interest Income Average Interest-Earning Assets Net Interest Margin Years EndedDec. 31 , Years EndedDec. 31 , Years EndedDec. 31 ,
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change 2022 2021 % Change Traditional Banking - GAAP$ 171,543 $ 157,249 $ 14,294 9 %$ 5,071,728 $ 4,945,316 $
126,412 3 % 3.38 % 3.18 % 0.20 %
Less: Impact of PPP fees and interest
1,384
20,029 (18,645) (93) 16,557 246,451 (229,894) (93) 0.02
0.26 (0.24)
Traditional Banking ex PPP fees and interest - non-GAAP
2.92 0.44 As previously disclosed, short-term interest rates driven by theFOMC are expected to continue to increase into 2023 as a result of expected monetary tightening by theFOMC . Additional increases in short-term interest rates are generally believed by management to be favorable to theTraditional Bank's net interest income and net interest margin in the near term. While many factors will determine theTraditional Bank's net interest income and net interest margin in 2023 and beyond, the Bank's ability to maintain its deposit balances near their current, relatively-low pricing levels is a significant assumption driving Management's current belief that rising short-term rates will be beneficial to theTraditional Bank's net interest income and net interest margin in the future. In addition, a continued or increased inversion of the yield curve could negatively impact theTraditional Bank's net interest income and net interest margin in the future as many of the Bank's loan products are priced relative to the long end of the yield curve while many of its deposit products are priced relative to the short-end of the yield curve. Additional variables which may also impact theTraditional Bank's net interest income and net interest margin in the future include, but are not limited to, the actual steepness and shape of the yield curve, future demand for theTraditional Bank's financial products, and theTraditional Bank's overall future liquidity needs.
Warehouse Lending segment
Net interest income within the Warehouse segment decreased$11.5 million , or 46%, from 2021, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from$748 million during the 2021 to$510 million for 2022, driven largely by the sharp rise in long-term interest rates during 2022, which depressed mortgage-refinancing demand and resulted in a significant drop in Warehouse line usage. In addition, the Warehouse net interest margin decreased 68 basis points from 3.37% during 2021 to 2.69% during 2022. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company's internal FTP methodology, generally rose in tandem with the increase in short-term interest rates during the year, while its yield increases were delayed until the adjustable rates on its clients' lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited Warehouse's net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during 2022.Committed Warehouse lines-of-credit decreased from$1.4 billion as ofDecember 31, 2021 to$1.1 billion as ofDecember 31, 2022 , while average usage rates for Warehouse lines were 44% and 53%, respectively, during 2022 and 2021. Additional increases in short-term interest 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 credit. 52
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Tax Refund Solutions segment
TRS's net interest income increased$5.9 million over 2021, driven by an increase in RA fees, which are recorded as interest income on loans; 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 internal FTP methodology and a rise in interest rates. TRS's RA product, including ERAs originated duringDecember 2022 , earned$14.5 million in fees during 2022, a$1.3 million increase from 2021, resulting primarily from a$159 million increase in RA originations from year to year.
Republic
RCS's net interest income increased
increase was driven primarily by an increase in fee income from RCS's LOC
products.
RCS's LOC loan fees, which are recorded as interest income on loans, increased to$27.3 million during 2022 compared to$19.3 million during 2021. Interest income on RCS's LOC I product increased$2.5 million during 2022, driven by a$3.4 million increase in average outstanding balances for this product from 2021 to 2022. Interest income on RCS'sLOC II product increased$5.4 million , as the Company first piloted this product during early 2021 with limited originations during the pilot phase.
Interest income from RCS's hospital receivables decreased
resulting from a
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 2023 will likely 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.
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Table 4 - Total Company Average Balance Sheets and Interest Rates
Years Ended December 31,
2022 2021 2020
Average Average Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest-earning assets:
Federal funds sold and other
interest-earning deposits $ 738,399 $ 11,370
1.54 %$ 806,811 $ 1,108 0.14 %$ 283,151 $ 911 0.32 % Investment securities, including FHLB stock (1) 671,858 11,739
1.75 555,599 7,706 1.39 584,300 10,303
1.76
TRS Refund Advance loans (2) 28,085 14,481 51.56 26,283 13,202 50.23 38,843 19,671 50.64 RCS LOC products (2) 28,986 27,318 94.25 20,662 19,345 93.63 20,217 18,522 91.62 Other RPG loans (3) (7) 96,538 5,744 5.95 107,129 5,991 5.59 105,569 6,101 5.78Outstanding Warehouse lines of credit (4) (7) 510,417 21,351
4.18 747,840 27,169 3.63 812,862 31,199
3.84
Paycheck Protection Program loans (5) (7) 16,557 1,384
8.36 246,451 20,029 8.13 341,704 12,178
3.56
All other Core Bank loans (6) (7) 3,657,850 150,797
4.12 3,370,912 133,856 3.97 3,477,646 153,373
4.41
Total interest-earning assets 5,748,690 244,184
4.25 5,881,687 228,406 3.88 5,664,292 252,258
4.45 Allowance for credit losses (67,951) (66,481) (60,008) Noninterest-earning assets: Noninterest-earning cash and cash equivalents 186,636 167,556 125,904 Premises and equipment, net 33,892
38,428 42,991 Bank owned life insurance 100,452 91,329 67,264 Other assets (1) 167,251 189,339 171,422 Total assets$ 6,168,970 $ 6,301,858 $ 6,011,865
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities: Transaction accounts$ 1,696,809 $ 1,974 0.12 %$ 1,580,570 $ 361 0.02 %$ 1,291,980 $ 1,201 0.09 % Money market accounts 779,457 2,000 0.26 784,777 385 0.05 739,524 1,930 0.26 Time deposits 240,701 2,636 1.10 300,784 3,625 1.21 400,704 7,868 1.96 Reciprocal money market and time deposits 55,042 147 0.27 226,503 644 0.28 274,725 1,776 0.65 Brokered deposits - - - 30,863 24 0.08 206,553 2,314 1.12
Total interest-bearing deposits 2,772,009 6,757
0.24 2,923,497 5,039 0.17 2,913,486 15,089
0.52
SSUARs and other short-term borrowings 265,188 397 0.15 231,430
63 0.03 204,797 177
0.09
Federal Reserve PPP Liquidity Facility - - - - - - 43,932 153
0.35
Federal Home Loan Bank advances 21,233 339
1.60 29,479 57 0.19 211,776 3,524 1.66 Subordinated note - - - 30,732 507 1.65 41,240 1,000 2.42
Total interest-bearing liabilities 3,058,430 7,493
0.24 3,215,138 5,666 0.18 3,415,231 19,943
0.58
Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,148,848 2,129,222 1,672,442 Other liabilities 108,965 112,466 121,466 Stockholders' equity 852,727 845,032 802,726 Total liabilities and stockholders' equity$ 6,168,970 $ 6,301,858 $ 6,011,865 Net interest income$ 236,691 $ 222,740 $ 232,315 Net interest spread 4.01 % 3.70 % 3.87 % Net interest margin 4.12 % 3.79 % 4.10 %
(1) For the purpose of this calculation, the fair market value adjustment on debt
securities is included as a component of other assets.
(2) Interest income for RAs and RCS line-of-credit products is composed entirely
of loan fees.
(3) Interest income includes loan fees of
million for 2022, 2021, and 2020.
(4) Interest income includes loan fees of
million for 2022, 2021, and 2020.
(5) Interest income includes loan fees of
million for 2022, 2021, and 2020.
(6) Interest income includes loan fees of
million for 2022, 2021, and 2020.
Average balances for loans include the principal balance of nonaccrual loans
(7) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees, and costs.
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Table 5 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 5 - Total Company Volume/Rate Variance Analysis
Year Ended December 31, 2022 Year Ended December 31, 2021
Compared to Compared to
Year Ended December 31, 2021 Year Ended December 31, 2020
Total Net Increase / (Decrease) Due to Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ 10,262 $ (102) $ 10,364 $ 197 $ 947 $ (750)
Investment securities, including
FHLB stock 4,033 1,799 2,234 (2,597) (486) (2,111)
TRS Refund Advance loans 1,279 922 357 (6,469) (6,310) (159)
RCS LOC products 7,973 7,844 129 823 401 422
Other RPG loans (247) (615) 368 (110) 89 (199)
Outstanding Warehouse lines of
credit (5,818) (9,510) 3,692 (4,030) (2,416) (1,614)
Paycheck Protection Program loans (18,645) (19,200)
555 7,851 (4,172) 12,023 All other Core Bank loans 16,941 11,694 5,247 (19,517) (4,597) (14,920) Net change in interest income 15,778 (7,168) 22,946 (23,852) (16,544) (7,308) Interest expense: Transaction accounts 1,613 29 1,584 (840) 222 (1,062) Money market accounts 1,615 (3) 1,618 (1,545) 111 (1,656) Time deposits (989) (679) (310) (4,243) (1,665) (2,578) Reciprocal money market and time deposits (497) (460) (37) (1,132) (270) (862) Brokered deposits (24) (24) - (2,290) (1,093) (1,197) SSUARs and other short-term borrowings 334 10 324 (114) 20 (134) Federal Reserve PPP Liquidity Facility - - - (153) (153) -
Federal Home Loan Bank advances 282 (20) 302 (3,467) (1,710) (1,757) Subordinated note (507) (507) - (493) (219) (274) Net change in interest expense 1,827 (1,654) 3,481 (14,277) (4,757) (9,520)
Net change in net interest income
55
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Provision
Total Company Provision was a net charge of
net charge of
The following were the most significant components comprising the Company's
Provision by reportable segment:
Traditional Banking segment
The Traditional Banking Provision during 2022 was a net charge of$1.4 million compared to a net credit of$38,000 for 2021. An analysis of the Provision for 2022 compared 2021 follows:
? For 2022, the Traditional Bank Provision primarily reflected the following:
o
upgrade of Substandard and Special Mention loans.
o
tied to general formula reserves for loan growth.
For 2021, there was a minimal net credit to the Traditional Bank Provision,
generally based on an improving economic outlook in conjunction with limited
net charge-offs incurred by the
? life-of-loan reserves during 2020 following the onset of the pandemic. The net
credit recorded during 2021 primarily included nominal ACLL releases for the
residential real estate, CRE, and HELOC portfolios offset by additional reserves for certain Special Mention loans with continued signs of pandemic-related hardship throughDecember 31, 2021 . As a percentage of totalTraditional Bank loans, the Traditional Banking ACLL was 1.32% as ofDecember 31, 2022 compared to 1.41% as ofDecember 31, 2021 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofDecember 31, 2022 . Table 6 - Traditional Bank ACLL to Non-PPP Traditional Bank Loans (Non-GAAP) December 31, 2022 2021 Allowance Allowance (dollars in thousands) Gross Loans Allowance to Loans Gross Loans Allowance to Loans Traditional Bank - GAAP$ 3,855,142 $ 50,709
1.32 %
Less: Paycheck Protection Program
4,980 - 56,014 -
1.32
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in this section of the filing under "Financial Condition" for additional discussion regarding the Provision and the Bank's delinquent, nonperforming, impaired,
and TDR loans. Warehouse Lending segment
Warehouse recorded a net credit of$1.1 million for 2022 compared to a net credit of$281,000 for 2021. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances.Outstanding Warehouse period-end balances decreased$447 million during 2022 compared to a decrease of$112 million during 2021. As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofDecember 31, 2022 , andDecember 31, 2021 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofDecember 31, 2022 . 56 Table of Contents Tax Refund Solutions segment TRS recorded a net charge to the Provision of$10.0 million during 2022 compared to a net charge of$6.7 million for in 2021. Substantially all TRS Provision in both periods was related to its RA product, including the ERA product. TRS recorded a charge to the Provision for RA loans of$10.5 million , or 2.56 % of its$409 million in total RAs and ERAs originated during 2022 compared to a charge to the Provision of$6.7 million , or 2.69% of its$250 million of RAs originated during 2021. The decrease in Provision as a percentage of originations for 2022 was primarily due to a contractual loss guaranty that TRS received from one of its large Tax Providers during 2022 that set a percentage ceiling on losses for RAs originated through this provider. Through this provider, TRS originated$172 million of RAs during 2022. The net benefit to the TRS Provision for this loan loss guaranty arrangement during 2022 was approximately$516,000 . See additional detail regarding the RA and ERA products under Footnote 4 "Loans and Allowance for Credit Losses" of Part II Item 8 "Financial Statements and Supplemental Data."
Republic
RCS recorded a net charge to the Provision of$12.1 million during 2022 compared to a net charge to the Provision of$8.4 million for 2021. The increase in the Provision was driven primarily by a$5.9 million increase in net charge-offs on RCS's line-of-credit products. Net charge-offs for RCS's LOC I product increased to$7.0 million for 2022 from$3.5 million during 2021, with government stimulus programs generally driving down usage of this product during 2021. Net charge-offs for RCS'sLOC II product were$3.2 million for 2022 compared to$840,000 of net charge-offs during 2021. The lower level of charge-offs for the LOC II product during 2021 were attributable to the relatively low level of originations during the year, as the product was launched during 2021 and remained in a pilot phase for much of the year. 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 13.73% as ofDecember 31, 2022 and 13.91% as ofDecember 31, 2021 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as ofDecember 31, 2022 .
The following table presents RCS Provision by product:
Table 7 - RCS Provision by Product
Percent
Increase/(Decrease)
Years Ended December 31 ,
(in thousands) 2022 2021 2020 2022/2021 2021/2020
Product:
Lines of credit $ 12,050 $ 8,509 $ 1,178 42 % 622 %
Hospital receivables 31 (65) 41 (148) (259)
Total $ 12,081 $ 8,444 $ 1,219 43 593
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Noninterest Income
Table 8 - Analysis of Noninterest Income
Percent Increase/(Decrease)
Years Ended
2020 2022/2021 2021/2020
Service charges on deposit accounts$ 13,426 $ 12,553 $ 11,615 7 % 8 % Net refund transfer fees 17,080 20,248 20,297 (16) - Mortgage banking income 6,196 19,994 31,847 (69) (37) Interchange fee income 13,125 13,062 11,188 - 17 Program fees 16,172 14,237 7,095 14 101 Increase in cash surrender value of bank owned life insurance 2,526 2,242 1,585 13 41 Death benefits in excess of cash surrender value of life insurance - 979 - (100) NM Net losses on other real estate owned (211) (160) (40) (32) (300) Contract termination fee 5,000 - - NM NM Legal settlement 13,000 Other 3,496 3,420 3,466 2 (1) Total noninterest income$ 89,810 $ 86,575 $ 87,053 4 (1) NM - Not meaningful
The following were the most significant components comprising the total
Company's noninterest income by reportable segment:
Traditional Banking segment
Traditional Banking's noninterest income increased$156,000 , or less than 1%, over 2021, driven primarily by a$882,000 increase in Service Charges on Deposit Accounts offset by a$399,000 nonrecurring gain on sale of a former banking center recorded during 2021. The Bank earns a substantial majority of its fee income related to its overdraft service. The total per item fees, net of refunds, included in service charges on deposits for 2022 and 2021 were$6.8 million and$5.6 million . The total daily overdraft charges, net of refunds, included in interest income for 2022 and 2021 were$1.3 million and$1.1 million . The year-over-year growth in these overdraft related fees were generally due to a full year of more normal economic activity during 2022 as opposed to 2021, which had less activity due to some continuing COVID restrictions. Mortgage Banking segment 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$20.0 million during 2021 to$6.2 million for 2022. For 2022, the Bank recorded proceeds of$238 million for its loans sold into the secondary market and achieved an average cash-gain-as-a-percent-of-loans-sold during the year of 3.01%. During 2021, however, long-term interest rates were closer to historical lows, driving secondary market loan sales higher with overall proceeds from sale of$718 million and comparable cash-gain-as-a-percent-of-loans-sold of 3.22%.
With the
program during 2023, management believes it is likely that the
mortgage origination volume will continue to be negatively impacted by higher
interest rates combined with a potential economic slow-down within the US
economy.
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Tax Refund Solutions segment
TRS's noninterest income increased$14.7 million , or 62%, over 2021. Green Dot paid RB&T a total of$18 million in nonrecurring payments during 2022 related to the now-cancelled TRS Purchase Agreement. These nonrecurring payments included the following:
A contract termination fee of
? Green Dot a notice of termination of the
the sale of substantially all of RB&T's TRS assets and operations to Green Dot.
? A legal settlement of
against Green Dot.
Regarding TRS's RT product, net RT revenue decreased 16% from$20.2 million during 2021 to$17.1 million during 2022. The decrease was primarily driven by an 3% overall decrease in RT volume from the 2021 to the 2022 tax season, with a substantial portion of that decrease driven by the loss of one of TRS's tax providers following the announcement of the now-cancelledMay 2021 Asset Purchase Agreement.
For factors affecting the comparison of the TRS results of operations for 2022
and 2021, see section titled "OVERVIEW - Tax Refund Solutions."
Republic
RCS's noninterest income increased$2.2 million , or 20%, 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 2021 by federal government stimulus programs implemented to combat the economic impact of the COVID pandemic. RPG program fees resulting from the sale of RCS loan products totaled$13.3 million during 2022, a 20% increase over 2021.
The following table presents RCS program fees by product:
Table 9 - RCS Program Fees by Product
Percent
Increase/(Decrease)
Years Ended December 31, (in thousands) 2022 2021 2020
2022/2021 2021/2020 Product: Lines of credit$ 6,406 $ 5,049 $ 3,119 27 % 62 % Hospital receivables 178 268 102 (34) 163 Installment loans* 6,716 5,749 1,681 17 242 Total$ 13,300 $ 11,066 $ 4,902 20 126
*The Company has elected the fair value option for this product, with
mark-to-market adjustments recorded as a component of program fees.
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Noninterest Expense
Table 10 - Analysis of Noninterest Expense
Percent Increase/(Decrease)
Years Ended
2020 2022/2021 2021/2020
Salaries and employee benefits$ 111,240 $ 110,088 $ 106,166 1 % 4 % Technology, equipment, and communication 28,954 29,351
29,128 (1) 1 Occupancy 13,014 13,193 13,438 (1) (2) Marketing and development 6,875 4,390 4,031 57 9 FDIC insurance expense 1,668 1,591 1,010 5 58
State bank franchise tax expense - -
5,369 - (100) Interchange related expense 4,773 4,960 4,303 (4) 15 Legal and professional fees 4,024 4,924 4,244 (18) 16
FHLB advances early termination penalties - -
2,108 NM NM Other 16,760 14,568 15,660 15 (7) Total noninterest expense$ 187,308 $ 183,065 $ 185,457 2 (1)
Total Company noninterest expense increased$4.2 million , or 2%, over 2021.
The following were the most significant components comprising the increase in
noninterest expense by reportable segment:
Traditional Banking segment
Traditional Banking noninterest expense increased
following primarily drove the change in noninterest expense:
? Other noninterest expense increased by
fluctuations within the Other noninterest expense category were as follows:
o Net losses related to client disputes for unauthorized checks as well as
unauthorized debit and credit card transactions increased
Meals, Entertainment, and Travel expenses increased
o community outreach and business-related travel increasing to nearer
pre-pandemic levels in combination with inflationary pressures on these costs.
o Freight, postage and supplies expense increased
negatively impacted by additional usage and inflation-related cost increases.
Provision for losses on off-balance sheet commitments increased
o primarily by an increase in the Bank's committed but unused lines of credit
during the previous 12 months.
o The remaining increase was spread over several miscellaneous accounts, with
these expenses rising back closer to pre-pandemic levels.
Salaries and Benefits expense increased a net
million for 2022. The most notable change within Salaries and Benefits was
? estimated bonus expense, which increased
expected bonus payouts for 2022 are expected to increase from those paid out
for 2021. Mortgage Banking segment Noninterest expense at the Mortgage Banking segment decreased$2.4 million , or 20%, from 2021, primarily due to a$3.3 million reduction in mortgage commissions partially offset by a$2.2 million reduction in credits to deferred salary expense. The decrease in mortgage commissions was directly attributable to the previously discussed significant decline in secondary market loan volume from 2021 to 2022. 60 Table of Contents The Company records a credit offset to salary expense for each loan it originates and recognizes the cost of that credit as an adjustment to the loan's yield over its estimated life. The amount of credit benefit to salary expense during a given year is determined by the overall loan origination volume during that year. With the dramatic decrease in mortgage origination volume during 2022, the overall credit benefit recognized by the Mortgage Banking segment during 2022 decreased substantially as compared to 2021 when mortgage origination volume was much higher. In addition to the change in salary expenses noted in the previous paragraph, the Mortgage Banking segment also experienced a year-to-year decrease of$350,000 in marketing expenses as the rapid rise in interest rates made the fixed-rate secondary market product a less attractive alternative for clients seeking mortgage loans. The remaining decline in noninterest expense was related to a reduction in general overhead expenses allocated to the business segment as a result of the decrease in new loan origination volume.
Republic
Noninterest expense at the RCS segment increased
2021, primarily due to increased marketing of RCS's
product was first piloted during the first quarter of 2021.
FINANCIAL CONDITION
Cash and Cash Equivalents
Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. For cash held at the FRB, the Bank earns a yield on amounts exceeding required reserves. This cash earned a weighted-average yield of 1.54% during 2022 with a spot balance yield of 4.40% onDecember 31, 2022 . For cash held within the Bank's banking center and ATM networks, the Bank does not earn interest. Republic had$314 million in cash and cash equivalents as ofDecember 31, 2022 compared to$757 million as ofDecember 31, 2021 . Period-end cash balances did decrease fromDecember 31, 2021 toDecember 31, 2022 due in part to cash utilized to fund$98 million of ERAs originated during December of 2022 and also due to a$301 million decline in customer deposit balances during the year. While the Company deployed a portion of its excess cash into the purchase of long-term investment securities during the fourth quarter of 2021 and periodically throughout 2022, it maintained a general strategy of keeping a large amount of interest earning cash on balance sheet for interest rate risk protection. As a result, Republic's average interest-earning cash and cash equivalent balances were$738 million during 2022 compared to$807 million for 2021. This strategy significantly benefitted theTraditional Bank's net interest income during the year as theFOMC began raising the FFTR during 2022.
The Company's Captive maintains cash reserves to cover insurable claims. Captive
cash reserves totaled approximately
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Investment Securities
Table 11 - Investment Securities Portfolio
December 31, (in thousands) 2022 2021
2020
Available-for-sale debt securities (fair value):U.S. Treasury securities andU.S. Government agencies$ 411,141 $ 237,459 $ 246,909 Private label mortgage-backed security 2,127 2,731
2,957
Mortgage-backed securities - residential 171,873 210,749
211,202
Collateralized mortgage obligations 21,368 30,294
48,952 Corporate bonds 10,001 10,046 10,043 Trust preferred security 3,855 3,847 3,800
Total available-for-sale debt securities 620,365 495,126
523,863
Held-to-maturity debt securities (carrying value):U.S. Treasury securities andU.S. Government agencies 75,000 -
-
Mortgage backed securities - residential 27 46
99
Collateralized mortgage obligations 7,270 9,080
13,061
Corporate bonds 4,964 34,928
39,808
Obligations of state and political subdivisions 125 245
356
Total held-to-maturity debt securities 87,386 44,299
53,324
Equity securities with a readily determinable fair value (fair value): Freddie Mac preferred stock 111 170
560
Community Reinvestment Act mutual fund - 2,450
2,523
Total equity securities with a readily determinable fair value 111 2,620
3,083
Total investment securities$ 707,862 $ 542,045
AFS debt securities primarily consists ofU.S. Treasury securities andU.S. Government agency obligations, including agency MBS and agency CMOs. The agency MBSs primarily consist of hybrid mortgage investment securities, as well as other adjustable rate mortgage investment securities, underwritten and guaranteed by the GNMA, the FHLMC and theFNMA . Agency CMOs held in the investment portfolio are substantially all floating rate securities that adjust monthly. The Bank uses a portion of the investment securities portfolio as collateral to Bank clients for SSUARs. The remaining eligible securities that are not pledged to secure client SSUARs may be pledged to the FHLB as collateral for the Bank's borrowing line. During 2022, the Bank purchased$330 million in investment debt securities, allocated among$30 million in MBSs,$160 million inU.S. Treasuries, and$140 million inU.S. government agencies. Of theU.S. Treasuries that were purchased during the year,$75 million of these securities were designated as HTM at their time of purchase. The mortgage-backed securities that were purchased had an expected weighted-average yield of approximately 1.30% and a weighted-average maturity at purchase of 9.0 years. TheU.S. Treasuries had an expected weighted-average yield of approximately 2.03% and a weighted-average life at purchase of 1.6 years. TheU.S. Government agencies purchased had an expected weighted-average yield of approximately 4.70% and a weighted-average life of 2.0 years. Strategies for the investment securities portfolio are influenced by economic and market conditions, loan demand, deposit mix, and liquidity needs. Since early 2020, the Bank has utilized a general investing strategy of purchasing securities with shorter-term durations or maintaining a large amount cash at theFederal Reserve . The Bank utilized this general strategy due to liquidity reasons and as an interest rate risk management tool, as management did not believe that extending the duration of a significant amount of the Company's cash into longer investment terms was worth the interest rate risk given the historically low level of long-term interest rates at that time. This strategy could change in 2023 depending upon several 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 Company's overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term. During 2019, one of the Company's floating rate corporate bonds with a current carrying amount of$10 million was downgraded to BBB+ (S&P/Fitch), driving a significant decrease in the bond's market value at that time. As ofDecember 31, 2022 , this bond had recovered its lost value and reflected an unrealized gain of$1,000 . 62 Table of Contents
Table 12 -
Weighted
Weighted Average
Amortized Fair
Average Maturity in
U.S. Treasury securities andU.S. Government agencies: Due in one year or less$ 31,789 $ 31,432 1.10 % 0.25 Due from one year to five years 404,544 379,709 1.81 2.29 Due from five years to 10 years - - - - TotalU.S. Treasury securities andU.S. Government agencies 436,333 411,141 1.75 2.14 Corporate bonds: Due in one year or less 10,000 10,001 5.08 0.29 Total Corporate bonds 10,000 10,001 5.08 0.29 Trust preferred security, due beyond ten years 3,741 3,855 5.48 14.43 Private label mortgage backed security 843 2,127 7.96 10.63 Total mortgage backed securities - residential 189,312 171,873 1.89 10.94 Total collateralized mortgage obligations 22,774 21,368 1.60 17.48 Total available-for-sale debt securities$ 663,003 $ 620,365 1.89 5.24
Table 13 -
Weighted
Weighted Average
Carrying Fair
Average Maturity in
U.S. Treasury securities andU.S. Government agencies: Due from one year or less$ 75,000 $ 75,106 5.17 1.91 TotalU.S. Treasury securities andU.S. Government agencies 75,000 75,106 5.17 1.91 Corporate bonds: Due from one year to five years$ 4,974 $ 4,925 5.56 % 3.10 Total corporate bonds 4,974 4,925 5.56 3.10 Obligations of state and political subdivisions: Due from one year or less 125 124 1.90 0.58 Due from one year to five years - - - - Total obligations of state and political subdivisions 125 124 1.90 0.58 Total mortgage backed securities - residential 27 26 4.37 11.59 Total collateralized mortgage obligations 7,270 7,176 1.29 17.09 Total held-to-maturity debt securities$ 87,396 $ 87,357 4.86 3.24 See Footnote 2 "Investment Securities " of Part II Item 8 "Financial Statements and Supplementary Data" for further information regarding the Bank's investment securities. 63 Table of Contents Loan Portfolio
Table 14 - Loan Portfolio Composition
December 31, (in thousands) 2022 2021 2020 Traditional Banking: Residential real estate: Owner occupied$ 911,427 $ 820,731 $ 879,800 Nonowner occupied 321,358 306,323 264,780 Commercial real estate 1,599,510 1,456,009 1,349,085
Construction & land development 153,875 129,337
98,674 Commercial & industrial 408,407 340,363 325,596 Paycheck Protection Program 4,980 56,014 392,319 Lease financing receivables 10,505 8,637 10,130 Aircraft 179,785 142,894 101,375 Home equity 241,739 210,578 240,640 Consumer: Credit cards 15,473 14,510 14,196 Overdrafts 726 683 587 Automobile loans 6,731 14,448 30,300 Other consumer 626 1,432 8,167 Total Traditional Banking 3,855,142 3,501,959 3,715,649 Warehouse lines of credit* 403,560 850,550 962,796 Total Core Banking 4,258,702 4,352,509 4,678,445 Republic Processing Group*: Tax Refund Solutions: Refund Advances 97,505 - -
Other TRS commercial & industrial loans 51,767 50,987
23,765
Republic Credit Solutions 107,828 93,066
110,893
Total Republic Processing Group 257,100 144,053
134,658 Total loans** 4,515,802 4,496,562 4,813,103 Allowance for credit losses (70,413) (64,577) (61,067) Total loans, net$ 4,445,389 $ 4,431,985 $ 4,752,036
* Identifies loans to borrowers located primarily outside of the Bank's market
footprint.
** Total loans are presented inclusive of premiums, discounts and net loan
origination fees and costs.
Gross loans increased by
31, 2022
reportable segment follow:
Traditional Banking segment
Period-end balances for Traditional Banking loans increased$353 million , or 10%, fromDecember 31, 2021 toDecember 31, 2022 . The following primarily drove the change in loan balances during 2022:
CRE loans grew
? during 2022, as the
lines, as well as itsNorthern Kentucky /Cincinnati andFlorida markets. 64 Table of Contents
With mortgage refinance volume at all-time record levels during 2020 and 2021,
balances of 1-4 family loans, including HELOCs, generally declined as the vast
majority of the volume of refinancings was sold into the secondary market. This
? trend began to change in 2022, however, as a significant rise in long-term,
fixed-rate mortgages caused portfolio level ARM loans to become generally more
attractive than secondary market loans. As a result, residential real estate
loans increased
during the same period.
Offsetting the growth above, during 2022, the
? decreased
down. Warehouse Lending segmentOutstanding Warehouse period-end balances decreased$447 million fromDecember 31, 2021 toDecember 31, 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 theBank'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 theBank's Warehouse lines have ranged from a low of 39% during 2022 to a high of 66% during 2020. As previously discussed, additional increases 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.
Tax Refund Solutions segment
Outstanding TRS loans increased$99 million fromDecember 31, 2021 toDecember 31, 2022 primarily reflecting the impact of$98 million of ERAs originated during the fourth quarter of 2022 through a new third party Tax Provider contract. Conversely, no ERAs were originated during the fourth quarter of 2021. In addition, other TRS loans increased$1 million fromDecember 31, 2021 toDecember 31, 2022 . Other TRS loans primarily represent commercial-related loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid byJune 30th of the following year.
Republic
Outstanding RCS loans increased$15 million during 2022 reflecting a$12 million increase in hospital receivables and a$3 million increase in outstanding balances for RCS's line-of-credit products. The increase in balances for RCS's line-of-credit product was the direct result of additional marketing of the
products during 2022.
65
Table of Contents
The table below illustrates the Bank's fixed and variable rate loan maturities:
Table 15 - Selected Loan Distribution
Over One
Over Five
One Year Through Through Over
December 31, 2022 (in thousands) Total Or Less Five Years
15 Years 15 Years Fixed rate loan maturities: Residential real estate$ 618,577 $ 19,402 $ 32,740 $ 252,817 $ 313,618 Commercial real estate 717,325 13,739 169,697 533,067 822 Construction & land development 57,797 17,886 22,148 14,636 3,127 Commercial & industrial 245,217 62,804 113,290 69,123 - Paycheck Protection Program 4,980 202 4,778 - - Lease financing receivables 10,505 316 10,189 - - Aircraft 179,785 - 1,528 36,949 141,308 Warehouse lines of credit - - - - - Home equity 1,070 - 1,025 45 - Consumer 161,635 154,788 6,633 147 67 Total fixed rate loans$ 1,996,891 $ 269,137 $ 362,028 $ 906,784 $ 458,942
Variable rate loan maturities:
Residential real estate$ 614,208 $ 2,000 $ 26,194 $ 174,741 $ 411,273 Commercial real estate 882,185 31,878 141,711 689,862 18,734 Construction & land development 96,078 13,983 4,805 77,184 106 Commercial & industrial 214,957 77,484 96,738 20,735 20,000 Paycheck Protection Program - - - - - Lease financing receivables - - - - - Aircraft - - - - - Warehouse lines of credit 403,560 403,560 - - - Home equity 240,669 14,894 61,444 164,331 - Consumer 67,254 15,473 8 - 51,773 Total variable rate loans$ 2,518,911 $ 559,272 $
330,900$ 1,126,853 $ 501,886 Total: Residential real estate$ 1,232,785 $ 21,402 $ 58,934 $ 427,558 $ 724,891 Commercial real estate 1,599,510 45,617 311,408 1,222,929 19,556 Construction & land development 153,875 31,869 26,953 91,820 3,233 Commercial & industrial 460,174 140,288 210,028 89,858 20,000 Paycheck Protection Program 4,980 202 4,778 - - Lease financing receivables 10,505 316 10,189 - - Aircraft 179,785 - 1,528 36,949 141,308 Warehouse lines of credit 403,560 403,560 - - - Home equity 241,739 14,894 62,469 164,376 - Consumer 228,889 170,261 6,641 147 51,840 Total loans$ 4,515,802 $ 828,409 $ 692,928 $ 2,033,637 $ 960,828 Loans at maturity interval to overall total loans 100 % 19 % 15 % 45 % 21 %
Allowance for Credit Losses
As ofDecember 31, 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 increased$5.8 million from$64.6 million as ofDecember 31, 2021 to$70.4 million as ofDecember 31, 2022 . As a percent of total loans, the total Company's ACLL increased to 1.56% as ofDecember 31, 2022 compared to 1.44% as ofDecember 31, 2021 . An analysis of the ACL by reportable segment
follows:
66
Table of Contents
Traditional Banking segment
The Traditional Banking ACLL increased approximately$1.3 million to$50.7 million as ofDecember 31, 2022 driven primarily by formula reserves tied to loan growth during 2022, partially offset by reserves released following the payoff or upgrade of loans graded Substandard or Special Mention.
Warehouse Lending segment
The Warehouse ACLL decreased to approximately$1.0 million , and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparingDecember 31, 2022 toDecember 31, 2021 . As ofDecember 31, 2022 , the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for 2021.
Tax Refund Solutions segment
The TRS ACLL increased to approximately$3.9 million as ofDecember 31, 2022 compared to$944,000 as ofDecember 31, 2021 . The increased ACLL was primarily driven by estimated loss reserves for$98 million of ERAs outstanding as ofDecember 31, 2022 . These ERAs were originated during the fourth quarter of 2022 through a new third party Tax Provider contract and are expected to be repaid from tax refunds generated by tax returns filed during the first quarter 2023 filing season. In contrast there were no ERAs outstanding as ofDecember 31, 2021
Republic
The RCS ACLL increased
to
RCS maintained an ACLL for two distinct credit products offered as ofDecember 31, 2022 , including its line-of-credit products and its healthcare-receivables products. As ofDecember 31, 2022 , the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 48.91% for its LOC I product and 54.85% for itsLOC II product. The lower reserve percentage of 0.25% was provided for RCS's healthcare receivables, as such receivables have recourse back to the third-party providers. For additional discussion regarding Republic's methodology for determining the adequacy of the ACLL, see the section titled "Critical Accounting Policies and Estimates" in this section of the filing.
See additional detail regarding Republic Credit Solution's loan products under
Item 1 "Business."
67
Table of Contents
Table 16 - Summary of Loan and Lease Loss Experience
Years EndedDecember 31 , (dollars in thousands) 2022 2021 2020 ACLL at beginning of period$ 64,577 $ 61,067 $ 43,351 Adoption of ASC 326 - - 6,734 Charge-offs: Traditional Banking: Residential real estate (21) - (169) Commercial real estate (9) (428) (795) Commercial & industrial - (86) (310) Home equity - (51) (14) Consumer (1,290) (895) (1,481) Total Traditional Banking (1,320) (1,460) (2,769) Warehouse lines of credit - - - Total Core Banking (1,320) (1,460) (2,769)Republic Processing Group : Tax Refund Solutions: Refund Advances (11,505) (10,256) (19,575) Other TRS loans (154) (51) (234) Republic Credit Solutions (11,390) (4,707) (6,163)
Total Republic Processing Group (23,049) (15,014)
(25,972) Total charge-offs (24,369) (16,474) (28,741) Recoveries: Traditional Banking: Residential real estate 104 396 182 Commercial real estate 287 82 472 Commercial & industrial 271 76 122 Home equity 121 46 115 Consumer 373 475 508 Total Traditional Banking 1,156 1,075 1,399 Warehouse lines of credit - - - Total Core Banking 1,156 1,075 1,399Republic Processing Group : Tax Refund Solutions: Refund Advances 4,831 3,533 6,542
Other TRS commercial & industrial loans 665 29
2
Republic Credit Solutions 1,168 408
629
Total Republic Processing Group 6,664 3,970
7,173 Total recoveries 7,820 5,045 8,572
Net loan recoveries (charge-offs) (16,549) (11,429)
(20,169) Provision - Core Banking 349 (188) 16,743 Provision - RPG 22,036 15,127 14,408 Total Provision 22,385 14,939 31,151 ACLL at end of period$ 70,413 $ 64,577 $ 61,067
Credit Quality Ratios -
ACLL to total loans 1.56 % 1.44 % 1.27 % ACLL to nonperforming loans 432 314
259
Net loan charge-offs (recoveries) to average loans 0.38 0.25
0.42
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.21 % 1.18 % 1.11 % ACLL to nonperforming loans 332 251
221
Net loan charge-offs (recoveries) to average
loans 0.00 0.01 0.03
68
Table of Contents
Table 17 - Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category
Net Loan Charge-Offs (Recoveries) to Average Loans
Years Ended December 31 , (dollars
in thousands) 2022 2021 2020
Traditional Banking:
Residential real estate:
Owner occupied (0.01) % (0.04) % - %
Nonowner occupied - - -
Commercial real estate (0.02) 0.03 0.02
Construction & land development -
- - Commercial & industrial (0.07) - 0.05 Paycheck Protection Program - - - Lease financing receivables - - - Aircraft - - - Home equity (0.06) - (0.04) Consumer: Credit cards 0.48 0.65 1.46 Overdrafts 104.04 51.69 93.94 Automobile loans (0.14) (0.10) 0.08 Other consumer 1.02 0.27 0.58 Total Traditional Banking - 0.01 0.04 Warehouse lines of credit - - - Total Core Banking - 0.01 0.03Republic Processing Group : Tax Refund Solutions: Refund Advances* 26.78 26.58 33.55 Other TRS commercial & industrial loans (3.18) 0.19 2.32 Republic Credit Solutions 10.73 3.93 5.35Total Republic Processing Group 12.02
7.42 12.20 Total 0.38 0.25 0.42 * Refund advances are originated during the first two months of each year, and beginning inDecember 2022 , ERAs for the upcoming first quarter tax season are originated during the fourth quarter of the year. All RAs, including ERAs, are charged-off byJune 30th of each year. The Company's net charge-offs to average total Company loans increased from 0.25% during 2021 to 0.38% during 2022, with net charge-offs increasing$5.1 million and average total Company loans decreasing$180 million , or 4%. The increase in net charge-offs was primarily driven by a$5.3 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 2021 to 2022, RPG experienced a$5.9 million increase in net charge-offs within its RCS segment. Net charge-offs for RCS's LOC I product increased to$7.0 million for 2022 from$3.5 million for 2021, with government stimulus programs generally driving down usage of this product during 2021. Net charge-offs for RCS'sLOC II product were$3.2 million for 2022 compared to$840,000 of net charge-offs during 2021. The LOC II product was launched inJanuary 2021 and remained in a pilot phase for much of 2021 leading to a lower level of originations during 2021, and as a result, a lower level of charge-offs for the year. From 2021 to 2022, RPG experienced a$582,000 decrease in net charge-offs within its TRS segment, as TRS amended one of its existing Tax Provider contracts to place a ceiling on loan losses for RAs originated through this Tax Provider. For factors affecting the comparison of the TRS results of operations for 2022 and 2021, see section titled "OVERVIEW - Tax Refund Solutions."
During 2022 and 2021, the Company's
Bank
69
Table of Contents
The following table sets forth management's allocation of the ACLL by loan class. The ACLL allocation is based on management's assessment of economic conditions, historical loss experience, forecasting for unemployment and vacancy rates, and various other life-of-loan and forecast considerations, as well as, qualitative factors. Additionally, management began including life-of-loan and forecast considerations into its ACLL allocation upon adoption of the CECL method onJanuary 1, 2020 . Since these factors and management's assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance or future ACLL allocation. Table 18 - Management's Allocation of the Allowance for Credit Losses on Loans 2022 2021 2020 Percent of Percent of Percent of Percent of Percent of Percent of Loans to ACLL to Loans to ACLL to Loans to ACLL to Total Total Total Total Total Total
December 31, (in thousands) ACLL Loans* Loan
Class ACLL Loans* Loan Class* ACLL Loans*
Loan Class* Traditional Banking: Residential real estate: Owner occupied$ 8,909 21 % 0.98 %$ 8,647 19 % 1.05 %$ 9,715 19 % 1.10 % Nonowner occupied 2,831 7 0.88 2,700 7 0.88 2,466 6 0.93 Commercial real estate 23,739 36 1.48 23,769 32 1.63 23,606 28 1.75 Construction & land development 4,123 3 2.68 4,128 3 3.19 3,274 2 3.32 Commercial & industrial 3,976 9 0.97 3,487 8 1.02 2,797 7 0.86
Paycheck Protection Program - - - - 1 - - 8
-
Lease financing receivables 110 - 1.05 91 - 1.05 106 - 1.05 Aircraft 449 4 0.25 357 3 0.25 253 2 0.25 Home equity 4,628 5 1.91 4,111 5 1.95 4,990 5 2.07 Consumer: Credit cards 996 - 6.44 934 - 6.44 929 - 6.54 Overdrafts 726 - 100.00 683 - 100.00 587 - 100.00 Automobile loans 87 - 1.29 186 - 1.29 399 1 1.32 Other consumer 135 - 21.57 314 - 21.93 577 - 7.07 Total Traditional Banking 50,709 85 1.32 49,407 78 1.41 49,699 78
1.34
Warehouse lines of credit 1,009 9 0.25 2,126 19 0.25 2,407 20 0.25 Total Core Banking 51,718 94 1.21 51,533 97 1.18 52,106 98 1.11Republic Processing Group : Tax Refund Solutions: Refund Advances 3,797 2 4 - - - - -
-
Other TRS commercial & industrial loans 91 1 0.18 96 1 0.19 158 - 0.66 Republic Credit Solutions 14,807 3 13.73 12,948 2 13.91 8,803 2 7.94Total Republic Processing Group 18,695 6 7.27 13,044 3 9.06 8,961 2 6.65 Total$ 70,413 100 1.56$ 64,577 100 1.44$ 61,067 100 1.27
*See Table 14 in this section of the filing for loan portfolio balances. Values
of less than 50 basis points are rounded down to zero.
Management believes, based on information presently available, that it has
adequately provided for loan and lease credit losses as of
For additional discussion regarding Republic's methodology for determining the
adequacy of the ACLL, see the section titled "Critical Accounting Policies and
Estimates" in this section of the filing.
70
Table of Contents
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$50 million during 2022, driven primarily by commercial-purpose loans within the hospitality and leisure industry upgraded during 2022.
See Footnote 4 "Loans and Allowance for Credit Losses" of Part II Item 8
"Financial Statements and Supplementary Data" for additional discussion
regarding Classified and Special Mention loans.
Table 19 - Classified and Special Mention Loans
December 31, (in thousands) 2022 2021 2020 Loss $ - $ - $ - Doubtful - - - Substandard 17,010 21,714 30,193 PCD - Substandard 1,498 1,692 1,887 Total Classified Loans 18,508 23,406 32,080 Special Mention 69,246 114,496 89,206 PCD - Special Mention 718 795 895 Total Special Mention Loans 69,964 115,291 90,101
Total Classified and Special Mention Loans
Nonperforming Loans Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category included TDRs totaling approximately$2 million and$6 million as ofDecember 31, 2022 and 2021. Nonperforming loans to total loans decreased to 0.36% as ofDecember 31, 2022 from 0.46% as ofDecember 31, 2021 , as the total balance of nonperforming loans decreased by$4 million , or 21%, while total loans increased$19 million during 2022. As presented in Tables 23 and 24 below, the decrease in nonperforming loans during 2022, including the nonaccrual loan component, was primarily driven by the pay off and pay down of$8 million of these loans during the year. The ACLL to total nonperforming loans increased to 432% as ofDecember 31, 2022 from 315% as ofDecember 31, 2021 , as the total ACLL increased$6 million , or 9%, and the balance of nonperforming loans decreased by$4 million , or 21%. The driver of the increase in ACLL was primarily growth in higher risk loans originated through the RCS segment, while the driver of the decrease in nonperforming loans was primarily the refinancing out of the Bank of a meaningful portion of these loans during 2022. 71
Table of Contents
Table 20 - Nonperforming Loans and Nonperforming Assets Summary
December 31, (in thousands) 2022 2021 2020 Loans on nonaccrual status*$ 15,562 $ 20,504 $ 23,548 Loans past due 90-days-or-more and still on accrual** 756 48 47 Total nonperforming loans 16,318 20,552 23,595 Other real estate owned 1,581 1,792 2,499 Total nonperforming assets$ 17,899 $ 22,344 $ 26,094 Credit Quality Ratios -Total Company : ACLL to total loans 1.56 % 1.44 % 1.27 % Nonaccrual loans to total loans 0.34 0.46
0.49
ACLL to nonaccrual loans 452 315
259
Nonperforming loans to total loans 0.36 0.46
0.49
Nonperforming assets to total loans (including OREO) 0.40 0.50
0.54
Nonperforming assets to total assets 0.31 0.37
0.42
Credit Quality Ratios -Core Bank : ACLL to total loans 1.21 % 1.18 % 1.11 % Nonaccrual loans to total loans 0.37 0.47
0.50
ACLL to nonaccrual loans 332 251
221
Nonperforming loans to total loans 0.37 0.47
0.50
Nonperforming assets to total loans (including OREO) 0.40 0.51
0.56
Nonperforming assets to total assets 0.32 0.40
0.45
* Loans on nonaccrual status include collateral-dependent loans. See Footnote 4
"Loans and Allowance for Credit Losses" of Part II Item 8 "Financial Statements
and Supplementary Data" for the components within the nonaccrual loans to total
loans and ACLL to nonaccrual loans ratios, as well as additional discussion
regarding nonaccrual loans and collateral-dependent loans.
** Loans past due 90-days-or-more and still accruing consist of smaller-balance
consumer loans.
72
Table of Contents
Table 21 - Nonperforming Loan Composition
2022 2021 2020
Percent of Percent of Percent of
Total Total Total
December 31, (in thousands) Balance Loan Class Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 13,388 1.47 % $ 12,039 1.47 % $ 14,328 1.63 %
Nonowner occupied 117 0.04 95 0.03 81 0.03
Commercial real estate 1,001 0.06 6,557 0.45 6,762 0.50
Construction & land development - - -
- - - Commercial & industrial - - 13 0.00 55 0.02 Paycheck Protection Program - - - - - - Lease financing receivables - - - - - - Aircraft - - - - - - Home equity 815 0.34 1,700 0.81 2,141 0.89 Consumer: Credit cards - - - - 5 0.04 Overdrafts - - 1 0.15 - - Automobile loans 31 0.46 97 0.67 170 0.56 Other consumer 210 33.55 3 0.21 11 0.13 Total Traditional Banking 15,562 0.40 20,505 0.59 23,553 0.63 Warehouse lines of credit - - - - - - Total Core Banking 15,562 0.37 20,505 0.47 23,553 0.50Republic Processing Group : Tax Refund Solutions: Refund Advances - - - - - - Other TRS commercial & industrial loans - - - - - - Republic Credit Solutions 756 0.70 47 0.05 42 0.04
Total Republic Processing Group 756 0.29 47
0.03 42 0.03 Total nonperforming loans$ 16,318 0.36$ 20,552 0.46$ 23,595 0.49 73 Table of Contents
Table 22 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance December 31, 2022 Balance >$100 & Balance Total (dollars in thousands) No. <=$100 No. <=$500 No. >$500 No. Balance Traditional Banking: Residential real estate: Owner occupied 134$ 4,650 45$ 7,353 1$ 1,385 180$ 13,388 Nonowner occupied 4 117 - - - - 4 117 Commercial real estate - - 1 232 1 769 2 1,001 Construction & land development - - - - - - - - Commercial & industrial - - - - - - - -
Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - - Aircraft - - - - - - - - Home equity 28 711 1 104 - - 29 815 Consumer: Credit cards - - - - - - - - Overdrafts NM - - - - - NM - Automobile loans 6 31 - - - - 6 31 Other consumer - - 1 210 - - 1 210
Total Traditional Banking 172 5,509 48 7,899 2 2,154 222 15,562 Warehouse lines of credit - - - - - - - - Total Core Banking 172 5,509 48 7,899
2 2,154 222 15,562
Republic Processing Group : Tax Refund Solutions: Refund Advances - - - - - - - - Other TRS commercial & industrial loans - - - - - - - -
Republic Credit Solutions NM - - - - 756 NM 756 Total Republic Processing Group NM - - - - 756 NM 756 Total 172$ 5,509 48$ 7,899 2$ 2,910 222$ 16,318
NM - Not meaningful. Loans from
dollar homogenous consumer loans.
Number of Nonperforming
Loans and
Balance December 31, 2021 Balance >$100 & Balance Total (dollars in thousands) No. <=$100 No. <=$500 No. >$500 No. Balance Traditional Banking: Residential real estate: Owner occupied 146$ 5,042 27$ 4,857 2$ 2,140 175$ 12,039 Nonowner occupied 3 95 - - - - 3 95 Commercial real estate - - 4 872 3 5,685 7 6,557 Construction & land development - - - - - - - - Commercial & industrial 1 13 - - - - 1 13
Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - - Aircraft - - - - - - - - Home equity 25 695 5 1,005 - - 30 1,700 Consumer: Credit cards - - - - - - - - Overdrafts NM 1 - - - - NM 1 Automobile loans 13 97 - - - - 13 97 Other consumer 4 3 - - - - 4 3
Total Traditional Banking 192 5,946 36 6,734 5 7,825 233 20,505 Warehouse lines of credit - - - - - - - - Total Core Banking 192 5,946 36 6,734
5 7,825 233 20,505
Republic Processing Group : Tax Refund Solutions: Refund Advances - - - - - - - - Other TRS commercial & industrial loans - - - - - - - -
Republic Credit Solutions NM 47 - - - - NM 47 Total Republic Processing Group NM 47 - - - - NM 47 Total 192$ 5,993 36$ 6,734 5$ 7,825 233$ 20,552
NM - Not meaningful. Loans from
dollar homogenous consumer loans.
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Interest income that would have been recorded if nonaccrual loans were on a
current basis in accordance with their original terms was
million
Based on the Bank's review as of
reserves are adequate to absorb expected losses on all nonperforming credits
Table 23 - Rollforward of Nonperforming Loans
Years Ended December 31, (in thousands) 2022 2021
2020
Nonperforming loans at the beginning of the period$ 20,552 $ 23,595 $ 23,489 Loans added to nonperforming status during the period that remained nonperforming at the end of the period 7,076 3,627
8,993
Loans removed from nonperforming status during the period that were nonperforming at the beginning of the period (see table below) (10,934) (5,221)
(7,959)
Principal balance paydowns of loans nonperforming at both period ends (1,084) (1,450)
(817)
Net change in principal balance of other loans nonperforming at both period ends* 708 1
(111)
Nonperforming loans at the end of the period
Table 24 - Detail of Loans Removed from Nonperforming Status
Years Ended December 31, (in thousands) 2022 2021
2020 Loans charged off $ -$ (57) $ (1,142) Loans transferred to OREO - - (2,254) Loan payoffs and paydowns (8,385) (4,884) (4,420)
Loans returned to accrual status (2,549) (280)
(143)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period$ (10,934) $ (5,221) $ (7,959) Delinquent Loans
Delinquent loans to total loans increased to 0.34% as ofDecember 31, 2022 , from 0.30% as ofDecember 31, 2021 , primarily due to a$3 million increase in delinquent RPG loans, partially offset by a$1 million decrease inCore Bank loans.Core Bank delinquent loans to totalCore Bank loans decreased to 0.14% as ofDecember 31, 2022 from 0.17% as ofDecember 31, 2021 . With the exception of small-dollar consumer loans, allTraditional Bank loans past due 90-days-or-more as ofDecember 31, 2022 andDecember 31, 2021 were on nonaccrual status. 75
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Table 25 - Delinquent Loan Composition*
2022 2021 2020
Percent of Percent of Percent of
Total Total Total
December 31 , (dollars in
thousands) Balance Loan Class Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 4,834 0.53 % $ 1,599 0.19 % $ 3,260 0.37 %
Nonowner occupied - - - - - -
Commercial real estate 604 0.04 5,292 0.36 5,457 0.40
Construction & land development - - -
- - - Commercial & industrial 177 0.04 21 0.01 12 0.00 Paycheck Protection Program - - - - - - Lease financing receivables - - - - - - Aircraft - - - - - - Home equity 175 0.07 314 0.15 702 0.29 Consumer: Credit cards 55 0.36 30 0.21 73 0.51 Overdrafts 160 22.04 164 24.01 147 25.04 Automobile loans 11 0.16 9 0.06 56 0.18 Other consumer 44 7.03 1 0.07 6 0.07 Total Traditional Banking 6,060 0.16 7,430 0.21 9,713 0.26 Warehouse lines of credit - - - - - - Total Core Banking 6,060 0.14 7,430 0.17 9,713 0.21Republic Processing Group : Tax Refund Solutions: Refund Advances - - - - - - Other TRS commercial & industrial loans - - - - - - Republic Credit Solutions 9,200 8.53 6,035 6.48 10,234 9.23
Total Republic Processing Group 9,200 3.58 6,035
4.19 10,234 7.60 Total delinquent loans$ 15,260 0.34$ 13,465 0.30$ 19,947 0.41
*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.
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Table 26 - Rollforward of Delinquent Loans
Years Ended December 31, (in thousands) 2022 2021
2020
Delinquent loans at the beginning of the period$ 13,465 $ 19,947 $ 20,804 Loans added to delinquency status during the period and remained in delinquency status at the end of the period 5,507 1,459
6,681
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below) (6,847) (3,559)
(8,617)
Principal balance paydowns of loans delinquent at both period ends (50) (158)
(146)
Net change in principal balance of other loans delinquent at both period ends* 3,185 (4,224)
1,225
Delinquent loans at the end of period$ 15,260 $ 13,465
*Includes small consumer portfolios, e.g., RCS loans.
Table 27 - Detail of Loans Removed from Delinquent Status
Years Ended December 31, (in thousands) 2022 2021
2020
Loans charged off$ (1) $ (58) $ (115) Refund Advances paid off or charged off Loans transferred to OREO - - (2,254) Loan payoffs and paydowns (6,243) (2,016) (4,052) Loans paid current (603) (1,485) (2,196) Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period$ (6,847) $ (3,559)
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 and 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 28 - Collateral Dependent Loan Composition
Years Ended December 31, (in thousands) 2022 2021
2020 Cashflow-dependent TDRs$ 5,761 $ 5,960 $ 10,938 Collateral-dependent TDRs 6,265 9,426 9,840 Total TDRs 12,026 15,386 20,778 Collateral-dependent loans (which are not TDRs) 14,186 14,645
20,806
Total recorded investment in TDRs and collateral-dependent loans$ 26,212 $ 30,031
See Footnote 4 "Loans and Allowance for Credit Losses" of Part II Item 8
"Financial Statements and Supplementary Data" for additional discussion
regarding collateral-dependent loans and TDRs.
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Other Real Estate Owned
Table 29 - Rollforward of Other Real Estate Owned Activity
Years Ended
OREO at beginning of period$ 1,792 $ 2,499 $ 113 Transfer from loans to OREO - 64 2,750 Proceeds from sale* - (611) (324) Net gain on sale - 51 65 Writedowns (211) (211) (105) OREO at end of period$ 1,581 $ 1,792 $ 2,499
*Inclusive of non-cash proceeds where the Bank financed the sale of the
property.
The fair value of OREO represents the estimated value that management expects to receive when the property is sold, net of related costs to sell. These estimates are based on the most recently available real estate appraisals, with certain adjustments made based on the type of property, age of appraisal, current status of the property and other relevant factors to estimate the current value of
the property. Bank Owned Life Insurance BOLI offers tax advantaged noninterest income to help the Bank offset employee benefits expenses. The Company carried$102 million and$99 million of BOLI on its consolidated balance sheet as ofDecember 31, 2022 and 2021.
Table 30 - Rollforward of Bank Owned Life Insurance
Years ended
BOLI at beginning of period$ 99,161 $ 68,018 $ 66,433 BOLI acquired - 30,000 - Death benefits paid - (1,099) - Increase in cash surrender value 2,526 2,242 1,585 BOLI at end of period$ 101,687 $ 99,161 $ 68,018 78 Table of Contents Deposits
Table 31 - Deposit Composition
December 31, (in thousands) 2022 2021 2020 Core Bank: Demand$ 1,336,082 $ 1,381,522 $ 1,217,263 Money market accounts 707,272 789,876 712,824 Savings 323,015 311,624 236,335 Reciprocal money market 28,635 60,685 246,257
Individual retirement accounts (1) 38,640 43,724
47,889
Time deposits,$250 and over (1) 54,855 81,050
83,448
Other certificates of deposit (1) 129,324 154,174
199,214
Reciprocal time deposits (1) 7,405 17,265
67,852
Brokered deposits (1) - -
25,010
2,836,092
1,503,662Total Core Bank deposits 4,089,721 4,419,091 4,339,754Republic Processing Group : Money market accounts 3,849 9,717 6,673
Total RPG interest-bearing deposits 3,849 9,717
6,673
Brokered prepaid card deposits 328,655 320,907
257,856
Other noninterest-bearing deposits 115,620 89,601
128,898
Total RPG noninterest-bearing deposits 444,275 410,508
386,754 Total RPG deposits 448,124 420,225 393,427 Total deposits$ 4,537,845 $ 4,839,316 $ 4,733,181
(1) Represents time deposits.
billion
million
million
Management believes the net decrease inCore Bank interest-bearing deposits was generally due to clients' responses to the low deposit beta the Bank maintained throughout 2022. A deposit beta measures the change in the interest rates the Bank pays for its interest-bearing deposit accounts versus the change in the federal funds target rate, which is a public index the Bank generally uses to price its non-maturity, interest-bearing deposits. A low deposit beta would indicate that the Bank has not changed the interest rates it pays on deposit accounts to the same magnitude as theFOMC has changed the FFTR. The Bank implemented a general strategy to maintain a low deposit beta during the year as part of its strategy to increase its overall net interest margin and net interest income. In general, the Bank maintained a low deposit beta during 2022 by not applying across-the-board increases in rates to all its interest-bearing accounts as a result of increases to the FFTR. Instead, the Bank applied a nominal amount of the FFTR's increases to products on an across-the-board basis and selectively applied larger rate increases for more price-sensitive commercial accounts. This strategy played a significant part in expanding theCore Bank's net interest margin throughout 2022 as the Bank's yield on its interest earning assets generally outpaced the cost of its interest-bearing liabilities as the FFTR increased during the year. As a result of this strategy, however, the Bank did experience a decline in both personal and business account balances as some clients moved their funds to more attractive offerings outside of the Bank. The Bank currently expects to continue its low beta strategy for deposits in 2023, but this strategy is subject to change depending upon several factors including, but not limited to, the Bank's overall current and projected liquidity positions, its clients' demand for its loans and deposit products, the Bank's overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term. 79
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In addition to the above, theCore Bank also experienced a$115 million decrease inCore Bank noninterest-bearing deposits. Management believes two factors generally drove this overall decrease in noninterest-bearing deposits. The first is a general decline in liquidity among both businesses and consumers as the excess liquidity created during the COVID pandemic continued to wane throughout the year. Second, Management believes that the substantial increase in market interest rates caused the difference between what a client can earn for an interest-bearing deposit versus the client's lack of a financial return for a noninterest-bearing deposit to become large enough to cause some clients to pursue other opportunities for their cash outside the Bank. As a result of all the factors noted above, Management believes the Company is more likely to experience slower overall growth and possibly a continued decline in its deposits over the foreseeable future.
Table 32 - Average Deposits
2022 2021 2020
Average Average Average Average Average Average
Years ended December 31 , (dollars
in thousands) Balance Rate Balance Rate Balance Rate
Transaction accounts $ 1,696,809 0.12 % $ 1,580,570 0.02 % $ 1,291,980 0.09 %
Money market accounts 779,457 0.26 784,777 0.05 739,524 0.26
Time deposits 240,701 1.10 300,784 1.21 400,704 1.96
Reciprocal money market accounts 44,152 0.22 185,922 0.18 202,112 0.28 Reciprocal time deposits 10,890 0.48 40,581 0.75 72,613 1.66 Brokered money market accounts - - 30,863 0.08 104,460 0.50 Brokered time deposits - - - - 102,093 1.75 Total average interest-bearing deposits 2,772,009 0.24 2,923,497 0.17 2,913,486 0.52 Total average noninterest-bearing deposits 2,148,848 - 2,129,222 - 1,672,442 - Total average deposits$ 4,920,857 0.14$ 5,052,719 0.10$ 4,585,928 0.33 Table 33 - Maturity Schedule of Time Deposits in Excess of the FDIC Limit and Estimated Time Deposits that are Otherwise Uninsured as ofDecember 31, 2022 Individual Instruments Estimated that Meet or Exceed the Otherwise Uninsured Maturity (dollars in thousands) FDIC Insurance Limit Time Deposits Total Three months or less $ 2,996 $ 972 $ 3,968 Over three months through six months 5,176 658 5,834 Over six months through 12 months 40,030 1,886 41,916 Over 12 months 6,653 1,438 8,091 Total $ 54,855 $ 4,954 $ 59,809
The Bank held total estimated uninsured deposits of
31, 2022
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
SSUARs are collateralized by securities and are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets
and are held by a safekeeping agent and the obligations to repurchase the
securities are reflected as liabilities. All securities underlying the
agreements are under the Bank's control.
SSUARs decreased$74 million , or 25%, during 2022 to$217 million as ofDecember 31, 2022 . SSUARs generally represent large customer relationships deposited into the Bank that require security collateral above the$250,000 FDIC insurance limit of the Bank. Due to the size of the underlying relationships, large fluctuations in the underlying account balances from period to period are common. 80 Table of Contents As it did with interest-bearing deposits, the Bank generally maintained a low beta strategy with its SSUARs. As a result of this strategy, the Bank experienced a decline in SSUAR balances as some clients moved their funds to more attractive offerings outside of the Bank. One client, in particular, reduced its SSUAR balances by$45 million fromDecember 31, 2021 toDecember 31, 2022 as it moved these funds into an outside brokerage account. As was noted with deposits, the Bank currently expects to continue its low beta strategy for SSUARS in 2023, but this strategy is subject to change depending upon several factors including, but not limited to, the Bank's overall current and projected liquidity positions, its clients' demand for its loans and deposit products, the Bank's overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.
Table 34 - Securities Sold Under Agreements to Repurchase
As of and for the Years EndedDecember 31 , (dollars in thousands) 2022 2021
2020
Outstanding balance at end of period$ 216,956 $ 290,967 $
211,026
Weighted average interest rate at period end 0.41 % 0.04 %
0.04 % Average outstanding balance during the period$ 265,188 $ 231,430 $
204,797
Average interest rate during the period 0.15 % 0.03 % 0.09 % Maximum outstanding at any month end$ 303,315 $ 432,047 $
295,698
Federal Home Loan Bank Advances
The Bank's total FHLB advances were$95 million as ofDecember 31, 2022 compared to$25 million as ofDecember 31, 2021 . Approximately$75 million of these borrowings were overnight in nature as ofDecember 31, 2022 compared to$25 million as ofDecember 31, 2021 . During 2022, the Bank extended the term on$25 million of its FHLB advances in anticipation of increasing long-term interest rates. As ofDecember 31, 2022 , the Company's$95 million of FHLB advances had a weighted-average maturity of 1.06 years and a weighted-average cost of 3.84%. Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.
Table 35 - Federal Home Loan Bank Advances
As of and for the Years Ended December 31, (dollars in thousands) 2022 2021
2020
Outstanding balance at end of period$ 95,000 $ 25,000 $ 235,000 Weighted average interest rate at period end 3.84 % 0.14 % 0.23 % Average outstanding balance during the period$ 21,233 $ 29,479 $
211,776
Average interest rate during the period 1.60 % 0.19 % 1.66 % Maximum outstanding at any month end$ 95,000 $ 25,000 $ 590,000 81 Table of Contents Interest Rate Swaps
Non-hedge Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank's interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
A summary of the Bank's interest rate swaps related to clients as of
31, 2022
2022 2021
Notional Notional
December 31, (in thousands) Bank Position Amount Fair Value Amount Fair Value
Interest rate swaps with Bank
clients - Assets Pay variable/receive fixed $
40,032
Interest rate swaps with Bank
clients - Liabilities
Pay variable/receive fixed 91,636 (6,742) 16,423 (298) Interest rate swaps with Bank clients - Total Pay variable/receive fixed $
131,668
Offsetting interest rate swaps with
institutional swap dealer - Assets Pay fixed/receive variable 91,636
6,742 16,423 298 Offsetting interest rate swaps with institutional swap dealer - Liabilities Pay fixed/receive variable
40,032 (1,386) 107,502 (5,786)
Offsetting interest rate swaps with
institutional swap dealer - Total Pay fixed/receive variable
Total$ 263,336 $ -$ 247,850 $ - See Footnote 8 "Interest Rate Swaps" of Part II Item 8 "Financial Statements and Supplementary Data" for further information regarding the Bank's interest rate swaps. Liquidity The Bank 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 37 - Liquid Assets and Borrowing Capacity
The Company's liquid assets and borrowing capacity included the following:
December 31, (in thousands) 2022 2021 2020 Cash and cash equivalents$ 313,689 $ 756,971 $ 485,587 Unincumbered debt securities 438,052 219,775 273,652 Total liquid assets 751,741 976,746 759,239 Available borrowing capacity with the FHLB 899,362 900,424 682,992 Available borrowing capacity through unsecured credit lines 125,000 125,000 125,000 Total available borrowing capacity 1,024,362
1,025,424 807,992
Total liquid assets and available borrowing capacity$ 1,776,103 $
2,002,170
The Bank had a loan to deposit ratio (excluding brokered deposits) of 107% as ofDecember 31, 2022 and 99% as ofDecember 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. 82
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As noted in the sections above titled "Deposits" and "Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings", the Bank implemented a general strategy during 2022 to maintain a low beta for its client-related interest-bearing liabilities as part of its overall strategy to increase its net interest margin and net interest income. As a result of this strategy, however, the Bank did experience a decline in both personal and business deposit balances and SSUAR balances as some clients moved their funds to more attractive offerings outside of the Bank. The Bank currently expects to continue its low beta strategy for deposits and SSUARS in 2023, but this strategy is subject to change depending upon several factors including, but not limited to, the Bank's overall current and projected liquidity positions, its clients' demand for its loans and deposit products, the Bank's overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term. As ofDecember 31, 2022 , the Bank had approximately$879 million in deposits from 185 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . The 20 largest non-sweep deposit relationships represented approximately$304 million , or 7%, of the Company's total deposit balances as ofDecember 31, 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 theTraditional Bank deposits they replace, potentially decreasing the Bank's earnings. The Bank's liquidity is also impacted by its ability to sell certain investment securities, which could be limited due to the level of investment securities that are needed to secure public deposits, SSUARs, FHLB borrowings, and for other purposes, as required by law. As ofDecember 31, 2022 andDecember 31, 2021 , these pledged investment securities had a fair value of$218 million
and$320 million . Capital Table 38 - Capital
Information pertaining to the Company's capital balances and ratios follows:
As of and for the Years EndedDecember 31 , (dollars in thousands, except per share data) 2022 2021
2020
Stockholders' equity$ 856,613 $ 835,054 $ 823,323 Book value per share at December 31, 43.38 41.79 39.40 Tangible book value per share at December 31,* 42.11 40.52 38.27 Dividends declared per share - Class A Common Stock 1.364 1.232 1.144 Dividends declared per share - Class B Common Stock 1.240 1.120 1.040 Average stockholders' equity to average total assets 13.82 % 13.41 % 13.35 % Total risk-based capital 17.92 17.48 18.52 Common equity tier 1 capital 16.70 16.39 16.61 Tier 1 risk-based capital 16.70 16.39 17.43 Tier 1 leverage capital 14.81 13.36 13.70 Dividend payout ratio 30 29 29 Dividend yield 3.33 2.42 3.17
*For additional detail, see Footnote 2 of "Selected Financial Data" in this
section of the filing.
Total stockholders' equity increased from$835 million as ofDecember 31, 2021 to$857 million as ofDecember 31, 2022 . The increase in stockholders' equity was primarily attributable to net income earned during 2022 reduced by cash dividends declared and common stock repurchases.
See Part II, Item 5. "Unregistered Sales of
Proceeds" for additional detail regarding stock repurchases and stock buyback
programs.
Common Stock - The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and ClassB Common shares have ten votes per
share.
83
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Class
Common shares on a share for share basis. The Class A Common shares are not
convertible into any other class of Republic's capital stock.
Dividend Restrictions -The Parent Company's principal source of funds for dividend payments are dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states' banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years. As ofJanuary 1, 2023 , the Bank could, without prior approval, declare dividends of approximately$92 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 1Risk-Based Capital ratio, an 8.0% Tier 1Risk-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 1Risk-Based Capital above their minimum risk-based capital requirements. Republic continues to exceed the regulatory requirements forTotal Risk Based Capital ,Common Equity Tier I Risk Based Capital ,Tier I Risk Based Capital andTier 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 theFDIC , in addition to the Capital Conservation Buffer. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
Contractual Obligations and Commitments
The Company or the Bank has required future payments under various contractual
obligations and other commitments.
See the following footnotes within Part II Item 8 "Financial Statements and
Supplementary Data" for additional detail regarding contractual obligations and
other commitments of the Company or Bank:
? Footnote 6 "Right-of-Use Assets and Operating Lease Liabilities"
? Footnote 9 "Deposits"
? Footnote 10 "Securities Sold Under Agreements to Repurchase"
? Footnote 13 "Off Balance Sheet Risks, Commitments, and Contingent Liabilities"
? Footnote 18 "Benefit Plans"
In addition, the Bank maintains contractual obligations for its technological needs, including its enterprise risk management application, customer relationship management application, internet banking platform, and its core accounting application. The total contractual commitment for these applications is approximately$13 million throughMay 2025 . 84
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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. The following table illustrates the Bank's projected percent change from its Base net interest income over the period beginningJanuary 1, 2023 and endingDecember 31, 2023 based on instantaneous movements in interest rates from Down 200 to Up 300 basis points equally across all points on the yield curve. The Bank's dynamic earnings simulation model includes secondary market loan fees and excludesTraditional Bank loan fees. Table 39 - Bank Interest Rate Sensitivity as ofDecember 31, 2022 and 2021
Change in Rates
-200 -100 +100 +200 +300
Basis Points Basis Points Basis Points Basis Points Basis Points
% Change from base net interest
income as of December 31, 2022 (2.8) % (0.6) % 1.8 % 3.7 % 5.7 %
% Change from base net interest
income as of December 31, 2021 (2.9) % 1.3 % (0.6) % 0.7 % 4.7 %
For the Down-100 scenario, the December 2022 simulation reflected a more
negative outcome than the December 2021 simulation. For the Up-100, Up-200, and
Up-300 scenarios, the December 31, 2022 simulation reflected a more positive
outcome for the Bank's net interest income than the comparable December 31, 2021
simulation.
The period-to-period decline in the Down-100 scenario was generally tied to
interest rate floors for the Bank's floating rate loans. As of December 31,
2021 , market interest rates were significantly lower than market interest rates
as of December 31, 2022 . As a result, many of the Bank's floating rate loans
were priced at their contractual interest rate floors as of December 31, 2021 .
The Bank's interest rate simulation model for December 31, 2021 , assumed that
interest rates for most of these loans would remain at their contractual
interest rate floors, even as market rates declined in the simulation. With
market interest rates significantly higher as of December 31, 2022 , the current
rates for a substantial amount of the Bank's floating rate loans are above their
contractual interest rate floors, and therefore, can reprice lower, down to
their contractual interest rate floors, in a declining market rate environment.
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As compared to the December 2021 simulation, the improvement for the December
2022 simulation outcomes for the Up-rate scenarios was generally tied to
contractual interest rate floors, as well. As previously noted, market interest
rates were significantly lower as of December 31, 2021 than market interest
rates as of December 31, 2022 , and many of the Bank's loans were already priced
at their contractual interest rate floors as of December 31, 2021 . By formula,
the interest rates for many of the Bank's floating rate loans would have been
much lower at December 31, 2021 had their contractual interest rate floors not
existed. As a result, the formula interest rate for each floating rate loan had
to increase substantially, in many cases, before the formula interest rate
surpassed the contractual interest rate floor and the loan starting repricing
higher. With most of the Bank's floating rate loans now above their contractual
interest rate floors as of December 31, 2022 , the Bank would generally
experience an earlier benefit from an increase in interest rates, based on each
loan's floating rate formula, in a rising interest rate environment.
LIBOR Exposure
InJuly 2017 , theFinancial 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, inNovember 2020 , theFCA announced that many tenors of LIBOR would continue to be published throughJune 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, onMarch 15, 2022 ,President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the "LIBOR Law"), which is designed to accomplish the following:
Establish a clear and uniform process, on a nationwide basis, for replacing
? LIBOR in existing contracts, the terms of which do not provide for the use of a
clearly defined or practicable replacement benchmark rate, without affecting
the ability of parties to use any appropriate benchmark rate in new contracts;
Preclude litigation related to existing contracts, the terms of which do not
? provide for the use of a clearly defined or practicable replacement benchmark
rate;
Allow existing contracts that reference LIBOR but provide for the use of a
? clearly defined and practicable replacement rate to operate according to their
terms; and
? Address LIBOR references in federal law.
With limited exception, the LIBOR Law generally covers legacy LIBOR contracts with no or inadequate fallback provisions. Additionally, under the LIBOR Law, theBoard of Governors of theFederal Reserve System (the "FRB Board") issued final regulations inDecember 2022 that included the selection of a FRB Board-Selected Benchmark Replacement based on SOFR and incorporates an applicable tenor spread adjustment and identification of any related conforming changes. As ofDecember 31, 2022 , the Company had approximately$410 million of legacy assets that reference LIBOR, with short-term Warehouse loans representing$10 million of these assets, investment securities representing$60 million , and commercial and mortgage loans primarily making up the remainder. As ofDecember 31, 2022 , of the Bank's legacy assets that reference LIBOR, approximately$351 million of those assets were scheduled to mature afterJune 30, 2023 . These amounts exclude derivative assets and liabilities on the Company's consolidated balance sheet. As of December31, 2022, the notional amount of the Company's LIBOR-referenced interest rate derivative contracts was approximately$183 million , with$183 million of such notional amount scheduled to mature afterJune 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 (Discussion of 2021 vs. 2020)."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See the section titled "Asset/Liability Management and Market Risk" included
under Part II Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
86
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Item 8. Financial Statements and Supplementary Data.
The following are included in this section:
Report of Independent Registered Public Accounting Firm (PCAOB ID 173) 88 Consolidated balance sheets - December 31, 2022 and 2021 92 Consolidated statements of income and comprehensive income - years ended 93
Consolidated statements of stockholders' equity - years ended
2022, 2021, and 2020
Consolidated statements of cash flows - years ended
96
2021, and 2020
Footnotes to consolidated financial statements 97
87
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[[Image Removed: Graphic]]
Independent MemberCrowe Global REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofRepublic Bancorp, Inc. (the "Company") as ofDecember 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period endedDecember 31, 2022 , and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2022 , in conformity with accounting principles generally accepted inthe United States of America . We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) ("PCAOB"), the Company's internal control over financial reporting as ofDecember 31, 2022 , based on criteria established in Internal Control - Integrated Framework: (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO)" and our report datedMarch 3, 2023 , expressed an adverse opinion.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 88
Table of Contents
Allowance for Credit Losses on Loans - Adjustments to the Historical Loss Rate
As described in Note 1 and Note 4, the allowance for credit losses on loans
("ACLL") under ASC 326 requires the measurement of expected lifetime credit
losses for financial assets measured at amortized cost at the reporting date.
The measurement is based on historical loss rates, qualitative factors, and
reasonable and supportable forecasts. The allowance for credit losses was $70.4
million as of December 31, 2022 .
Management employs a process and methodology to estimate the ACLL that evaluates
both quantitative and qualitative metrics. The methodology for evaluating
quantitative loss rates consists of two basic components. The first component
involves pooling loans into portfolio segments for loans that share similar risk
characteristics. These loans are referred to as pooled loans and the
methodology to estimate the ACLL is discussed below. The second component
involves individually analyzed loans that do not share similar risk
characteristics with loans that are pooled into portfolio segments.
For pooled loans, the Company utilizes a "static-pool" method to estimate credit
losses over the expected life of the loan. The "static-pool" methodology
analyzes historical closed pools of similar loans over their expected lives to
attain a historical loss rate. Adjustments are made to the historical loss rate
for current conditions including underwriting standards, portfolio mix or term,
delinquency level as well as for changes in environmental conditions, such as
changes in property value or other relevant factors. One-year forecast
adjustments to the historical loss rate are based on the U.S. national
unemployment rate and commercial real estate values. Subsequent to the one-year
forecast, loss rates are assumed to immediately revert back to long-term
historical averages.
We identified management's application of the allowance for credit losses on
loans, specifically the adjustments to the historical loss rate, as a critical
audit matter due to the degree of judgment applied to these adjustments. This
critical audit matter requires the performance of audit procedures to evaluate
the application of ASC 326 for loans and involved especially subjective auditor
judgment and required significant audit effort, including the need to involve
more experienced audit personnel. Management's analysis of the adjustments to
the historical loss rates during the reasonable and supportable forecast period
within the allowance for credit losses on loans requires a high degree of
subjectivity and judgment and requires the Company to make significant estimates
of the risks present for each portfolio segment. Changes in these assumptions
could have a material effect on the Company's financial results.
The primary procedures we performed to address this critical audit matter
included:
Testing the design and operating effectiveness of controls over the evaluation
of the ACLL, including controls addressing:
Relevance and reliability of the underlying data inputs, judgments, and
? calculations used to determine the forecasts and adjustments to historical loss
rates.
? Management's review of the reasonableness of forecasts and the adjustments to
historical loss rates.
Substantively testing management's process, including evaluating their judgments
and assumptions, to assess the estimate of the ACLL including:
Evaluating the reasonableness of management's significant assumptions,
? judgments, and conclusions related to the reasonable and supportable forecasts
and adjustments to historical loss rates. Our evaluation considered the weight
of evidence from internal and external sources and loan portfolio performance.
Testing the relevance and reliability of data inputs and mathematical accuracy
? of the forecasts and adjustments to historical loss rates within the ACLL
calculation. /S/ Crowe LLP We have served as the Company's auditor since 1996.Louisville, Kentucky March 3, 2023 89 Table of Contents [[Image Removed: Graphic]]Crowe LLP
Independent Member
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of
Opinion on Internal Control over Financial Reporting
We have auditedRepublic Bancorp, Inc.'s (the "Company") internal control over financial reporting as ofDecember 31, 2022 , based on criteria established in Internal Control - Integrated Framework: (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, because of the effects of the material weaknesses discussed in the following paragraph, the Company has not maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2022 , based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's report. 1)the Company did not maintain effective controls over the initial implementation of new products offered through third parties within RPG. Specifically, Management identified that an RCS product's contractual terms were not sufficiently communicated internally, and the controls were not designed to identify and test all relevant transactional data posting to the Company's financial statements for the product;
2)the Company did not maintain effective controls over the information and
communication as it relates to the reconciliation function. Specifically, the
controls were not precisely designed to identify, communicate, resolve, and
timely escalate reconciliation issues to the appropriate levels within the
organization; and
3)the Company did not design and maintain effective controls over the financial analysis of RCS products' yields. Specifically, the Company reviewed the weighted average yield of all RCS products on a segment basis rather than an individual product basis. We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) ("PCAOB"), the consolidated balance sheets of the Company as ofDecember 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period endedDecember 31, 2022 , and the related notes (collectively referred to as the "financial statements") and our report datedMarch 3, 2023 expressed an unqualified opinion. We considered the material weaknesses identified above in determining the nature, timing, and extent of audit procedures applied in our audit of the 2022 consolidated financial statements, and this report on Internal Control over Financial Reporting does not affect such report on the financial statements. 90 Table of Contents Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
We have served as the Company's auditor since 1996.
Louisville, Kentucky March 3, 2023 91 Table of Contents CONSOLIDATED BALANCE SHEETS
2022 2021
ASSETS
Cash and cash equivalents $ 313,689 $ 756,971
Available-for-sale debt securities, at fair value
(amortized cost of
2021, allowance for credit losses of
2021)
620,365
495,126
Held-to-maturity debt securities (fair value of
in 2022 and
of
87,386
44,299
Equity securities with readily determinable fair value 111
2,620
Mortgage loans held for sale, at fair value 1,302
29,393
Consumer loans held for sale, at fair value 4,706
19,747
Consumer loans held for sale, at the lower of cost or fair value 13,169
2,937
Loans (loans carried at fair value of
4,515,802
4,496,562
Allowance for credit losses (70,413)
(64,577)
Loans, net 4,445,389
4,431,985
Federal Home Loan Bank stock, at cost 9,146
10,311 Premises and equipment, net 31,978 36,073 Right-of-use assets 37,017 38,825 Goodwill 16,300 16,300 Other real estate owned 1,581 1,792 Bank owned life insurance 101,687 99,161
Low-income housing tax credit investments 75,324
50,619
Other assets and accrued interest receivable 76,393
57,473 TOTAL ASSETS$ 5,835,543 $ 6,093,632 LIABILITIES Deposits: Noninterest-bearing$ 1,908,768 $ 1,989,679 Interest-bearing 2,629,077 2,849,637 Total deposits 4,537,845 4,839,316
Securities sold under agreements to repurchase and other
short-term borrowings
216,956
290,967
Operating lease liabilities 37,809
39,672
Federal Home Loan Bank advances 95,000
25,000
Low-income housing tax credit obligations 43,609
23,383
Other liabilities and accrued interest payable 47,711
40,240 Total liabilities 4,978,930 5,258,578
Commitments and contingent liabilities (Footnote 13) -
- STOCKHOLDERS' EQUITY Preferred stock, no par value - -
Class A Common Stock, no par value, 30,000,000 shares
authorized, 17,584,928 shares (2022) and 17,816,083
shares (2021) issued and outstanding; Class B Common
Stock, no par value, 5,000,000 shares authorized,
2,159,495 shares (2022) and 2,164,903 shares (2021)
issued and outstanding
4,648 4,702 Additional paid in capital 141,694 139,956 Retained earnings 742,250
688,522
Accumulated other comprehensive (loss) income (31,979)
1,874 Total stockholders' equity 856,613 835,054 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$ 5,835,543 $
6,093,632
See accompanying footnotes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED
2022 2021 2020
INTEREST INCOME:
Loans, including fees $ 221,075 $ 219,592 $ 241,044
Taxable investment securities 11,384 7,450 9,798
Federal Home Loan Bank stock and other 11,725 1,364 1,416
Total interest income 244,184 228,406 252,258
INTEREST EXPENSE:
Deposits 6,757
5,039 15,089
Securities sold under agreements to repurchase and
other short-term borrowings
397 63 177 Federal Reserve Payment Protection Plan Liquidity Facility - - 153 Federal Home Loan Bank advances 339 57 3,524 Subordinated note - 507 1,000 Total interest expense 7,493 5,666 19,943 NET INTEREST INCOME 236,691 222,740 232,315 Provision for expected credit loss expense for on-balance sheet exposures (loans and investment securities) 22,348
14,808 31,278
NET INTEREST INCOME AFTER PROVISION 214,343
207,932 201,037
NONINTEREST INCOME:
Service charges on deposit accounts 13,426 12,553 11,615 Net refund transfer fees 17,080 20,248 20,297 Mortgage banking income 6,196 19,994 31,847 Interchange fee income 13,125 13,062 11,188 Program fees 16,172
14,237 7,095
Increase in cash surrender value of bank owned life
insurance
2,526 2,242 1,585 Net losses on other real estate owned (211) (160) (40) Contract termination fee 5,000 - - Legal settlement 13,000 Other 3,496 4,399 3,466 Total noninterest income 89,810 86,575 87,053 NONINTEREST EXPENSE: Salaries and employee benefits 111,240 110,088 106,166 Technology, equipment, and communication 28,954 29,351 29,128 Occupancy 13,014 13,193 13,438 Marketing and development 6,875 4,390 4,031 FDIC insurance expense 1,668 1,591 1,010
State and local bank franchise tax expense -
- 5,369 Interchange related expense 4,773 4,960 4,303 Legal and professional fees 4,024 4,924 4,244
FHLB advances early termination penalties -
- 2,108 Other 16,760 14,568 15,660 Total noninterest expense 187,308 183,065 185,457 INCOME BEFORE INCOME TAX EXPENSE 116,845 111,442 102,633 INCOME TAX EXPENSE 25,739 23,831 19,387 NET INCOME$ 91,106 $ 87,611 $ 83,246 BASIC EARNINGS PER SHARE: Class A Common Stock$ 4.60 $ 4.29 $ 4.00 Class B Common Stock 4.19 3.90 3.64 DILUTED EARNINGS PER SHARE: Class A Common Stock$ 4.59 $ 4.28 $ 3.99 Class B Common Stock 4.17 3.89 3.63
See accompanying footnotes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED
2022 2021 2020
Net income $ 91,106 $ 87,611 $ 83,246
OTHER COMPREHENSIVE INCOME (LOSS)
Change in fair value of derivatives used for cash flow hedges - - (177) Reclassification amount for net derivative losses realized in income - - 281 Unrealized losses on AFS debt securities (45,109) (8,908) 7,147 Unrealized (loss) gain on AFS debt security for which a portion of OTTI has been recognized in earnings (29) 63 (35) Total other comprehensive loss before income tax (45,138) (8,845) 7,216 Tax effect 11,285 2,210 (1,805) Total other comprehensive loss, net of tax (33,853) (6,635) 5,411 COMPREHENSIVE INCOME$ 57,253 $ 80,976 $ 88,657
See accompanying footnotes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED
Common Stock Accumulated
Class A Class B Additional Other Total
Shares Shares Paid In Retained Comprehensive Stockholders'
(in thousands, except per share data) Outstanding Outstanding Amount Capital Earnings Income
Equity Balance, January 1, 2020 18,737 2,206 $
4,907
Adjustment for adoption of ASU 2016-13 - - - - (4,291) - (4,291) Net income - - - - 83,246 - 83,246 Net change in accumulated other comprehensive income (loss) - - - - - 5,411 5,411 Dividends declared on Common Stock: Class A Shares ($1.144 per share) - - - - (21,433) - (21,433) Class B Shares ($1.04 per share) - - - - (2,288) - (2,288) Stock options exercised, net of shares withheld 25 - 13 197 - - 210 Conversion of Class B to Class A Common Shares 7 (7) - - - - - Repurchase of Class A Common Stock (115) - (26) (782) (3,127) - (3,935) Net change in notes receivable on Class A Common Stock - - - (35) - - (35) Deferred compensation - Class A Common Stock: Directors 4 - - 352 - - 352 Designated key employees - - - 566 - - 566 Employee stock purchase plan - Class A Common Stock 20 - 4 623 - - 627 Stock-based awards - Class A Common Stock: Performance stock units, net of shares tendered back 18 - - (200) - - (200) Restricted stock, net of shares tendered back 1 - 1 385 - - 386 Stock options - - - 463 - - 463 Balance, December 31, 2020 18,697 2,199$ 4,899 $ 143,637 $ 666,278 $ 8,509 $ 823,323 Net income - - - - 87,611 - 87,611 Net change in accumulated other comprehensive income (loss) - - - - - (6,635) (6,635) Dividends declared on Common Stock: Class A Shares ($1.232 per share) - - - - (22,451) - (22,451) Class B Shares ($1.12 per share) - - - - (2,435) - (2,435) Stock options exercised, net of shares withheld 28 - 13 (155) - - (142) Conversion of Class B to Class A Common Shares 34 (34) - - - - - Repurchase of Class A Common Stock (980) - (216) (6,831) (40,481) - (47,528) Net change in notes receivable on Class A Common Stock - - - 151 - - 151 Deferred compensation - Class A Common Stock: Directors 4 - - 417 - - 417 Designated key employees - - - 607 - - 607 Employee stock purchase plan - Class A Common Stock 15 - 4 691 - - 695 Stock-based awards - Class A Common Stock: Performance stock units, net of shares tendered back - - - 129 - - 129 Restricted stock, net of shares tendered back 18 - 2 736 - - 738 Stock options - - - 574 - - 574 Balance, December 31, 2021 17,816 2,165$ 4,702 $ 139,956 $ 688,522 $ 1,874 $ 835,054 Net income - - - - 91,106 - 91,106 Net change in accumulated other comprehensive income (loss) - - - - - (33,853) (33,853) Dividends declared on Common Stock: Class A Shares ($1.364 per share) - - - - (24,122) - (24,122) Class B Shares ($1.24 per share) - - - - (2,679) - (2,679) Stock options exercised, net of shares withheld 3 - 2 50 - - 52 Conversion of Class B to Class A Common Shares 5 (5) - - - - - Repurchase of Class A Common Stock (273) - (60) (1,940) (10,577) - (12,577) Net change in notes receivable on Class A Common Stock - - - 61 - - 61 Deferred compensation - Class A Common Stock: Directors 6 - - 503 - - 503 Designated key employees - - - 725 - - 725 Employee stock purchase plan - Class A Common Stock 16 - 4 690 - - 694 Stock-based awards - Class A Common Stock: Performance stock units, net of shares tendered back - - - 152 - - 152 Restricted stock, net of shares tendered back 12 - - 937 - - 937 Stock options - - - 560 - - 560
Balance, December 31, 2022 17,585 2,160 $
4,648
See accompanying footnotes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
2022 2021 2020
OPERATING ACTIVITIES:
Net income $ 91,106 $ 87,611 $ 83,246
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization on investment securities and
low-income housing investments 4,798 4,414 3,204
Net accretion and amortization on loans (3,760) (13,973) (13,084)
Unrealized and realized losses on equity
securities with readily determinable fair value 263 463 105
Depreciation of premises and equipment 7,598 8,986 9,725
Amortization of mortgage servicing rights 2,264 3,453 3,756
(Recovery) loss of mortgage servicing rights - (500) 500
Provision for on-balance sheet exposures 22,348 14,808 31,278
Provision for off-balance sheet exposures 198 63 533
Net gain on sale of mortgage loans held for sale (4,942) (19,659) (33,179)
Origination of mortgage loans held for sale (205,365) (680,714) (782,939)
Proceeds from sale of mortgage loans held for sale 238,398 717,847 788,475
Net gain on sale of consumer loans held for sale (13,277) (11,298) (4,980)
Origination of consumer loans held for sale (1,045,715) (882,180) (518,873)
Proceeds from sale of consumer loans held for sale 1,063,801 875,570 531,321
Net gain realized on sale of other real estate
owned - (51) (65)
Writedowns of other real estate owned 211 211 105
Deferred compensation expense - Class A Common
Stock 1,228 1,024 918
Stock-based awards and ESPP expense - Class A
Common Stock 1,753 1,545 953
Net gain on sale of bank premises and equipment - (399) (353)
Increase in cash surrender value of bank owned
life insurance (2,526) (2,242) (1,585)
Death benefits in excess of cash surrender value
of life insurance - (979) -
FHLB advances early termination penalties - - 2,108
Net change in other assets and liabilities:
Accrued interest receivable (3,695) 3,048 (14)
Accrued interest payable 80 (183) (2,460)
Other assets (3,896) (940) (19,391)
Other liabilities 3,919 (5,672) (3,872)
Net cash provided by operating activities 154,789 100,253 75,432 INVESTING ACTIVITIES: Purchases of available-for-sale debt securities (329,820) (211,545) (298,878) Purchases of held-to-maturity debt securities (75,000) - - Proceeds from calls, maturities and paydowns of equity and available-for-sale debt securities 161,561 230,457 251,930 Proceeds from calls, maturities and paydowns of held-to-maturity debt securities 31,945 9,139 9,009 Net change in outstanding warehouse lines of credit 446,990 112,246 (245,338) Net change in other loans (478,958)
207,115 (142,811)
Proceeds from redemption of
stock
1,165 7,086 22,434 Purchase of Federal Home Loan Bank stock - - (9,000) Proceeds from sales of other real estate owned - 611 324 Proceeds from sale of bank premises and equipment - 637 894 Purchase of bank owned life insurance, net of death benefits paid - (28,901) - Investments in low-income housing tax partnerships (8,889) (14,507) (6,998) Net purchases of premises and equipment (3,503) (5,785) (3,582) Net cash (used in) provided by investing activities (254,509) 306,553 (422,016) FINANCING ACTIVITIES: Net change in deposits (301,471) 106,415 947,173 Net change in securities sold under agreements to repurchase and other short-term borrowings (74,011) 79,941 43,409 Payments of Federal Home Loan Bank advances (25,000) (235,000) (1,105,000) Proceeds from Federal Home Loan Bank advances 95,000 25,000 590,000 FHLB advances early termination penalties - - (2,108) Payoff of subordinated note, net of common security interest - (40,000) - Repurchase of Class A Common Stock (12,577) (47,528) (3,935) Net proceeds from Class A Common Stock purchased through employee stock purchase plan 590 591 533 Net proceeds from option exercises and equity awards vested - Class A Common Stock 52 (142) - Cash dividends paid (26,145) (24,699) (23,204) Net cash (used in) provided by financing activities (343,562)
(135,422) 446,868
NET CHANGE IN CASH AND CASH EQUIVALENTS (443,282) 271,384 100,284 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 756,971 485,587 385,303 CASH AND CASH EQUIVALENTS AT END OF PERIOD$ 313,689 $ 756,971 $ 485,587 SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION: Cash paid during the period for: Interest$ 7,413 $ 5,849 $ 22,403 Income taxes 21,637 20,069 24,926 SUPPLEMENTAL NONCASH DISCLOSURES: Mortgage servicing rights capitalized$ 1,838 $ 5,054 $ 5,463 Transfers from loans to real estate acquired in settlement of loans - 64 2,750 New unfunded obligations in low-income-housing investments 29,115 10,000 10,000 Right-of-use assets recorded 6,360 1,354 14,144 Allowance for credit losses recorded upon adoption of ASC 326 - - 7,241
See accompanying footnotes to consolidated financial statements.
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FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation - The consolidated financial statements include the accounts ofRepublic Bancorp, Inc. (the "Parent Company") and its wholly owned subsidiaries,Republic Bank & Trust Company andRepublic Insurance Services, Inc. As used in this filing, the terms "Republic," the "Company," "we," "our," and "us" refer toRepublic 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 inLouisville, Kentucky . The Bank is aKentucky -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 theU.S. The Captive is aNevada -based, wholly owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives for which insurance may not be available or economically feasible. In 2005,Republic Bancorp Capital Trust , an unconsolidated trust subsidiary of Republic, was formed and issued$40 million in TPS. The sole asset of RBCT represented the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. OnSeptember 30, 2021 , as permitted under the terms of RBCT's governing documents, Republic repaid the subordinated note and redeemed the TPS at par without penalty. As ofDecember 31, 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. 97 Table of ContentsCore Bank
Traditional Banking segment - The Traditional Banking segment provides
traditional banking products primarily to customers in the Company's market
footprint. As of
with locations as follows:
?
? Metropolitan
?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
·Metropolitan
·Metropolitan
Republic's headquarters are in
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 - TheCore Bank provides short-term, revolving credit facilities to mortgage bankers acrossthe 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. TheCore 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. 98
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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 theFNMA . 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 theU.S. , as well as tax-preparation software providers (collectively, the "Tax Providers"). The majority of all the business generated by the TRS business occurs during the first half of each year. During the second half of each year, TRS generates limited revenue and incurs costs preparing for the next year's tax season. RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item "Net refund transfer fees." The RA credit product is a loan made in conjunction with the filing of a taxpayer's final federal tax return, which allows the taxpayer to borrow funds as an advance of a portion of their tax refund. The RA product had the following features during the first quarters of 2022 and 2021:
? Offered only during the first two months of each year;
? The taxpayer was given the option to choose from multiple loan-amount tiers,
subject to underwriting, up to a maximum advance amount of
? No requirement that the taxpayer pays for another bank product, such as an RT;
Multiple disbursement methods were available with most Tax Providers, including
? direct deposit, prepaid card, or check, based on the taxpayer-customer's
election;
? Repayment of the RA to the Bank is deducted from the taxpayer's tax refund
proceeds; and
? If an insufficient refund to repay the RA occurs:
o there is no recourse to the taxpayer,
o no negative credit reporting on the taxpayer, and
o no collection efforts against the taxpayer.
The ERA credit product is similar to the RA, with the distinction of the timing of when the ERA is originated and the documentation available to underwrite the credit. The ERA is originated prior to the taxpayer receiving their fiscal year taxable income documentation, e.g., W-2 and the filing of the taxpayer's final federal tax return. The repayment of the ERA is incumbent upon the taxpayer client returning to the Bank's Tax Provider for the filing of their final federal tax return in order for the tax refund to potentially be received by the Bank from the federal government to pay off the advance. The ERA product related to the first quarter 2023 tax filing season had the following features:
? Offered only during
? The taxpayer had the option to choose from multiple loan-amount tiers, subject
to underwriting, up to a maximum advance amount of
? No requirement that the taxpayer pays for another bank product, such as an RT;
? Multiple disbursement methods were available with most Tax Providers, including
direct deposit or prepaid card, based on the taxpayer-customer's election;
? Repayment of the ERA to the Bank is deducted from the taxpayer's tax refund
proceeds; and
? If an insufficient refund to repay the ERA occurs:
o there is no recourse to the taxpayer,
o no negative credit reporting on the taxpayer, and
o no collection efforts against the taxpayer.
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The Company reports fees paid for RAs, including ERAs, as interest income on
loans. RAs originated related to the first quarter 2022 tax season were repaid,
on average, within 32 days after the taxpayer's tax return was submitted to the
applicable taxing authority. RAs and ERAs do not have a contractual due date but
the Company considered an RA, related to the first quarter 2022 tax season,
delinquent if it remained unpaid 35 days after the taxpayer's tax return was
submitted to the applicable taxing authority. The number of days for delinquency
eligibility is based on management's annual analysis of tax return processing
times. Provisions on RAs are estimated when advances are made. Unpaid RAs,
including ERAs, related to the first quarter tax season of a given year are
charged-off by June 30th of that year, with RAs collected during the second half
of that year recorded as recoveries of previously charged-off loans.
Related to the overall credit losses on RAs and ERAs, the Bank's ability to
control losses is highly dependent upon its ability to predict the taxpayer's
likelihood to receive the tax refund as claimed on the taxpayer's tax return.
Each year, the Bank's RA and ERA approval model is based primarily on the
prior-year's tax refund payment patterns. Because the substantial majority of
the RA and ERA 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
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, onJune 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. OnJune 6, 2022 , the Bank and Green Dot filed a stipulation of dismissal of the Lawsuit with theDelaware Court of Chancery , which was effective to dismiss the Lawsuit when filed. RepublicCredit 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:
RCS line-of-credit products - Using separate third-party service providers, the
Bank originates two line-of-credit products to generally subprime borrowers in
? multiple states. The first of these two products (the "LOC I") has been
originated by the Bank since 2014. The second (the "LOC II") was introduced in
RCS's LOC I represented the substantial majority of RCS activity during 2021
and 2022.
third-party service providers for the product and are subject to the Bank's
oversight and supervision. Together, these companies provide the Bank with
o certain marketing, servicing, technology, and support services, while a
separate third party provides customer support, servicing, and other services
on the Bank's behalf. The Bank is the lender for this product and is marketed
as such. Further, the Bank controls the loan terms and underwriting guidelines,
and the Bank exercises consumer compliance oversight of the product.
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.
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In
RCS's existing third-party service providers, subject to the Bank's oversight
and supervision, provides the Bank with marketing services and loan servicing
o for the LOC II product. The Bank is the lender for this product and is marketed
as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this product.
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 underlyingLOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
RCS installment loan product - Through RCS, the Bank offers installment loans
with terms ranging from 12 to 60 months to borrowers in multiple states. The
same third-party service provider for RCS's
for the installment loans. This third-party provider is subject to the Bank's
oversight and supervision and provides the Bank with marketing services and
loan servicing for these RCS installment loans. The Bank is the lender for
these RCS installment loans and is marketed as such. Furthermore, the Bank
? controls the loan terms and underwriting guidelines, and the Bank exercises
consumer compliance oversight of this RCS installment loan product. Currently,
all loan balances originated under this RCS installment loan program are
carried as "held for sale" on the Bank's balance sheet, with the intention to
sell these loans to a third-party, who is an affiliate of the Bank's
third-party service provider, 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.
RCS healthcare receivables products - The Bank originates
? healthcare-receivables products across the
third-party service providers.
o For two of the programs, the Bank retains 100% of the receivables, with
recourse in the event of default.
For the remaining program, in some instances the Bank retains 100% of the
receivables originated, with recourse in the event of default, and in other
o instances, the Bank sells 100% of the receivables within one month of
origination. 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."
Use of Estimates - To prepare financial statements in conformity with GAAP,
management makes estimates and assumptions based on available information. These
estimates affect the amounts reported in the financial statements and the
disclosures provided. Actual amounts could differ from these estimates. The
resulting change in estimates could be material to the financial statements.
Concentration of Credit Risk - With limited exception, the Company's Traditional Banking business activity is with clients located inKentucky ,Indiana ,Florida , andTennessee . The Company's Traditional Banking exposure to credit risk is significantly affected by changes in the economy in these specific areas. The Bank's warehouse lines of credit are secured by single family, first lien residential real estate loans originated by the Bank's mortgage clients acrossthe United States . As ofDecember 31, 2022 , 28% of collateral securing warehouse lines was located inCalifornia . Earnings Concentration - For 2022, 2021, and 2020, approximately 31%, 24% and 23% of total Company net revenues (net interest income plus noninterest income) were derived from the RPG operations. Within RPG, the TRS segment accounted for 18%, 13% and 14%, while the RCS segment accounting for 13%, 11% and 9% of total Company net revenues.
For 2022, 2021, and 2020, approximately 4%, 8% and 8% of total Company net
revenues (net interest income plus noninterest income) were derived from the
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Cash Flows - Cash and cash equivalents include cash, deposits with other
financial institutions with original maturities less than 90 days and federal
funds sold. Net cash flows are reported for client loan and deposit
transactions, interest-bearing deposits in other financial institutions,
repurchase agreements and income taxes.
Interest-Bearing Deposits in Other Financial Institutions - Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.Debt Securities - Debt securities are classified as AFS when they might be sold before maturity. AFS debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Debt securities are classified as HTM and carried at amortized cost less any applicable ACLS when management has the positive intent and ability to hold them to maturity. Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to the earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
A debt security is placed on nonaccrual status at the time any principal or
interest payments become more than 90 days delinquent. Interest accrued but not
received for a security placed on nonaccrual is reversed against interest
income.
Equity Securities - Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without a readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. Allowance for Credit Losses on Available-for-Sale Securities - For the Company's AFS corporate bond, the Company uses third-party PD and LGD data to estimate an ACLS, which is limited by the amount that the bond's fair value is less than its amortized cost basis. For all other AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For other AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACLS is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACLS is recognized in other comprehensive income. Changes in ACLS are recorded as a charge or credit to the Provision. Losses are charged against the ACLS when management believes the lack of collectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest on AFS debt securities totaled $2 million and $1 million as of December 31, 2022 and 2021 and is excluded from the ACLS. Accrued interest on AFS debt securities is presented as a component of other assets on the Company's balance sheet. Allowance for Credit Losses on Held-to-Maturity Securities - The Company measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $92,000 and $89,000 as of December 31, 2022 and 2021 and is excluded from the ACLS. Accrued interest on HTM debt securities is presented as a component of other assets on the Company's balance sheet.
The estimate of ACLS on HTM debt securities considers historical credit loss
information that is adjusted for current conditions and reasonable and
supportable forecasts.
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The Company classifies its HTM portfolio into the following major security
types: MBS, corporate bonds, and municipal bonds. MBS securities include CMOs.
Nearly all of the MBS portfolio is issued by U.S. government entities or
government sponsored entities. These securities are highly rated by major rating
agencies and have a long history of no credit losses. The MBS portfolio also
carries ratings no lower than investment grade. The Company uses PD and LGD
estimates provided by a third-party to estimate an ACLS for its corporate and
municipal bond portfolios. These PD and LGD estimates are updated at least
quarterly by the Company, with these estimates incorporating the most recent
market expectations and forecasted information.
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 Banking Activities - Mortgage loans originated and intended for sale in
the secondary market are carried at fair value, as determined by outstanding
commitments from investors. Net gains on mortgage loans held for sale are
recorded as a component of Mortgage Banking income and represent the difference
between the selling price and the carrying value of the loans sold.
Substantially all of the gains or losses on the sale of loans are reported in
earnings when the interest rates on loans are locked.
Commitments to fund mortgage loans ("interest rate lock commitments") to be sold
into the secondary market and non-exchange traded mandatory forward sales
contracts ("forward contracts") for the future delivery of these mortgage loans
or the purchase of TBA securities are accounted for as free-standing
derivatives. Fair values of these mortgage derivatives are estimated based on
changes in mortgage interest rates from the date the Bank enters into the
derivative. Generally, the Bank enters into forward contracts for the future
delivery of mortgage loans or the purchase of TBA securities when interest rate
lock commitments are entered into, in order to hedge the change in interest
rates resulting from its commitments to fund the loans. Changes in the fair
values of these mortgage derivatives are included in net gains on sales of
loans, which is a component of Mortgage Banking income on the income statement.
Mortgage loans held for sale are generally sold with the MSRs retained. When
mortgage loans are sold with servicing retained, servicing rights are initially
recorded at fair value with the income statement effect recorded as a component
of Mortgage Banking income. Fair value is based on market prices for comparable
mortgage servicing contracts, when available or alternatively, is based on a
valuation model that calculates the present value of estimated future net
servicing income. All classes of servicing assets are subsequently measured
using the amortization method, which requires servicing rights to be amortized
into Mortgage Banking income in proportion to, and over the period of, the
estimated future net servicing income of the underlying loans. Amortization of
MSRs are initially set at seven years and subsequently adjusted on a quarterly
basis based on the weighted average remaining life of the underlying loans.
MSRs are evaluated for impairment quarterly based upon the fair value of the
MSRs as compared to carrying amount. Impairment is determined by stratifying
MSRs into groupings based on predominant risk characteristics, such as interest
rate, loan type, loan terms and investor type. Impairment is recognized through
a valuation allowance for an individual grouping, to the extent that fair value
is less than the carrying amount. If the Bank later determines that all or a
portion of the impairment no longer exists for a particular grouping, a
reduction of the valuation allowance is recorded as an increase to income.
Changes in valuation allowances are reported within Mortgage Banking income on
the income statement. The fair value of the MSR portfolios is subject to
significant fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates.
A primary factor influencing the fair value is the estimated life of the
underlying serviced loans. The estimated life of the serviced loans is
significantly influenced by market interest rates. During a period of declining
interest rates, the fair value of the MSRs generally will decline due to higher
expected prepayments within the portfolio. Alternatively, during a period of
rising interest rates the fair value of MSRs generally will increase, as
prepayments on the underlying loans would be expected to decline.
See Footnote 16 "Mortgage Banking Activities" in this section of the filing for
management's determination of MSR impairment.
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Loan servicing income is reported on the income statement as a component of Mortgage Banking income. Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. Loan servicing income totaled $3.5 million, $3.3 million and $2.9 million for the years ended December 31, 2022, 2021, and 2020. Late fees and ancillary fees related to loan servicing are considered nominal. Consumer Loans Held for Sale, at Fair Value - The Bank offers RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as "held for sale" on the Bank's balance sheet, with the intent to sell generally within sixteen days following the Bank's origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly. Consumer Loans Held for Sale, at Lower of Cost or Fair Value - RCS originates for sale 90% or 95% of the balances from its line-of-credit products and a portion of its healthcare receivables product. Ordinary gains or losses on the sale of these RCS products are reported as a component of "Program fees." Loans - The Bank's financing receivables consist primarily of loans and lease financing receivables (together referred to as "loans"). Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the ACLL. Amortized cost is the principal balance outstanding, net of premiums and discounts, and deferred loan fees and costs. Accrued interest on loans, which is excluded from the ACLL, totaled $11 million and $8 million as of December 31, 2022 and 2021 and was reported as a component of other assets on the Company's balance sheet. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method. Premiums on loans held for investment are amortized into interest income on the level-yield method over the expected life of the loan. Lease financing receivables, which are generally direct financing leases, are reported at their principal balance outstanding, including any lease residual amount, net of any unearned income, deferred loan fees and costs, and applicable ACLL. Leasing income is recognized on a basis that achieves a constant periodic rate of return on the outstanding lease financing balances over the lease terms. Interest income on mortgage and commercial loans is typically discontinued at the time the loan is 80 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan, which may define past due status by the number of days or the number of payments past due. In most cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 80 days still on accrual include smaller balance, homogeneous loans that are evaluated collectively or individually for loss. Interest accrued but not received for all classes of loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, typically a minimum of six consecutive months of performance. Consumer and credit card loans are not placed on nonaccrual status but are reviewed periodically and charged-off when the loan is deemed uncollectible, generally no more than 120 days. Purchased Credit Deteriorated Loans - The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. The Company will generally classify a loan acquired in a business acquisition as PCD if it meets any of the following criteria:
? Non-accretable discount assigned by the Bank;
? Classified by either the acquired bank or the Bank as Special Mention or
Substandard;
? Nonaccrual status when purchased;
? Past due 30 days or more when purchased;
? Loans that have been at least one time over 30 days past due;
? Past maturity date when purchased;
? Select loans that are cross collateralized with any loans identified above;
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PCD loans are recorded at the amount paid. An ACLL is determined using the same methodology as other loans held for investment. The initial ACLL determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and ACLL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACLL are recorded through the Provision. Allowance for Credit Losses on Loans - The ACLL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the ACLL when management believes the lack of collectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACLL is measured on a collective or pooled basis when similar risk characteristics exist. The first table of Footnote 4 illustrates the Company's loan portfolio by ACLL risk pool. This pooling method is primarily based on the pool's collateral type or the pool's purpose and generally follows the Bank's loan segmentation for regulatory reporting. For each of its loan pools, the Company uses a "static-pool" method, which analyzes historical closed pools of similar loans over their expected lives to attain a loss rate. This loss rate is then adjusted for current conditions and reasonable and supportable forecasts prior to being applied to the current balance of the analyzed pools. Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. A one-year forecast adjustment to the historical loss rate is based on a forecast of theU.S. national unemployment rate, which has shown a relatively strong historical correlation to the Bank's loan losses. For its CRE loan pool, the Company uses a one-year forecast of general CRE values. Subsequent to one-year forecasts, loss rates are assumed to immediately revert back to long-term historical averages. Loans that do not share risk characteristics are evaluated on an individual basis, with the Company choosing to individually evaluate all TDRs. Loans evaluated individually are not included in the pooled evaluation but are instead evaluated under a discounted cash flow or collateral-dependent method. A collateral dependent method is used when foreclosure is probable, with expected credit losses based on the fair value of the collateral at the reporting date, adjusted for selling costs if appropriate. Determining Expected Loan Lives: Expected credit losses are estimated over the contractual loan term, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower, or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
See Footnote 4 "Loans and Allowance for Credit Losses" in this section of the
filing for additional discussion regarding the Company's ACLL.
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. The Company measures the ACLL for TDRs
individually using either a discounted cash-flow method or the collateral
method, if the TDR is collateral dependent. TDRs whose ACLL is measured using a
discounted cash flow method use the original pre-modification interest rate on
the loan for discounting.
Transfers of Financial Assets - Transfers of financial assets are accounted for
as sales when control over the assets has been relinquished. Control over
transferred assets is deemed to be surrendered when the assets have been
isolated from the Company, the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets and the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Other Real Estate Owned - Assets acquired through loan foreclosures are
initially recorded at fair value less costs to sell when acquired, establishing
a new cost basis. Physical possession of residential real estate property
collateralizing a consumer mortgage loan occurs when legal title is obtained
upon completion of foreclosure or when the borrower conveys all interest in the
property to satisfy the loan through completion of a deed in lieu of foreclosure
or through a similar legal agreement. These assets are subsequently accounted
for at lower of cost or fair value less estimated costs to sell. The Bank's
selling costs for OREO typically range from
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10- 13% of each property's fair value, depending on property class. Fair value is commonly based on recent real estate appraisals or broker price opinions. Operating costs after acquisition are expensed. Appraisals for both collateral-dependent loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Once the appraisal is received, a member of the Bank's CCAD reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On at least an annual basis, the Bank performs a back test of collateral appraisals by comparing actual selling prices on recent collateral sales to the most recent appraisal of such collateral. Back tests are performed for each collateral class, e.g., residential real estate or commercial real estate, and may lead to additional adjustments to the value of unliquidated collateral of similar class. Premises and Equipment, Net - Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the related assets on the straight-line method. Estimated lives typically range from 25 to 39 years for buildings and improvements, three to ten years for furniture, fixtures and equipment and three to five years for leasehold improvements. Right of Use Assets and Operating Lease Liabilities - For its long-term operating leases, the Company records on its balance sheet operating lease liabilities equal to the present value of the 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. Regarding lease terms, the Company's assumes the remaining lease term includes the fixed noncancelable term, plus all periods for which failure to renew the lease imposes a penalty on the Company, plus all periods for which the Company is reasonably certain to exercise a lease renewal option, plus all periods for which the Company is reasonably certain not to exercise a lease termination option. In determining whether it is reasonably certain to exercise a lease renewal or termination option, the Company considers its overall strategic plan and all economic and environmental circumstances connected to the leased property.
To discount its operating lease payments and guarantees, the Company employs the
interest rate curve published by the FHLB of
collateralized term borrowings, matching expected lease term to borrowing term.
The Company does not place short-term leases on its balance sheet. Short-term
leases have a lease term of 12 months or less and do not include a purchase
option that the Company is reasonably certain to exercise.
Federal Home LoanBank Stock - The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security and annually evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are recorded as interest income. Bank Owned Life Insurance - The Bank maintains BOLI policies on certain employees. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. The Bank recognizes tax-free income from the periodic increases in cash surrender value of these policies and from death benefits in noninterest income. Credit ratings for the Bank's BOLI carriers are reviewed at least annually.Goodwill and Other Intangible Assets -Goodwill resulting from business acquisitions represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets assumed as of the acquisition date.Goodwill and intangible assets acquired in a purchase combination and determined to have an indefinite useful life are not amortized but tested annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. 106
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The Company has selected September 30th as the date to perform its annual
goodwill impairment test. Intangible assets with definite useful lives are
amortized over their estimated useful lives to their estimated residual values.
balance sheet.
All goodwill is attributable to the Company's Traditional Banking segment and is not expected to be deductible for tax purposes. Based on its assessment, the Company believes its goodwill of $16 million as of December 31, 2022 and 2021 was not impaired and is properly recorded in the consolidated financial. Off Balance Sheet Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to fund loans and standby letters of credit. The face amount for these items represents the exposure to loss, before considering client collateral or ability to repay. Such financial instruments are recorded upon funding. Instruments such as standby letters of credit are considered financial guarantees and are recorded at fair value. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures - The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The likelihood that funding will occur is based on the historical usage rate of such commitments.
For a listing of off-balance sheet credit exposures the Company generally
considers for an ACLC, see Footnote 13 "Off Balance Sheet Risks, Commitments And
Contingent Liabilities" in this section of the filing.
The ACLC is recorded as a component of other liabilities on the Company's
balance sheet. Any provision for the ACLC is recorded on the Company's income
statement as a component of other noninterest expense.
Derivatives -Derivatives are reported at fair value in other assets or other liabilities. The Company's derivatives include interest rate swap agreements. For asset/liability management purposes, the Bank uses interest rate swap agreements to hedge the exposure or to modify the interest rate characteristic of certain immediately repricing liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a derivative designated as a cash flow hedge, the effective portion of the derivative's unrealized gain or loss
is recorded as a component of other comprehensive income (loss). For derivatives
not designated as hedges, the gain or loss is recognized in current period
earnings.
Net cash settlements on interest rate swaps are recorded in interest expense and
cash flows related to the swaps are classified in the cash flow statement the
same as the interest expense and cash flows from the liabilities being hedged.
The Bank formally documents the relationship between derivatives and hedged
items, as well as the risk-management objective and the strategy for undertaking
hedge transactions at the inception of the hedging relationship. This
documentation includes linking cash flow hedges to specific assets and
liabilities on the balance sheet. The Bank also formally assesses, both at the
hedge's inception and on an ongoing basis, whether a swap is highly effective in
offsetting changes in cash flows of the hedged items. The Bank discontinues
hedge accounting when it determines that the derivative is no longer effective
in offsetting changes in cash flows of the hedged item, the derivative is
settled or terminates, or treatment of the derivative as a hedge is no longer
appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the
derivative are recorded as noninterest income. When a cash flow hedge is
discontinued but the hedged cash flows or forecasted transactions are still
expected to occur, gains or losses that were accumulated in other comprehensive
income are amortized into earnings over the same periods that the hedged
transactions will affect earnings.
The Bank enters into interest rate swaps to facilitate client transactions and
meet their financing needs. Upon entering into these instruments to meet client
needs, the Bank enters into offsetting positions with dealer counterparties in
order to minimize the Bank's interest rate risk. These swaps are derivatives but
are not designated as hedging instruments; therefore, changes in fair value are
reported in current year earnings.
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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 does not have credit risk. Stock Based Compensation - For stock options and restricted stock awards issued to employees, compensation cost is recognized based on the fair value of these awards at the date of grant. The Company utilizes a Black-Scholes model to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures of stock-based awards are accounted for when incurred in lieu of using forfeiture estimates. Income Taxes - Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. DTAs and DTLs are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces DTAs to the amount expected to be realized. A tax position is recognized as a benefit only if it is "more-likely-than-not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more-likely-than-not" test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters
in income tax expense.
Retirement Plans - 401(k) plan expense is recorded as a component of salaries and employee benefits and represents the amount of Company matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. Earnings Per Common Share - Basic earnings per share is based on net income (in the case of Class B Common Stock, less the dividend preference on Class A Common Stock), divided by the weighted average number of shares outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential Class A common shares issuable under stock options. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Earnings and dividends per share are restated for all stock dividends through the date of issuance of the financial statements. Comprehensive Income - Comprehensive income consists of net income and OCI. OCI includes, net of tax, unrealized gains and losses on available-for-sale debt securities and unrealized gains and losses on cash flow hedges, which are also recognized as separate components of equity. Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are any outstanding matters that would have a material effect on the financial statements. Restrictions on Cash and Cash Equivalents - Republic has historically been required by the FRB to maintain average reserve balances. Effective March 15, 2020, the FRB reduced the Bank's reserve requirement ratio to zero percent, therefore, cash and due from banks on the consolidated balance sheet included no required reserve balances as of December 31, 2022 and 2021.
The Company's Captive maintains cash reserves to cover insurable claims.
Reserves totaled $4 million as of December 31, 2022 and 2021.
Equity - Stock dividends in excess of 20% are reported by transferring the par
value of the stock issued from retained earnings to common stock. Stock
dividends for 20% or less are reported by transferring the fair value, as of the
ex-dividend date, of the stock issued from retained earnings to common stock and
additional paid in capital. Fractional share amounts are paid in cash with a
reduction in retained earnings.
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Dividend Restrictions - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Republic or by Republic to shareholders. Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Footnote 15 "Fair Value" in this section of the filing. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Revenue from Contracts with Customers - The Company's services that fall within the scope of ASC 606, Revenue from Contracts with Customers, are presented within noninterest income and are recognized as revenue as the Company satisfies its obligation to its client. The Company expenses as-incurred incremental costs of obtaining a contract when the amortization period of those costs would be less than one year. Segment Information - Reportable segments represent parts of the Company evaluated by management with separate financial information. Republic's internal information is primarily reported and evaluated in five reportable segments - Traditional Banking, Warehouse, Mortgage Banking, TRS and RCS.
Reclassifications - Certain amounts presented in prior periods have been
reclassified to conform to the current period presentation. These
reclassifications had no impact on previously reported prior periods' net income
or shareholders' equity.
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Recently Adopted Accounting Standards
The following ASUs were adopted by the Company during the year ended December
31, 2022:
z
Method of Financial
ASU. No. Topic Nature of Update Date Adopted Adoption Statement Impact
2020-06 Debt-Debt with This ASU simplifies accounting for January 1, 2022 Prospectively Immaterial
Conversion and convertible instruments by removing major
Other Options separation models required under current U.S.
(Subtopic 470-20) GAAP. Consequently, more convertible debt
and Derivatives instruments will be reported as a single
and Hedging- liability instrument and more convertible
Contracts in preferred stock as a single equity instrument
Entity's Own with no separate accounting for embedded
Equity (Subtopic conversion features. The ASU removes certain
815-40): settlement conditions that are required for
Accounting for equity contracts to qualify for the
Convertible derivative scope exception, which will permit
Instruments and more equity contracts to qualify for it. The
Contracts in an ASU also simplifies the diluted earnings per
Entity's Own share calculation in certain areas.
Equity
2021-04 Earnings Per Share This ASU provides guidance for a modification January 1, 2022 Prospectively Immaterial
(Topic 260), Debt- or an exchange of a freestanding
Modifications and equity-classified written call option that is
Extinguishments not within the scope of another Topic. It
(Subtopic 470-50), specifically addresses: (1) How an entity
Compensation-Stock should treat a modification of the terms or
Compensation conditions or an exchange of a
freestanding
(Topic 718), and equity-classified written call option
that
Derivatives and remains equity classified after
modification
Hedging-Contracts or exchange; (2) How an entity should measure
in Entity's Own the effect of a modification or an exchange
Equity (Subtopic of a freestanding equity-classified written
815-40): Issuer's call option that remains equity classified
Accounting for after modification or exchange; and (3) How
Certain an entity should recognize the effect of a
Modifications or modification or an exchange of a
freestanding
Exchanges of equity-classified written call option that
Freestanding remains equity classified after modification
Equity-Classified or exchange.
Written Call
Options
Accounting Standards Updates
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. Generally, if an issued-but-not-yet-effective ASU with an expected
immaterial impact to the Company has been disclosed in prior Company filings,
that ASU will not be subsequently redisclosed.
Date Adoption Adoption Expected
ASU. No. Topic Nature of Update Required Method Financial Impact
2022-02 Financial This ASU eliminates the TDR recognition
January 1, 2023 Prospectively The Company is
Instruments-Credit and measurement guidance and, instead, currently
Losses (Topic requires the Company to evaluate analyzing the
326): Troubled (consistent with the accounting for other impact of this
Debt loan modifications) whether a ASU on its
Restructurings and modification represents a new loan or a financial
Vintage continuation of an existing loan. This statements.
Disclosures ASU also enhances existing disclosure
requirements and introduces new
requirements related to certain
modifications of receivables made to
borrowers experiencing financial
difficulty.
This ASU requires the Company to disclose
current-period gross write-offs by year
of origination for financing receivables
and net investment in leases within the
scope of Subtopic 326-20. Gross writeoff
information must be included in the
vintage disclosures required for the
Company in accordance with ASC
326-20-50-6, which requires that the
Company disclose the amortized cost basis
of financing receivables by credit
quality indicator and class of financing
receivable by year of origination. (see
Note 4 in this section of the filing)
2022-03 Fair Value This ASU clarifies that a contractual
January 1, 2024 Prospectively Immaterial
Measurement (Topic restriction on the sale of an equity
820): Fair Value security is not considered part of the
Measurement of unit of account of the equity security
Equity Securities and, therefore, is not considered in
Subject to measuring fair value.
Contractual Sale
Restrictions
2022-06 Reference Rate This ASU extends the period of time January 1, 2023 Prospectively Immaterial. The
Reform (Topic preparers can utilize the reference rate Company ceased
848): Deferral of reform relief guidance in Topic 848. The making new loans
the Sunset Date of objective of the guidance in Topic 848 is and renewing
Topic 848 to provide relief during the temporary loans indexed to
transition period, so the FASB included a LIBOR on January
sunset provision within Topic 848 based 1, 2022.
on expectations of when the London
Interbank Offered Rate (LIBOR) would
cease being published. In 2021, the UK
Financial Conduct Authority (FCA) delayed
the intended cessation date of certain
tenors of USD LIBOR to June 30, 2023.
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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
Gross Allowance
Amortized Unrealized Unrealized for Fair
December 31, 2022 (in thousands) Cost Gains Losses Credit Losses Value
U.S. Treasury securities andU.S. Government agencies $ 436,333 $ 1 $ (25,193) $ - $ 411,141 Private label mortgage-backed security 843 1,284 - - 2,127 Mortgage-backed securities - residential 189,312 16 (17,455) - 171,873 Collateralized mortgage obligations 22,774 21 (1,427) - 21,368 Corporate bonds 10,000 1 - - 10,001 Trust preferred security 3,741 114 - - 3,855 Total available-for-sale debt securities $ 663,003 $ 1,437 $ (44,075) $ - $ 620,365 Gross Gross Allowance Amortized Unrealized Unrealized for Fair
December 31, 2021 (in thousands) Cost Gains Losses Credit Losses Value
U.S. Treasury securities andU.S. Government agencies $ 239,880 $ 473 $ (2,894) $ - $ 237,459 Private label mortgage-backed security 1,418 1,313 - - 2,731 Mortgage-backed securities - residential 207,697 3,525 (473) - 210,749 Collateralized mortgage obligations 29,947 377 (30) - 30,294 Corporate bonds 10,000 46 - - 10,046 Trust preferred security 3,684 163 - - 3,847 Total available-for-sale debt securities $ 492,626 $ 5,897 $ (3,397) $ - $ 495,126
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:
Gross Gross Allowance
Amortized Unrecognized Unrecognized Fair for
December 31, 2022 (in thousands) Cost Gains
Losses Value Credit Losses
U.S. Treasury securities andU.S. Government agencies $ 75,000 $ 106 $ - $ 75,106 $ - Mortgage-backed securities - residential 27 - (1) 26 - Collateralized mortgage obligations 7,270 54 (148) 7,176 - Corporate bonds 4,974 - (49) 4,925 (10) Obligations of state and political subdivisions 125 - (1) 124 - Total held-to-maturity debt securities $ 87,396 $ 160 $ (199) $ 87,357 $ (10) Gross Gross Allowance Amortized Unrecognized Unrecognized Fair for
December 31, 2021 (in thousands) Cost Gains
Losses Value Credit Losses
Mortgage-backed securities -
residential $ 46 $ - $ - $ 46 $ -
Collateralized mortgage obligations 9,080 158 - 9,238 -
Corporate bonds 34,975 263 (6) 35,232 (47)
Obligations of state and political
subdivisions 245 3 - 248 -
Total held-to-maturity debt
securities $ 44,346 $ 424 $ (6) $ 44,764 $ (47)
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Sales and Calls of Available-for-Sale Debt Securities
During 2022, 2021, and 2020 there were no material sales of AFS debt securities. The Company had no AFS debt securities called during 2022. The Company did have AFS debt securities called during 2021 and 2020 with an amortized cost of $90 million and $119 million.
Debt Securities by Contractual Maturity
The following table presents the amortized cost and fair value of debt
securities by contractual maturity as of December 31, 2022. Expected maturities
may differ from contractual maturities if borrowers have the right to call or
prepay obligations with or without call or early termination penalties.
Securities not due at a single maturity date are detailed separately.
Available-for-Sale Held-to-Maturity
Debt Securities Debt Securities
Amortized Fair Amortized Fair
December 31, 2022 (in thousands) Cost Value
Cost Value
Due in one year or less $ 41,789 $ 41,433 $ 125 $ 124 Due from one year to five years 404,544 379,709 79,974 80,031 Due from five years to ten years - - - - Due beyond ten years 3,741 3,855 - - Private label mortgage-backed security 843 2,127 - - Mortgage-backed securities - residential 189,312 171,873 27 26 Collateralized mortgage obligations 22,774 21,368
7,270 7,176 Total debt securities $ 663,003 $ 620,365 $ 87,396 $ 87,357
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 December 31, 2022 and
2021, aggregated by investment category and length of time in a continuous
unrealized loss position:
Less than 12 months 12 months or more Total
Unrealized Unrealized Unrealized
December 31, 2022 (in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
Available-for-sale debt securities:U.S. Treasury securities andU.S. Government agencies $ 229,372 $ (7,139) $ 171,676 $ (18,054) $ 401,048 $ (25,193) Mortgage-backed securities - residential 105,274 (7,434)
65,520 (10,021) 170,794 (17,455)
Collateralized mortgage obligations
20,418 (1,426) 6 (1) 20,424 (1,427)
Total available-for-sale debt
securities $ 355,064 $ (15,999) $ 237,202 $ (28,076) $ 592,266 $ (44,075)
Less than 12 months 12 months or more Total
Unrealized Unrealized Unrealized
December 31, 2021 (in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
Available-for-sale debt securities:U.S. Treasury securities andU.S. Government agencies $ 177,138 $ (2,622) $ 9,728 $ (272) $ 186,866 $ (2,894) Mortgage-backed securities - residential 84,937 (473) - - 84,937 (473)
Collateralized mortgage obligations 4,495 (30)
- - 4,495 (30) Total available-for-sale debt securities $ 266,570 $ (3,125) $ 9,728 $ (272) $ 276,298 $ (3,397)
As of December 31, 2022, the Bank's portfolio consisted of 179 securities, 163
of which were in an unrealized loss position.
As of December 31, 2021, the Bank's portfolio consisted of 173 securities, 29 of
which were in an unrealized loss position.
As of December 31, 2022 and 2021, there were no holdings of debt securities of any one issuer, other than theU.S. Government and its agencies, in an amount greater than 10% of stockholders' equity. 112
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Mortgage-Backed Securities and Collateralized Mortgage Obligations
As of December 31, 2022, with the exception of the $2.1 million private label mortgage-backed security, all other mortgage-backed securities and CMOs held by the Bank were issued byU.S. government-sponsored entities and agencies, primarily the FHLMC andFNMA . As of December 31, 2022 and 2021, there were gross unrealized losses of $18.9 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
million par value. The coupon on this security is based on the 3-month LIBOR
rate plus 159 basis points. The Company performs an ongoing analysis of the
credit risk of the underlying borrower in relation to its TRUP.
Private Label Mortgage-Backed Security
The Bank owns one private label mortgage-backed security with a total carrying
value of $2.1 million as of December 31, 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 in this section of the filing under Footnote 15 "Fair Value."
The following table presents a rollforward of the Bank's private label
mortgage-backed security credit losses recognized in earnings:
Years Ended December 31, (in thousands) 2022 2021 2020
Balance, beginning of period $ 1,462 $ 1,462 $ 1,462
Recovery of losses previously recorded - - -
Balance, end of period $ 1,462 $ 1,462 $ 1,462
Further deterioration in economic conditions could cause the Bank to record an
additional impairment charge related to credit losses of up to $843,000, which
is the current gross amortized cost of the Bank's remaining private label
mortgage-backed security.
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Rollforward of the Allowance for Credit Losses on Debt Securities
The tables below present a rollforward for 2022 and 2021 of the ACLS on AFS and
HTM debt securities:
ACLS Rollforward
Years Ended December 31,
2022 2021
Beginning Charge- Ending Beginning Charge- Ending
(in thousands) Balance Provision offs Recoveries Balance Balance Provision offs Recoveries Balance
Available-for-Sale Securities:
Corporate Bonds $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -
Held-to-Maturity Securities:
Corporate Bonds 47 (37) - - 10 178 (131) - - 47
Total $ 47 $ (37) $ - $ - $ 10 $ 178 $ (131) $ - $ - $ 47
The Company decreased the ACLS on its HTM corporate bonds during 2022 based on improved PD and LGD estimates on these bonds. PD and LGD estimates for these bonds were elevated during 2020 due to pandemic-driven economic concerns. There were no HTM debt securities in nonaccrual status or past due 90 days or more as of December 31, 2022 and 2021. All of the Company's HTM corporate bonds were rated investment grade as of December 31, 2022 and 2021.
There were no HTM debt securities considered collateral dependent as of December
31, 2022 and 2021.
Pledged Debt Securities
Debt securities pledged to secure public deposits, securities sold under
agreements to repurchase, and securities held for other purposes, as required or
permitted by law are as follows:
December 31, (in thousands) 2022 2021
Carrying amount $ 217,562 $ 319,650
Fair value 217,562 319,808
Equity Securities
During 2022, the Company sold an equity security for $2.2 million and realized a
loss of $55,000. There were no material sales of equity securities in 2021 or
2020. The following tables present the carrying value, gross unrealized gains
and losses, and fair value of equity securities with readily determinable fair
values:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2022 (in thousands) Cost Gains
Losses Value
Freddie Mac preferred stock $ - $ 111 $ - $ 111
Total equity securities with readily
determinable fair values $ - $ 111 $ - $ 111
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2021 (in thousands) Cost Gains
Losses Value
Freddie Mac preferred stock $ - $ 170 $ - $ 170
Community Reinvestment Act mutual fund 2,500 - (50) 2,450
Total equity securities with readily
determinable fair values $ 2,500 $ 170 $ (50) $ 2,620
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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
Year Ended December 31, 2022 Year Ended December 31, 2021 (in thousands) Realized Unrealized Total Realized Unrealized Total
Freddie Mac preferred stock $ - $ (59) $ (59) $ - $ (390) $ (390) Community Reinvestment Act mutual fund (204) - (204) - (73) (73) Total equity securities with readily determinable fair value $ (204) $ (59) $ (263) $ - $ (463) $ (463) 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 16 "Mortgage Banking Activities" of this section of the
filing.
Consumer Loans Held for Sale, at Fair Value
The Bank offers RCS installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. Balances originated under this RCS installment loan program are carried as "held for sale" on the Bank's balance sheet, with the intent to sell generally within sixteen days following the Bank's origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.
Activity for consumer loans held for sale and carried at fair value was as
follows:
Years Ended December 31, (in thousands) 2022 2021 2020 Balance, beginning of period $ 19,747 $ 3,298 $ 598 Origination of consumer loans held for sale 311,704 271,430 58,833 Proceeds from the sale of consumer loans held for sale (333,438) (260,730) (57,814) Net gain on sale of consumer loans held for sale 6,693
5,749 1,681 Balance, end of period $ 4,706 $ 19,747 $ 3,298
Consumer Loans Held for Sale, at Lower of Cost or Fair Value
RCS originates for sale 90% of the balances from its line-of-credit product and a portion of its healthcare receivables product. 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:
Years Ended December 31, (in thousands) 2022 2021 2020 Balance, beginning of period $ 2,937 $ 1,478 $ 11,646 Origination of consumer loans held for sale 734,011 610,750 460,040 Proceeds from the sale of consumer loans held for sale (730,363) (614,840) (473,507) Net gain on sale of consumer loans held for sale 6,584
5,549 3,299
Balance, end of period $ 13,169 $ 2,937 $ 1,478
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4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the loan portfolio follows:
December 31, (in thousands) 2022 2021 Traditional Banking: Residential real estate: Owner occupied $ 911,427 $ 820,731 Nonowner occupied 321,358 306,323 Commercial real estate 1,599,510 1,456,009 Construction & land development 153,875 129,337 Commercial & industrial 408,407 340,363 Paycheck Protection Program 4,980 56,014 Lease financing receivables 10,505 8,637 Aircraft 179,785 142,894 Home equity 241,739 210,578 Consumer: Credit cards 15,473 14,510 Overdrafts 726 683 Automobile loans 6,731 14,448 Other consumer 626 1,432 Total Traditional Banking 3,855,142 3,501,959 Warehouse lines of credit* 403,560 850,550 Total Core Banking 4,258,702 4,352,509 Republic Processing Group*: Tax Refund Solutions: Refund Advances 97,505 - Other TRS commercial & industrial loans 51,767 50,987 Republic Credit Solutions 107,828 93,066 Total Republic Processing Group 257,100 144,053 Total loans** 4,515,802 4,496,562 Allowance for credit losses (70,413) (64,577) Total loans, net $ 4,445,389 $ 4,431,985
*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 as of December 31, 2022 and 2021:
December 31, (in thousands) 2022 2021 Contractually receivable $ 4,519,136 $ 4,498,671 Unearned income (835) (542) Unamortized premiums 99 116 Unaccreted discounts (479) (641) PPP net unamortized deferred origination (fees) and costs (91)
(1,203)
Other net unamortized deferred origination (fees) and costs (2,028) 161 Carrying value of loans $ 4,515,802 $ 4,496,562
Paycheck Protection Program
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-19 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 December 31, 2022, net PPP loans of $5 million remained on theCore Bank's balance sheet with $91,000 of yet-to-be-earned PPP lender fees reported as a credit offset to
these
originated balances.
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To provide liquidity to banks administering the SBA's PPP, the FRB created the PPPLF, a liquidity facility secured by the PPP loans of the participating banks. As of December 31, 2022, the Bank had no outstanding borrowings from the FRB under the PPPLF. Credit Quality Indicators
Bank procedures for assessing and maintaining credit gradings are the same whether a new or renewed loan is being underwritten, or whether an existing loan is being re-evaluated for potential credit quality concerns. The latter usually occurs upon receipt of updated financial information, or other pertinent data, which triggers a review in the loan grade. Specific Bank procedures follow:
? For new and renewed C&I, CRE and C&D loans, the Bank's CCAD scores and assigns
the credit quality grade to the loan.
Commercial loan officers are responsible for monitoring their respective loan
portfolios and reporting any adverse material changes to senior management.
? When circumstances warrant a review and possible change in the credit quality
grade, loan officers are required to notify the Bank's CCAD or Special Asset
division (under certain deteriorating circumstances).
The Special Asset area of the Bank monitors throughout the month the status of
? all past due loans and classified loans with the respective commercial
officers. These meetings are designed to give loan officers an opportunity to
identify other existing loans that should be downgraded as well.
Monthly, members of Executive Management along with managers of Commercial
Lending, CCAD, Accounting, Special Assets and Retail Collections attend a
Special Asset Committee meeting. The SAC reviews all loans for the Bank graded
Special Mention or worse or loans potentially subject to downgrade into these
classifications and discusses the relative trends and current status of these
? assets. In addition, the SAC reviews all classified and potentially classified
residential real estate and home equity loans. SAC also reviews the actions
taken by management regarding credit-quality grades, foreclosure mitigation,
loan extensions, deferrals or forbearance, troubled debt restructurings, and
collateral repossessions. Based on the information reviewed in this meeting,
the SAC approves all specific loan loss allocations to be recognized by the
Bank within the ACLL analysis.
All new and renewed warehouse lines of credit are approved by the Executive
Loan Committee. The credit area of the Warehouse Lending division initially
recommends the credit quality grade for warehouse facilities to ELC, of which
ELC may approve or amend. The Bank's internal loan review department is the
final authority on a loan's grade and reviews all approved loan grades, which
? they may approve or amend based on their independent review. Monthly, the CLO
reviews warehouse lending activity including data associated with the
underlying collateral to the warehouse facilities, i.e., the mortgage loans
associated with the balances drawn. Key performance indicators monitored
include average days outstanding for each draw, average FICO credit report
score for the underlying collateral, average LTV for the underlying collateral
and other factors deemed relevant.
On at least an annual basis, the Bank's internal loan review department analyzes
all individual loans with outstanding balances greater than $1 million that are
internally classified as "Special Mention," "Substandard," "Doubtful" or "Loss."
In addition, on an annual basis, the Bank analyzes a sample of "Pass" rated
loans.
The Bank categorizes loans into risk categories based on relevant information
about the ability of borrowers to service their debt such as current financial
information, historical payment experience, public information, and current
economic trends. The Bank also considers the fair value of the underlying
collateral and the strength and willingness of the guarantor(s). The Bank
analyzes loans individually, and based on this analysis, establishes a credit
risk rating. The Bank uses the following definitions for risk ratings:
Risk Grade 1 - Excellent (Pass): Loans fully secured by liquid collateral, such
as certificates of deposit, reputable bank letters of credit, or other cash
equivalents; loans fully secured by publicly traded marketable securities where
there is no impediment to liquidation; or loans to any publicly held company
with a current long-term debt rating of A or better.
Risk Grade 2 - Good (Pass): Loans to businesses that have strong financial
statements containing an unqualified opinion from a Certified Public Accounting
firm and at least three consecutive years of profits; loans supported by
unaudited financial statements containing strong balance sheets, five
consecutive years of profits, a five-year satisfactory relationship with the
Bank, and key balance sheet and income statement trends that are either stable
or positive; loans that are guaranteed
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or otherwise backed by the full faith and credit of theU.S. government or an agency thereof, such as the Small Business Administration; or loans to publicly held companies with current long-term debt ratings of Baa or better. Risk Grade 3 - Satisfactory (Pass): Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Risk Grade 4 - Satisfactory/Monitored (Pass): Loans in this category are considered to be acceptable credit quality but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher-than-average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. All revolving lines of credit will be placed in this category if a borrowing base is to be implemented as a condition of approval for the loan. Lastly, a start-up business venture will receive this rating due to the lack of any historical financial data. Risk Grade 5 - Special Mention: Loans that possess some credit deficiency or potential weakness that deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) credit weaknesses are considered potential and are not defined impairments to the primary source of repayment. Purchased with Credit Deterioration Loans - Group 1: To the extent that a PCD, formerly PCI, loan's performance does not reflect an increased risk of loss of contractual principal beyond the ACLL established as part of its initial day-one evaluation, such loan would be classified in the PCD-1 category, whose credit risk is considered by management equivalent to a non-PCD "Special Mention" loan within the Bank's credit rating matrix. Purchased with Credit Deterioration Loans - Substandard: If during the Bank's periodic evaluations of its PCD, formerly PCI, loan portfolio, management deems a PCD-1 loan to have an increased risk of loss of contractual principal beyond the ACLL established as part of its initial day-one evaluation, such loan would be classified PCD-Sub within the Bank's credit risk matrix. Management deems the risk of default and overall credit risk of a PCD-Sub loan to be greater than a PCD-1 loan and more analogous to a non-PCD "Substandard" loan within the Bank's credit rating matrix.
Risk Grade 6 - Substandard: One or more of the following characteristics may be
exhibited in loans classified as Substandard:
Loans that possess a defined credit weakness. The likelihood that a loan will
? be paid from the primary source of repayment is uncertain. Financial
deterioration is under way and very close attention is warranted to ensure that
the loan is collected without loss.
? Loans are inadequately protected by the current net worth and paying capacity
of the obligor.
? The primary source of repayment is gone, and the Bank is forced to rely on a
secondary source of repayment, such as collateral liquidation or guarantees.
? Loans have a distinct possibility that the Bank will sustain some loss if
deficiencies are not corrected.
? Unusual courses of action are needed to maintain a high probability of
repayment.
? The borrower is not generating enough cash flow to repay loan principal;
however, it continues to make interest payments.
? The Bank is forced into a subordinated or unsecured position due to flaws in
documentation.
? The Bank is seriously contemplating foreclosure or legal action due to the
apparent deterioration in the loan.
? There is significant deterioration in market conditions to which the borrower
is highly vulnerable.
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Risk Grade 7 - Doubtful: One or more of the following characteristics may be
present in loans classified as Doubtful:
Loans have all of the weaknesses of those classified as Substandard. However,
? based on existing conditions, these weaknesses make full collection of
principal highly improbable.
? The primary source of repayment is gone, and there is considerable doubt as to
the quality of the secondary source of repayment.
The possibility of loss is high but because of certain important pending
? factors, which may strengthen the loan, loss classification is deferred until
the exact status of repayment is known.
Risk Grade 8 - Loss: Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified "Loss" when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future. For all real estate and consumer loans, including small-dollar RPG loans, which do not meet the scope above, the Bank uses a grading system based on delinquency and nonaccrual status. Loans that are 80 days or more past due or on nonaccrual are graded Substandard. Occasionally, a real estate loan below scope may be graded as "Special Mention" or "Substandard" if the loan is cross collateralized with a classified C&I or CRE loan.
Purchased loans are accounted for as any other Bank-originated loan, potentially
becoming nonaccrual, as well as being risk rated under the Bank's standard
practices and procedures. In addition, these loans are considered in the
determination of the ACLL once day-one fair values are final.
Management separately monitors PCD, formerly PCI, loans and no less than quarterly reviews them against the factors and assumptions used in determining day-one fair values. In addition to its quarterly evaluation, a PCD loan is typically reviewed when it is modified or extended, or when information becomes available to the Bank that provides additional insight regarding the loan's performance, the status of the borrower, or the quality or value of the underlying collateral.
If a troubled debt restructuring is performed on a PCD loan, the loan is
transferred out of the PCD population. The loan may require an additional
Provision if its restructured cash flows are less than management's initial
day-one expectations. PCD loans for which the Bank simply chooses to extend the
maturity date are generally not considered TDRs and remain in the PCD
population.
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The following tables include loans by segment, risk category, and, for
non-revolving loans, origination year. 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 Revolving Loans
(in thousands) Term Loans Amortized Cost Basis by Origination Year Amortized Converted
As of December 31, 2022 2022 2021 2020 2019 Prior Cost Basis to Term Total
Residential real estate
owner occupied:
Risk Rating
Pass or not rated $ 231,638 $ 189,495 $ 188,004 $ 71,306 $ 208,296 $ - $ - $ 888,739
Special Mention - 160 - - 7,240 - - 7,400
Substandard 1,230 1,103 1,501 1,460 9,994 - - 15,288
Doubtful - - - - - - - -
Total $ 232,868 $ 190,758 $ 189,505 $ 72,766 $ 225,530 $ - $ - $ 911,427
Residential real estate
nonowner occupied:
Risk Rating
Pass or not rated $ 78,337 $ 91,778 $ 55,058 $ 32,803 $ 57,053 $ - $ 6,147 $ 321,176
Special Mention - - - - 32 - - 32
Substandard - 30 - - 120 - - 150
Doubtful - - - - - - - -
Total $ 78,337 $ 91,808 $ 55,058 $ 32,803 $ 57,205 $ - $ 6,147 $ 321,358
Commercial real estate:
Risk Rating
Pass or not rated $ 451,327 $ 394,317 $ 210,055 $ 117,928 $ 253,213 $ 25,499 $ 99,791 $ 1,552,130
Special Mention 3,124 11,870 - 21,296 9,967 318 - 46,575
Substandard - - - - 805 - - 805
Doubtful - - - - - - - -
Total $ 454,451 $ 406,187 $ 210,055 $ 139,224 $ 263,985 $ 25,817 $ 99,791 $ 1,599,510
Construction and land
development:
Risk Rating
Pass or not rated $ 107,153 $ 43,289 $ 638 $ 641 $ 373 $ 1,781 $ - $ 153,875
Special Mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total $ 107,153 $ 43,289 $ 638 $ 641 $ 373 $ 1,781 $ - $ 153,875
Commercial and
industrial:
Risk Rating
Pass or not rated $ 116,483 $ 78,224 $ 17,171 $ 36,254 $ 36,367 $ 103,257 $ 4,865 $ 392,621
Special Mention 536 13,239 - - 1,756 255 - 15,786
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total $ 117,019 $ 91,463 $ 17,171 $ 36,254 $ 38,123 $ 103,512 $ 4,865 $ 408,407
Paycheck Protection
Program:
Risk Rating
Pass or not rated $ - $ 4,207 $ 773 $ - $ - $ - $ - $ 4,980
Special Mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total $ - $ 4,207 $ 773 $ - $ - $ - $ - $ 4,980
Lease financing
receivables:
Risk Rating
Pass or not rated $ 5,469 $ 1,964 $ 542 $ 1,548 $ 982 $ - $ - $ 10,505
Special Mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total $ 5,469 $ 1,964 $ 542 $ 1,548 $ 982 $ - $ - $ 10,505
Aircraft:
Risk Rating
Pass or not rated $ 65,399 $ 54,749 $ 35,085 $ 16,888 $ 7,454 $ - $ - $ 179,575
Special Mention - - - - - - - -
Substandard - - - - 210 - - 210
Doubtful - - - - - - - -
Total $ 65,399 $ 54,749 $ 35,085 $ 16,888 $ 7,664 $ - $ - $ 179,785
Home equity:
Risk Rating
Pass or not rated $ - $ - $ - $ - $ - $ 240,704 $ - $ 240,704
Special Mention - - - - - 171 - 171
Substandard - - - - - 864 - 864
Doubtful - - - - - - - -
Total $ - $ - $ - $ - $ - $ 241,739 $ - $ 241,739
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Revolving Loans Revolving Loans
(in thousands) Term Loans Amortized Cost Basis by Origination Year (Continued) Amortized Converted
As of December 31, 2022 2022 2021 2020 2019 Prior Cost Basis to Term Total
Consumer:
Risk Rating
Pass or not rated $ 415 $ 499 $ 168 $ 2,531 $ 4,328 $ 15,573 $ - $ 23,514
Special Mention - - - - - - - -
Substandard - - - 9 33 - - 42
Doubtful - - - - - - - -
Total $ 415 $ 499 $ 168 $ 2,540 $ 4,361 $ 15,573 $ - $ 23,556
Warehouse:
Risk Rating
Pass or not rated $ - $ - $ - $ - $ - $ 403,560 $ - $ 403,560
Special Mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total $ - $ - $ - $ - $ - $ 403,560 $ - $ 403,560
TRS:
Risk Rating
Pass or not rated $ - $ - $ - $ - $ - $ 149,272 $ - $ 149,272
Special Mention - - - - - - - -
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total $ - $ - $ - $ - $ - $ 149,272 $ - $ 149,272
RCS:
Risk Rating
Pass or not rated $ 22,357 $ 2,273 $ 1,264 $ 602 $ 29,594 $ 50,589 $ - $ 106,679
Special Mention - - - - - - - -
Substandard - - - - - 1,149 - 1,149
Doubtful - - - - - - - -
Total $ 22,357 $ 2,273 $ 1,264 $ 602 $ 29,594 $ 51,738 $ - $ 107,828
Grand Total:
Risk Rating
Pass or not rated $ 1,078,578 $ 860,795 $ 508,758 $ 280,501 $ 597,660 $ 990,235 $ 110,803 $ 4,427,330
Special Mention 3,660 25,269 - 21,296 18,995 744 - 69,964
Substandard 1,230 1,133 1,501 1,469 11,162 2,013 - 18,508
Doubtful - - - - - - - -
Grand Total $ 1,083,468 $ 887,197 $ 510,259 $ 303,266 $ 627,817 $ 992,992 $ 110,803 $ 4,515,802
Revolving Loans Revolving Loans
(in thousands) Term Loans Amortized Cost Basis by Origination Year Amortized Converted
As of December 31, 2021 2021 2020 2019 2018 Prior Cost Basis to Term Total
Residential real estate
owner occupied:
Risk Rating
Pass or not rated $ 218,981 $ 213,010 $ 89,186 $ 50,301 $ 226,852 $ - $ - $ 798,330
Special Mention 301 - - 33 8,209 - - 8,543
Substandard 45 870 679 1,189 11,075 - - 13,858
Doubtful - - - - - - - -
Total $ 219,327 $ 213,880 $ 89,865 $ 51,523 $ 246,136 $ - $ - $ 820,731
Residential real estate
nonowner occupied:
Risk Rating
Pass or not rated $ 107,041 $ 65,786 $ 44,376 $ 29,292 $ 55,872 $ - $ 3,729 $ 306,096
Special Mention - - - - 132 - - 132
Substandard - - - - 95 - - 95
Doubtful - - - - - - - -
Total $ 107,041 $ 65,786 $ 44,376 $ 29,292 $ 56,099 $ - $ 3,729 $ 306,323
Commercial real estate:
Risk Rating
Pass or not rated $ 472,095 $ 256,039 $ 153,224 $ 94,212 $ 286,223 $ 25,188 $ 80,211 $ 1,367,192
Special Mention 20,059 2,399 29,639 11,207 18,778 - - 82,082
Substandard - 111 266 2,453 3,905 - - 6,735
Doubtful - - - - - - - -
Total $ 492,154 $ 258,549 $ 183,129 $ 107,872 $ 308,906 $ 25,188 $ 80,211 $ 1,456,009
Construction and land
development:
Risk Rating
Pass or not rated $ 88,743 $ 30,593 $ 2,599 $ 1,155 $ 128 $ 1,925 $ - $ 125,143
Special Mention - 524 3,670 - - - - 4,194
Substandard - - - - - - - -
Doubtful - - - - - - - -
Total $ 88,743 $ 31,117 $ 6,269 $ 1,155 $ 128 $ 1,925 $ - $ 129,337
Commercial and
industrial:
Risk Rating
Pass or not rated $ 105,148 $ 34,361 $ 54,524 $ 18,110 $ 44,972 $ 60,454 $ 2,541 $ 320,110
Special Mention 15,015 1,921 785 34 1,956 350 - 20,061
Substandard - 13 179 - - - - 192
Doubtful - - - - - - - -
Total $ 120,163 $ 36,295 $ 55,488 $ 18,144 $ 46,928 $ 60,804 $ 2,541 $ 340,363
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Revolving Loans Revolving Loans
(in thousands) Term Loans Amortized Cost
Basis by Origination Year (Continued) Amortized Converted As of December 31, 2021 2021 2020 2019 2018 Prior Cost Basis to Term Total Paycheck Protection Program: Risk Rating Pass or not rated $ 40,607 $ 15,407 $ - $ - $ - $ - $ - $ 56,014 Special Mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total $ 40,607 $ 15,407 $ - $ - $ - $ - $ - $ 56,014 Lease financing receivables: Risk Rating Pass or not rated $ 2,638 $ 839 $ 2,641 $ 1,264 $ 1,255 $ - $ - $ 8,637 Special Mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total $ 2,638 $ 839 $ 2,641 $ 1,264 $ 1,255 $ - $ - $ 8,637 Aircraft: Risk Rating Pass or not rated $ 65,886 $ 43,301 $ 22,933 $ 9,119 $ 1,655 $ - $ - $ 142,894 Special Mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total $ 65,886 $ 43,301 $ 22,933 $ 9,119 $ 1,655 $ - $ - $ 142,894 Home equity: Risk Rating Pass or not rated $ - $ - $ - $ - $ - $ 208,429 $ - $ 208,429 Special Mention - - - - - 279 - 279 Substandard - - - - - 1,870 - 1,870 Doubtful - - - - - - - - Total $ - $ - $ - $ - $ - $ 210,578 $ - $ 210,578 Consumer: Risk Rating Pass or not rated $ 978 $ 417 $ 4,694 $ 4,326 $ 5,768 $ 14,613 $ - $ 30,796 Special Mention - - - - - - - - Substandard - - 22 61 194 - - 277 Doubtful - - - - - - - - Total $ 978 $ 417 $ 4,716 $ 4,387 $ 5,962 $ 14,613 $ - $ 31,073 Warehouse: Risk Rating Pass or not rated $ - $ - $ - $ - $ - $ 850,550 $ - $ 850,550 Special Mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total $ - $ - $ - $ - $ - $ 850,550 $ - $ 850,550 TRS: Risk Rating Pass or not rated $ - $ - $ - $ - $ - $ 50,987 $ - $ 50,987 Special Mention - - - - - - - - Substandard - - - - - - - - Doubtful - - - - - - - - Total $ - $ - $ - $ - $ - $ 50,987 $ - $ 50,987 RCS: Risk Rating Pass or not rated $ 5,524 $ 3,409 $ 1,642 $ 869 $ 3,699 $ 77,544 $ - $ 92,687 Special Mention - - - - - - - - Substandard - - - - - 379 - 379 Doubtful - - - - - - - - Total $ 5,524 $ 3,409 $ 1,642 $ 869 $ 3,699 $ 77,923 $ - $ 93,066 Grand Total: Risk Rating Pass or not rated $ 1,107,641 $
663,162 $ 375,819 $ 208,648 $ 626,424 $ 1,289,690 $ 86,481 $ 4,357,865 Special Mention 35,375 4,844 34,094 11,274 29,075 629 - 115,291 Substandard 45 994 1,146 3,703 15,269 2,249 - 23,406 Doubtful - - - - - - - - Grand Total $ 1,143,061 $ 669,000 $ 411,059 $ 223,625 $ 670,768 $ 1,292,568 $
86,481 $ 4,496,562
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Subprime Lending
Both the Traditional Banking segment and the RCS segment of the Company have
certain classes of loans that are considered to be "subprime" strictly due to
the credit score of the borrower at the time of origination.
Traditional Bank loans considered subprime totaled approximately $49 million and
$48 million as of December 31, 2022 and 2021. Approximately $30 million and $28
million of the outstanding Traditional Bank subprime loan portfolio as of
December 31, 2022 and 2021 were originated for CRA purposes. Management does not
consider these loans to possess significantly higher credit risk due to other
underwriting qualifications.
The RCS segment originates two short-term line-of-credit products, with the
second product introduced in January 2021. The Bank sells 90% or 95% of the
balances maintained through these products within three business days of loan
origination and retains a 5% or 10% interest. These products are unsecured and
made to borrowers with subprime or near prime credit scores. The aggregate
outstanding balance held-for-investment for these products totaled $29 million
and $26 million as of December 31, 2022 and 2021.
Allowance for Credit Losses
The following tables present the activity in the ACLL by portfolio class for the
years ended December 31, 2022, 2021, and 2020:
ACLL Rollforward
Years Ended December 31,
2022 2021
Beginning Charge- Ending Beginning Charge- Ending
(in thousands) Balance Provision offs Recoveries Balance Balance Provision offs Recoveries Balance
Traditional Banking:
Residential real estate:
Owner occupied $ 8,647 $ 181 $ (21) $ 102 $ 8,909 $ 9,715 $ (1,461) $ - $ 393 $ 8,647
Nonowner occupied 2,700 129 - 2 2,831 2,466 231 - 3 2,700
Commercial real estate 23,769 (308) (9) 287 23,739 23,606 509 (428) 82 23,769
Construction & land
development 4,128 (5) - - 4,123 3,274 854 - - 4,128
Commercial & industrial 3,487 218 - 271 3,976 2,797 700 (86) 76 3,487
Paycheck Protection Program - - - - - - - - - -
Lease financing receivables 91 19 - - 110 106 (15) - - 91
Aircraft 357 92 - - 449 253 104 - - 357
Home equity 4,111 396 - 121 4,628 4,990 (874) (51) 46 4,111
Consumer:
Credit cards 934 140 (155) 77 996 929 107 (163) 61 934
Overdrafts 683 866 (1,038) 215 726 587 425 (641) 312 683
Automobile loans 186 (111) (3) 15 87 399 (233) (19) 39 186
Other consumer 314 (151) (94) 66 135 577 (254) (72) 63 314
Total Traditional Banking 49,407 1,466 (1,320) 1,156 50,709 49,699 93 (1,460) 1,075 49,407
Warehouse lines of credit 2,126 (1,117) - - 1,009 2,407 (281) - - 2,126
Total Core Banking 51,533 349 (1,320) 1,156 51,718 52,106 (188) (1,460) 1,075 51,533
Republic Processing Group:
Tax Refund Solutions:
Refund Advances - 10,471 (11,505) 4,831 3,797 - 6,723 (10,256) 3,533 -
Other TRS commercial &
industrial loans 96 (516) (154) 665 91 158 (40) (51) 29 96
Republic Credit Solutions 12,948 12,081 (11,390) 1,168 14,807 8,803 8,444 (4,707) 408 12,948
Total Republic Processing
Group 13,044 22,036 (23,049) 6,664 18,695 8,961 15,127 (15,014) 3,970 13,044
Total $ 64,577 $ 22,385 $ (24,369) $ 7,820 $ 70,413 $ 61,067 $ 14,939 $ (16,474) $ 5,045 $ 64,577
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ACLL Rollforward
Year Ended December 31, 2020
Beginning ASC 326 Provision Charge- Ending
(in thousands) Balance Adoption for Credit Loss offs Recoveries Balance
Traditional Banking:
Residential real estate:
Owner occupied $ 4,729 $ 4,199 $ 785 $ (169) $ 171 $ 9,715
Nonowner occupied 1,737 148 570 - 11 2,466
Commercial real estate 10,486 273 13,170 (795) 472 23,606
Construction & land
development 2,152 1,447 (325) - - 3,274
Commercial & industrial 2,882 (1,318) 1,421 (310) 122 2,797
Paycheck Protection Program - - - - -
Lease financing receivables 147 - (41) - - 106
Aircraft 176 - 77 - - 253
Home equity 2,721 1,652 516 (14) 115 4,990
Consumer:
Credit cards 1,020 33 111 (295) 60 929
Overdrafts 1,169 - 79 (886) 225 587
Automobile loans 612 (7) (176) (60) 30 399
Other consumer 374 307 (57) (240) 193 577
Total Traditional Banking 28,205 6,734 16,130 (2,769) 1,399 49,699
Warehouse lines of credit 1,794 - 613 - - 2,407
Total Core Banking 29,999 6,734 16,743 (2,769) 1,399 52,106
Republic Processing Group:
Tax Refund Solutions:
Refund Advances - - 13,033 (19,575) 6,542 -
Other TRS commercial &
industrial loans 234 - 156 (234) 2 158
Republic Credit Solutions 13,118 - 1,219 (6,163) 629 8,803
Total Republic Processing
Group 13,352 - 14,408 (25,972) 7,173 8,961
Total $ 43,351 6,734 $ 31,151 $ (28,741) $ 8,572 $ 61,067
The cumulative loss rate used as the basis for the estimate of the Company's
ACLL as of December 31, 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 2020, 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 initially 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.
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Nonperforming Loans and Nonperforming Assets
Detail of nonperforming loans and nonperforming assets and select credit quality ratios follows: December 31, (in thousands) 2022 2021 Loans on nonaccrual status* $ 15,562 $ 20,504 Loans past due 90-days-or-more and still on accrual** 756 48 Total nonperforming loans 16,318 20,552 Other real estate owned 1,581 1,792 Total nonperforming assets $ 17,899 $ 22,344
Credit Quality Ratios - Total Company:
Nonperforming loans to total loans 0.36 % 0.46 % Nonperforming assets to total loans (including OREO) 0.40 0.50 Nonperforming assets to total assets 0.31
0.37
Credit Quality Ratios -
Nonperforming loans to total loans 0.37 % 0.47 % Nonperforming assets to total loans (including OREO) 0.40 0.51 Nonperforming assets to total assets 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.
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The following table presents the recorded investment in nonaccrual loans and
loans past due 90-days-or-more and still on accrual by class of loans:
Past Due 90-Days-or-More
Nonaccrual and Still Accruing Interest*
December 31, (in thousands) 2022 2021 2022 2021
Traditional Banking:
Residential real estate:
Owner occupied $ 13,388 $ 12,039 $ - $ -
Nonowner occupied 117 95 - -
Commercial real estate 1,001 6,557 - -
Construction & land development - -
- - Commercial & industrial - 13 - - Paycheck Protection Program - - Lease financing receivables - - - - Aircraft - - Home equity 815 1,700 - - Consumer: Credit cards - - - - Overdrafts - - - 1 Automobile loans 31 97 - - Other consumer 210 3 - - Total Traditional Banking 15,562 20,504 - 1 Warehouse lines of credit - - - - Total Core Banking 15,562 20,504 - 1 Republic Processing Group: Tax Refund Solutions: Refund Advances - - - -
Other TRS commercial & industrial loans - - - - Republic Credit Solutions - - 756 47 Total Republic Processing Group - -
756 47
Total $ 15,562 $ 20,504 $ 756 $ 48
* Loans past due 90-days-or-more and still accruing consist of smaller balance
consumer loans.
Year Ended
As of December 31, 2022 December 31, 2022
Nonaccrual Nonaccrual Total Interest Income
Loans with Loans without Nonaccrual Recognized
(in thousands) ACLL ACLL Loans on Nonaccrual Loans*
Residential real estate:
Owner occupied $ 2,252 $ 11,136 $ 13,388 $ 1,000
Nonowner occupied 56 61 117 1
Commercial real estate 1,001 - 1,001 1,384
Construction & land
development - - - -
Commercial & industrial - - - -
Paycheck Protection
Program - - - -
Lease financing
receivables - - - -
Aircraft - - - -
Home equity - 815 815 263
Consumer 15 226 241 16
Total $ 3,324 $ 12,238 $ 15,562 $ 2,664
* Includes interest income for loans on nonaccrual loans as of the beginning of
the period that were paid off during the period.
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Year Ended
As of December 31, 2021 December 31, 2021
Nonaccrual Nonaccrual Total Interest Income
Loans with Loans without Nonaccrual Recognized
(in thousands) ACLL ACLL Loans
on Nonaccrual Loans*
Residential real estate:
Owner occupied $ 1,944 $ 10,095 $ 12,039 $ 874
Nonowner occupied 31 64 95 6
Commercial real estate 4,105 2,452 6,557 154
Construction & land
development - - - -
Commercial & industrial - 13 13 3
Paycheck Protection
Program - - - -
Lease financing
receivables - - - -
Aircraft - - - -
Home equity - 1,700 1,700 152
Consumer 17 83 100 10
$ 6,097 $ 14,407 $ 20,504 $ 1,199
* Includes interest income for loans on nonaccrual as of the beginning of the
period that were paid off during the period.
Nonaccrual loans and loans past due 90-days-or-more and still on accrual include
smaller balance, primarily retail, homogeneous loans. Nonaccrual loans are
typically returned to accrual status when all the principal and interest amounts
contractually due are brought current and held current for six consecutive
months and future contractual payments are reasonably assured. 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.
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Delinquent Loans
The following tables present the aging of the recorded investment in loans by
class of loans:
30 - 59 60 - 89 90 or More
December 31, 2022 Days Days Days Total Total
(dollars in thousands) Delinquent Delinquent Delinquent* Delinquent** Current Total
Traditional Banking:
Residential real estate:
Owner occupied $ 2,382 $ 1,185 $ 1,267 $ 4,834 $ 906,593 $ 911,427
Nonowner occupied - - - - 321,358 321,358
Commercial real estate 604 - - 604 1,598,906 1,599,510
Construction & land development - -
- - 153,875 153,875 Commercial & industrial 177 - - 177 408,230 408,407 Paycheck Protection Program - - - - 4,980 4,980 Lease financing receivables - - - - 10,505 10,505 Aircraft - - - - 179,785 179,785 Home equity 56 93 26 175 241,564 241,739 Consumer: Credit cards 50 5 - 55 15,418 15,473 Overdrafts 158 1 1 160 566 726 Automobile loans 8 - 3 11 6,720 6,731 Other consumer 43 1 - 44 582 626 Total Traditional Banking 3,478 1,285 1,297 6,060 3,849,082 3,855,142 Warehouse lines of credit - - - - 403,560 403,560 Total Core Banking 3,478 1,285 1,297 6,060 4,252,642 4,258,702 Republic Processing Group: Tax Refund Solutions: Refund Advances - - - - 97,505 97,505
Other TRS commercial & industrial loans - - - - 51,767 51,767 Republic Credit Solutions 6,488 1,956 756 9,200 98,628 107,828 Total Republic Processing Group 6,488 1,956
756 9,200 247,900 257,100 Total $ 9,966 $ 3,241 $ 2,053 $ 15,260 $ 4,500,542 $ 4,515,802 Delinquency ratio*** 0.22 % 0.07 % 0.05 % 0.34 %
*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.
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Table of Contents
30 - 59 60 - 89 90 or More
December 31, 2021 Days Days Days Total Total
(dollars in thousands) Delinquent Delinquent Delinquent* Delinquent** Current Total
Traditional Banking:
Residential real estate:
Owner occupied $ 606 $ 383 $ 610 $ 1,599 $ 819,132 $ 820,731
Nonowner occupied - - - - 306,323 306,323
Commercial real estate - - 5,292 5,292 1,450,717 1,456,009
Construction & land development - -
- - 129,337 129,337 Commercial & industrial 8 - 13 21 340,342 340,363 Paycheck Protection Program - - - - 56,014 56,014 Lease financing receivables - - - - 8,637 8,637 Aircraft - - - - 142,894 142,894 Home equity 38 35 241 314 210,264 210,578 Consumer: Credit cards 19 11 - 30 14,480 14,510 Overdrafts 160 3 1 164 519 683 Automobile loans - - 9 9 14,439 14,448 Other consumer 1 - - 1 1,431 1,432 Total Traditional Banking 832 432 6,166 7,430 3,494,529 3,501,959 Warehouse lines of credit - - - - 850,550 850,550 Total Core Banking 832 432 6,166 7,430 4,345,079 4,352,509 Republic Processing Group: Tax Refund Solutions: Refund Advances - - - - - -
Other TRS commercial & industrial loans - - - - 50,987 50,987 Republic Credit Solutions 5,010 978 47 6,035 87,031 93,066 Total Republic Processing Group 5,010 978
47 6,035 138,018 144,053 Total $ 5,842 $ 1,410 $ 6,213 $ 13,465 $ 4,483,097 $ 4,496,562 Delinquency ratio*** 0.13 % 0.03 % 0.14 % 0.30 %
*All loans past due 90 days-or-more, excluding small-dollar consumer loans, were
on nonaccrual status.
**Delinquent status may be determined by either the number of days past due or
number of payments past due.
***Represents total loans 30-days-or-more past due divided by total loans.
Collateral-Dependent Loans
The following table presents the amortized cost basis of collateral-dependent
loans by class of loans as of December 31, 2022, 2021, and 2020:
December 31, 2022 December 31, 2021 December 31, 2020
Secured Secured Secured Secured Secured Secured
by Real by Personal by Real by Personal by Real by Personal
(in thousands) Estate Property Estate Property Estate Property
Traditional Banking:
Residential real estate:
Owner occupied $ 18,057 $ - $ 14,798 $ - $ 17,212 $ -
Nonowner occupied 150 - 95 - 81 -
Commercial real estate 1,041 - 6,736 - 10,205 -
Construction & land development - -
- - - -
Commercial & industrial - - - 192 - 12
Paycheck Protection Program - - - - - -
Lease financing receivables - - - - - -
Aircraft - 210 - - - -
Home equity 967 - 1,976 - 2,899 -
Consumer - 26 - 274 - 237
Total Traditional Banking $ 20,215 $ 236 $ 23,605 $ 466 $ 30,397 $ 249
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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 cost, when selling costs are applicable. Selling costs range from 10%-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 December 31, 2022 and 2021, $3 million and $6 million of TDRs were on nonaccrual status.
Detail of TDRs differentiated by loan type and accrual status follows:
Troubled Debt Troubled Debt Total
Restructurings on Restructurings on Troubled Debt
Nonaccrual Status Accrual Status Restructurings
Number of Recorded Number of Recorded Number of Recorded
December 31, 2022 (dollars in thousands) Loans Investment Loans Investment Loans Investment
Residential real estate 66 $ 3,427 84 $ 7,345 150 $ 10,772
Commercial real estate - - 1 847 1 847
Commercial & industrial - - 1 1 1 1
Consumer 1 9 2,322 397 2,323 406
Total troubled debt restructurings 67 $ 3,436
2,408 $ 8,590 2,475 $ 12,026
Troubled Debt Troubled Debt Total
Restructurings on Restructurings on Troubled Debt
Nonaccrual Status Accrual Status Restructurings
Number of Recorded Number of Recorded Number of Recorded
December 31, 2021 (dollars in thousands) Loans Investment Loans Investment Loans Investment
Residential real estate 63 $ 3,179 89 $ 7,856 152 $ 11,035
Commercial real estate 2 2,575 2 1,239 4 3,814
Commercial & industrial 2 45 1 1 3 46
Consumer 1 12 2,269 479 2,270 491
Total troubled debt restructurings 68 $ 5,811
2,361 $ 9,575 2,429 $ 15,386
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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 December 31, 2022 and 2021 follows:
Troubled Debt Troubled Debt
Restructurings Restructurings Total
Performing to Not Performing to Troubled Debt
Modified Terms Modified Terms Restructurings
Number of Recorded
Number of Recorded Number of Recorded
December 31, 2022 (dollars in
thousands)
Loans Investment
Loans Investment Loans Investment
Residential real estate loans (including home equity loans): Rate reduction 67 $ 6,305 3 $ 242 70 $ 6,547 Principal deferral 7 699 - - 7 699 Legal modification 67 3,149 6 377 73 3,526 Total residential TDRs 141 10,153 9 619 150 10,772 Commercial related and construction/land development loans: Rate reduction 1 847 - - 1 847 Principal deferral 1 1 - - 1 1 Total commercial TDRs 2 848 - - 2 848 Consumer loans: Principal deferral 2,320 393 - - 2,320 393 Legal modification 3 13 - - 3 13 Total consumer TDRs 2,323 406 - - 2,323 406
Total troubled debt restructurings 2,466 $ 11,407
9 $ 619 2,475 $ 12,026
Troubled Debt Troubled Debt
Restructurings Restructurings Total
Performing to Not Performing to Troubled Debt
Modified Terms Modified Terms Restructurings
Number of Recorded
Number of Recorded Number of Recorded
December 31, 2021 (dollars in
thousands)
Loans Investment
Loans Investment Loans Investment
Residential real estate loans (including home equity loans): Rate reduction 82 $ 7,461 4 $ 303 86 $ 7,764 Principal deferral 7 729 - - 7 729 Legal modification 48 2,100 11 442 59 2,542 Total residential TDRs 137 10,290 15 745 152 11,035 Commercial related and construction/land development loans: Rate reduction 1 919 - - 1 919 Principal deferral 5 477 1 2,464 6 2,941 Total commercial TDRs 6 1,396 1 2,464 7 3,860 Consumer loans: Principal deferral 2,266 470 - - 2,266 470 Legal modification 4 21 - - 4 21 Total consumer TDRs 2,270 491 - - 2,270 491
Total troubled debt restructurings 2,413 $ 12,177
16 $ 3,209 2,429 $ 15,386
As of December 31, 2022 and 2021, 95% and 79% of the Bank's TDR balances were
performing according to their modified terms. The Bank had provided $769,000 and
$2 million of specific reserve allocations to clients whose loan terms have been
modified in TDRs as of December 31, 2022 and 2021. The Bank had no commitments
to lend any additional material amounts to its existing TDR relationships as of
December 31, 2022 and 2021.
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A summary of the categories of TDR loan modifications and respective performance
as of December 31, 2022, 2021, and 2020 that were modified during the years
ended December 31, 2022, 2021, and 2020 follows:
Troubled Debt Troubled Debt
Restructurings Restructurings Total
Performing to Not Performing to Troubled Debt
Modified Terms Modified Terms Restructurings
Number of Recorded
Number of Recorded Number of Recorded
December 31, 2022 (dollars in
thousands)
Loans Investment
Loans Investment Loans Investment
Residential real estate loans (including home equity loans): Rate reduction 1 $ 192 - $ - 1 $ 192 Legal modification 30 1,607 3 297 33 1,904 Total residential TDRs 31 1,799 3 297 34 2,096 Consumer loans: Principal deferral 1,042 145 - - 1,042 145 Total consumer TDRs 1,042 145 - - 1,042 145
Total troubled debt restructurings 1,073 $ 1,944
3 $ 297 1,076 $ 2,241
Troubled Debt Troubled Debt
Restructurings Restructurings Total
Performing to Not Performing to Troubled Debt
Modified Terms Modified Terms Restructurings
Number of Recorded
Number of Recorded Number of Recorded
December 31, 2021 (dollars in
thousands)
Loans Investment
Loans Investment Loans Investment
Residential real estate loans (including home equity loans): Principal deferral 1 $ 159 - $ - 1 $ 159 Legal modification 9 309 5 272 14 581 Total residential TDRs 10 468 5 272 15 740 Commercial related and construction/land development loans: Principal deferral 2 45 - - 2 45 Total commercial TDRs 2 45 - - 2 45 Consumer loans: Principal deferral 621 92 - - 621 92 Legal modification 2 4 - - 2 4 Total consumer TDRs 623 96 - - 623 96
Total troubled debt restructurings 635 $ 609
5 $ 272 640 $ 881
The tables above are inclusive of loans that were TDRs at the end of previous
years and were re-modified, e.g., a maturity date extension during the current
year.
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Troubled Debt Troubled Debt
Restructurings Restructurings Total
Performing to Not Performing to Troubled Debt
Modified Terms Modified Terms Restructurings
Number of Recorded
Number of Recorded Number of Recorded
December 31, 2020 (dollars in
thousands)
Loans Investment
Loans Investment Loans Investment
Residential real estate loans (including home equity loans): Rate reduction 2 $ 53 1 $ 3 3 $ 56 Legal modification 15 701 3 131 18 832 Total residential TDRs 17 754 4 134 21 888 Commercial related and construction/land development loans: Principal deferral 2 133 - - 2 133 Total commercial TDRs 2 133 - - 2 133 Consumer loans: Principal deferral 486 71 - - 486 71 Legal modification 1 14 - - 1 14 Total consumer TDRs 487 85 - - 487 85
Total troubled debt restructurings 506 $ 972
4 $ 134 510 $ 1,106
The table above is inclusive of loans that were TDRs at the end of previous
years and were re-modified, e.g., a maturity date extension during the current
year.
As of December 31, 2022, 2021, and 2020, 87%, 69% and 88% of the Bank's TDR balances that occurred during the years ended December 31, 2022, 2021, and 2020 were performing according to their modified terms. The Bank provided approximately $45,000, $45,000 and $48,000 in specific reserve allocations to clients whose loan terms were modified in TDRs during 2022, 2021, and 2020.
There was no significant change between the pre and post modification loan
balances as of December 31, 2022, 2021, and 2020.
The following tables present loans by class modified as troubled debt
restructurings within the previous 12 months of December 31, 2022, 2021, and
2020 and for which there was a payment default during 2022, 2021, and 2020:
Years Ended December 31,
2022 2021 2020
Number of Recorded Number of Recorded Number of Recorded
(dollars in thousands) Loans Investment Loans Investment Loans Investment
Residential real estate:
Owner occupied 7 $ 441 5 $ 314 5 $ 218
Commercial real estate - - - - - -
Home equity 2 43 1 14 2 32
Total 9 $ 484 6 $ 328 7 $ 250
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Foreclosures
The following table presents the carrying amount of foreclosed properties held
as of December 31, 2022 and 2021 as a result of the Bank obtaining physical
possession of such properties:
December 31, (in thousands) 2022 2021 Residential real estate $ - $ - Commercial real estate 1,581 1,792
Total other real estate owned $ 1,581 $ 1,792
The following table presents the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction as of December 31, 2022 and 2021: December 31, (in thousands) 2022
2021
Recorded investment in consumer residential real estate mortgage loans in the process of foreclosure $ 909 $
508 Refund advances The Company's TRS segment offered its RA product during the first two months of 2022, 2021, and 2020 and its ERA product during December 2022 related to the first quarter 2023 tax filing season. The Company bases its estimated Provision for RAs on the current year's RA delinquency information, the prior year's tax refund payment patterns subsequent to the first quarter, and any Tax Provider loss guarantee arrangements. Each year, all unpaid RAs and ERAs are charged off by June 30th, and each quarter thereafter, any credits to the Provision for RAs and ERAs match the recovery of previously charged-off accounts.
Information regarding RA follows:
Years Ended
December 31,
(dollars in thousands) 2022 2021 2020
Refund Advances originated $ 311,207 $ 250,045 $ 387,762
Net charge (credit) to the
Provision for Refund Advances 6,674 6,723 13,033
Provision to total Refund
Advances originated 2.14 % 2.69 % 3.36 %
Refund Advances net charge-offs
(recoveries) $ 6,674 $ 6,723 $ 13,033
Refund Advances net charge-offs
(recoveries) to total Refund
Advances originated 2.14 % 2.69 % 3.36 %
Information regarding ERAs follows:
Years Ended
December 31,
(dollars in thousands) 2022 2021 2020
Early Season Refund Advances
originated $ 97,505 $ - $ -
Net charge (credit) to the
Provision for Early Season Refund
Advances 3,797 - -
Provision to total Early Season
Refund Advances originated 3.89 % - % - %
Early Season Refund Advances net
charge-offs (recoveries) $ - $ - $ -
ERAs net charge-offs (recoveries)
to total Early Season Refund
Advances originated - % - % - %
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5. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and equipment
follows:
December 31, (in thousands) 2022 2021
Land $ 3,818 $ 3,818
Buildings and improvements 32,780 32,629
Furniture, fixtures and equipment 51,652 51,429
Leasehold improvements 21,755 22,430
Construction in progress 547 -
Total premises and equipment 110,552 110,306
Less: Accumulated depreciation and amortization 78,574 74,233
Premises and equipment, net
$ 31,978 $ 36,073
Depreciation expense related to premises and equipment follows:
Years Ended December 31, (in thousands) 2022 2021 2020 Depreciation expense $ 7,598 $ 8,986 $ 9,725
6. 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 December 31, 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 December 31, 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 two new third-party office leases, renewed one of its existing related-party leases, and extended six of its third-party leases during the first nine months of 2022, with a related total right-of-use asset value of $6 million connected to this 2022 activity. The Company executed no new operating leases during 2021. The Company renewed a related-party lease on one of itsLouisville, Kentucky banking centers during the fourth quarter of 2020 that commenced in January 2021 with a right-of-use asset value of $392,000. During the second quarter of 2021, the Company extended one third-party lease for an additional five years, with the extended term beginning during the third quarter of 2021 and valued at approximately $263,000. During the fourth quarter of 2021, the Company recorded two amendments to one related-party lease to add leased space, with these amendments valued at approximately $1.1 million. 135 Table of Contents
The following table presents information concerning the Company's operating
lease expense recorded as a noninterest expense within the category "Occupancy
and equipment, net" for years ended December 31, 2022, 2021, and 2020:
Years Ended December 31, (in thousands) 2022 2021 2020 Operating lease expense: Related Party: Variable lease expense $ 4,831 $ 4,921 $ 4,885 Fixed lease expense 207 137 91 Third Party: Variable lease expense 1,001 787 786 Fixed lease expense 1,526 1,372 1,617 Total operating lease expense $ 7,565 $ 7,217 $ 7,379
Other information concerning operating leases:
Cash paid for amounts included in the measurement of
operating lease liabilities
$ 6,847 $
7,286 $ 7,254
Cash paid for variable rent payments not included in
measurement of operating lease liabilities
603
-
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 December 31, 2022 and 2021:
December 31, (dollars in thousands) 2022 2021
Weighted average remaining term in years 8.44 7.57
Weighted average discount rate
2.10 % 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 December 31, 2022:
Year (in thousands) Related Party Third Party Total
2023 $ 4,050 $ 2,522 $ 6,572
2024 3,726 2,144 5,870
2025 3,570 1,609 5,179
2026 3,640 1,310 4,950
2027 3,680 987 4,667
Thereafter 11,751 3,601 15,352
Total undiscounted cash flows $ 30,417 $ 12,173 $ 42,590
Discount applied to cash flows (3,258) (1,523) (4,781)
Total discounted cash flows reported as
operating lease liabilities $ 27,159 $ 10,650 $ 37,809
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7.GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
A progression of the balance for goodwill follows:
Years Ended December 31, (in thousands) 2022 2021 2020 Beginning of period $ 16,300 $ 16,300 $ 16,300 Acquired goodwill - - - Impairment - - - End of period $ 16,300 $ 16,300 $ 16,300
The goodwill balance relates entirely to the Company's Traditional Banking
segment and Core Banking operations.
Impairment exists when a reporting unit's carrying value of goodwill exceeds its fair value. As of December 31, 2022 and 2021, the Company's Core Banking reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value.
8. 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 counter party or client owes the Bank, and results in credit risk to the Bank. When the fair value of a derivative instrument contract is negative, the Bank owes the client or counterparty and has no credit risk.
A summary of the Bank's interest rate swaps related to clients as of December
31, 2022 and 2021 is included in the following table:
2022 2021
Notional Notional
December 31, (in thousands) Bank Position Amount Fair Value Amount Fair Value
Interest rate swaps with Bank
clients - Assets Pay variable/receive fixed $
40,032 $ 1,386 $ 107,502 $ 5,786
Interest rate swaps with Bank
clients - Liabilities
Pay variable/receive fixed 91,636 (6,742) 16,423 (298) Interest rate swaps with Bank clients - Total Pay variable/receive fixed $
131,668 $ (5,356) $ 123,925 $ 5,488
Offsetting interest rate swaps with
institutional swap dealer - Assets Pay fixed/receive variable 91,636
6,742 16,423 298 Offsetting interest rate swaps with institutional swap dealer - Liabilities Pay fixed/receive variable
40,032 (1,386) 107,502 (5,786)
Offsetting interest rate swaps with
institutional swap dealer - Total Pay fixed/receive variable $ 131,668 $ 5,356 $ 123,925 $ (5,488)
Total $ 263,336 $ - $ 247,850 $ -
The Bank is required to pledge securities or cash 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
$560,000 and $6.8 million as of December 31, 2022 and 2021.
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9. DEPOSITS
The composition of the deposit portfolio follows:
December 31, (in thousands) 2022 2021 Core Bank: Demand $ 1,336,082 $ 1,381,522 Money market accounts 707,272 789,876 Savings 323,015 311,624 Reciprocal money market 28,635 60,685 Individual retirement accounts (1) 38,640
43,724
Time deposits, $250 and over (1) 54,855
81,050
Other certificates of deposit (1) 129,324
154,174
Reciprocal time deposits (1) 7,405
17,265
TotalCore Bank interest-bearing deposits 2,625,228
2,839,920
Total Core Bank noninterest-bearing deposits 1,464,493 1,579,171 Total Core Bank deposits 4,089,721 4,419,091 Republic Processing Group: Money market accounts 3,849 9,717 Total RPG interest-bearing deposits 3,849
9,717
Brokered prepaid card deposits 328,655
320,907
Other noninterest-bearing deposits 115,620
89,601
Total RPG noninterest-bearing deposits 444,275 410,508 Total RPG deposits 448,124 420,225 Total deposits $ 4,537,845 $ 4,839,316
(1) Represents time deposits.
As of December 31, 2022, the scheduled maturities and weighted average rate of
all time deposits, including brokered and reciprocal certificates of deposit,
were as follows:
Weighted
Average
Years (dollars in thousands) Principal Rate
2023 $ 173,120 1.40 %
2024 27,226 1.42
2025 16,815 1.45
2026 3,611 0.29
2027 8,589 1.45
Thereafter 128 1.98
Total $ 229,489 1.39
10.SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of short-term excess
funds from correspondent banks, repurchase agreements and overnight liabilities
to deposit clients arising from the Bank's treasury management program. While
comparable to deposits in their transactional nature, these overnight
liabilities to clients are in the form of repurchase agreements. Repurchase
agreements collateralized by securities are treated as financings; accordingly,
the securities involved with the agreements are recorded as assets and are held
by a safekeeping agent and the obligations to repurchase the securities are
reflected as liabilities. Should the fair value of
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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 December 31, 2022 and 2021, all securities sold under agreements to
repurchase had overnight maturities. Additional information regarding securities
sold under agreements to repurchase follows:
December 31, (dollars in thousands) 2022
2021
Outstanding balance at end of period $ 216,956 $
290,967
Weighted average interest rate at end of period 0.41 %
0.04 %
Fair value of securities pledged: U.S. Treasury securities and U.S. Government agencies $ 254,296 $ 108,813 Mortgage-backed securities - residential -
167,561
Collateralized mortgage obligations -
33,441 Total securities pledged $ 254,296 $ 309,815
Additional information regarding securities sold under agreements to repurchase
for the years ended December 31, 2022, 2021, and 2020 follows:
Years Ended December 31, (in thousands) 2022 2021
2020
Average outstanding balance during the period $ 265,188 $ 231,430 $ 204,797 Average interest rate during the period 0.15 % 0.03 % 0.09 % Maximum outstanding at any month end during the period $ 303,315 $ 432,047
$ 295,698
11. FEDERAL HOME LOAN BANK ADVANCES
As of December 31, 2022 and 2021, FHLB advances were as follows:
December 31, (in thousands) 2022 2021 Overnight advances $ 75,000 $ 25,000 Fixed interest rate advances 20,000 - Total FHLB advances $ 95,000 $ 25,000
The Company incurred $2.1 million early termination penalties on the payoff of
$60 million in FHLB advances during 2020, with no similar penalty incurred in
2022 or 2021.
FHLB advances are collateralized by a blanket pledge of eligible real estate
loans. As of December 31, 2022 and 2021, Republic had available borrowing
capacity of $899 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 December 31, 2022 and 2021.
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Aggregate future principal payments on FHLB advances based on contractual
maturity and the weighted average cost of such advances are detailed below:
Weighted
Average
Year (dollars in thousands) Principal Rate
2023 $ 75,000 4.36 %
2024 - -
2025 - -
2026 - -
2027 20,000 1.89
Total $ 95,000 3.84 %
Information regarding overnight FHLB advances follows:
December 31, (dollars in thousands) 2022 2021 Outstanding balance at end of period $ 75,000 $ 25,000 Weighted average interest rate at end of period 4.36 % 0.14 % Years Ended December 31, (dollars in thousands) 2022 2021
2020
Average outstanding balance during the period $ 4,630 $ 28,767 $ 25,546 Average interest rate during the period 0.53 % 0.15 % 0.81 % Maximum outstanding at any month end during the period $ 75,000 $ 25,000
$ 250,000
The following table illustrates real estate loans pledged to collateralize
advances and letters of credit with the FHLB:
December 31, (in thousands) 2022 2021 First lien, single family residential real estate $ 1,106,287 $ 1,041,461 Home equity lines of credit 219,644 186,396 12. SUBORDINATED NOTE
In 2005, Republic Bancorp Capital Trust, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. The sole asset of RBCT represented the proceeds of the offering loaned to Republic in exchange for a subordinated note with similar terms to the TPS. On September 30, 2021, as permitted under the terms of RBCT's governing documents, Republic repaid the subordinated note and redeemed the TPS at par without penalty.
13. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES
Commitments to Extend Credit
The Company, in the normal course of business, is party to financial instruments
with off balance sheet risk. These financial instruments primarily include
commitments to extend credit and standby letters of credit. The contract or
notional amounts of these instruments reflect the potential future obligations
of the Company pursuant to those financial instruments. Creditworthiness for all
instruments is evaluated on a case-by-case basis in accordance with the
Company's credit policies. Collateral from the client may be required based on
the Company's credit evaluation of the client and may include business assets of
commercial clients, as well as personal property and real estate of individual
clients or guarantors.
The Company also extends binding commitments to clients and prospective clients.
Such commitments assure a borrower of financing for a specified period of time
at a specified rate. The risk to the Company under such loan commitments is
limited by the terms of the
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contracts. For example, the Company may not be obligated to advance funds if the
client's financial condition deteriorates or if the client fails to meet
specific covenants.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company's client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company's client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding.
The following table presents the Company's commitments, exclusive of Mortgage
Banking loan commitments for each year ended:
December 31, (in thousands) 2022 2021
Unused warehouse lines of credit $ 733,940 $ 565,950
Unused home equity lines of credit 410,057 348,681
Unused loan commitments - other
951,021 828,229 Standby letters of credit 9,735 11,305 FHLB letter of credit 643 643 Total commitments $ 2,105,396 $ 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 years ended December
31, 2022 and 2021:
ACLC Rollforward
Years Ended December 31,
2022 2021
Beginning Charge- Ending Beginning Charge- Ending
(in thousands) Balance Provision offs Recoveries Balance Balance Provision offs Recoveries Balance
Loan Commitments
Unused warehouse lines of
credit $ 154 $ 36 $ - $ - $ 190 $ 79 $ 75 $ - $ - $ 154
Unused home equity lines of
credit 247 85 - - 332 173 74 - - 247
Unused loan commitments -
other 651 77 - - 728 737 (86) - - 651
Total $ 1,052 $ 198 $ - $ - $ 1,250 $ 989 $ 63 $ - $ - $ 1,052
The Company increased its ACLC during 2022 primarily due to a $192 million
increase in unused commitments.
14. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL MATTERS
Common Stock - The Company's Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on ClassB Common Stock. Class A Common shares have one vote per share and ClassB Common shares have ten votes per share. ClassB Common shares may be converted, at the option of the holder, to Class A Common shares on a share-for-share basis. The Class A Common shares are not convertible into any other class of Republic's capital stock. Dividend Restrictions -The Parent Company's principal source of funds for dividend payments are dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states' banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years. As of January 1, 2023, the Bank could, without prior approval, declare dividends of approximately $92 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. 141
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Regulatory Capital Requirements -The Parent Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of December 31, 2022 and 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. 142
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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.
Minimum Requirement
to be Well Capitalized
Minimum Requirement Under Prompt
for Capital Adequacy Corrective Action
Actual Purposes Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2022 Total capital to risk-weighted assets Republic Bancorp, Inc. $ 941,865 17.92 % $ 420,514 8.00 % NA NA Republic Bank & Trust Company 904,592 17.23 420,040
8.00 $ 525,050 10.00 %
Common equity tier 1 capital to
risk-weighted assets
Republic Bancorp, Inc. 877,735 16.70 236,539 4.50 NA NA
Republic Bank & Trust Company 840,462 16.01 236,273 4.50 341,283 6.50
Tier 1 (core) capital to
risk-weighted assets
Republic Bancorp, Inc. 877,735 16.70 315,386 6.00 NA NA
Republic Bank & Trust Company 840,462 16.01 315,030 6.00 420,040 8.00
Tier 1 leverage capital to average
assets
Republic Bancorp, Inc. 877,735 14.81 237,106 4.00 NA NA
Republic Bank & Trust Company 840,462 14.09 238,578 4.00 298,222 5.00
Minimum Requirement
to be Well Capitalized
Minimum Requirement Under Prompt
for Capital Adequacy Corrective Action
Actual Purposes Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2021
Total capital to risk-weighted
assets
Republic Bancorp, Inc. $ 879,310 17.48 % $ 402,327 8.00 % NA NA
Republic Bank & Trust Company 862,637 17.16 402,166
8.00 $ 502,707 10.00 %
Common equity tier 1 capital to
risk-weighted assets
Republic Bancorp, Inc. 824,326 16.39 226,309 4.50 NA NA
Republic Bank & Trust Company 807,653 16.07 226,218 4.50 326,760 6.50
Tier 1 (core) capital to
risk-weighted assets
Republic Bancorp, Inc. 824,326 16.39 301,745 6.00 NA NA
Republic Bank & Trust Company 807,653 16.07 301,624 6.00 402,166 8.00
Tier 1 leverage capital to average
assets
Republic Bancorp, Inc. 824,326 13.36 246,751 4.00 NA NA
Republic Bank & Trust Company 807,653 13.11 246,334 4.00 307,917 5.00
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15. 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.
The Company acquired its TRUP investment in 2015 and considered the most recent bid price for the same instrument to approximate market value as of December 31, 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 CRA mutual fund investment and fall within Level 1 of the fair value hierarchy.
The fair value of the Company's Freddie Mac preferred stock is determined by
matrix pricing, as described above (Level 2 inputs).
Mortgage loans held for sale, at fair value: The fair value of mortgage loans held for sale is determined using quoted secondary market prices. Mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.
Consumer loans held for sale, at fair value: The 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.
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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 approach or a combination of approaches, including comparable
sales and the income approach. Adjustments are routinely made in the process by
the independent experts to adjust for differences between the comparable sales
and income data available. Such adjustments may be significant and typically
result in a Level 3 classification of the inputs for determining fair value.
Appraisals for collateral-dependent loans, impaired premises and other real
estate owned are performed by certified general appraisers (for commercial
properties) or certified residential appraisers (for residential properties)
whose qualifications and licenses have been reviewed and verified by the Bank.
Once the appraisal is received, a member of the Bank's CCAD reviews the
assumptions and approaches utilized in the appraisal, as well as the overall
resulting fair value in comparison with independent data sources, such as recent
market data or industry-wide statistics. On at least an annual basis, the Bank
performs a back test of collateral appraisals by comparing actual selling prices
on recent collateral sales to the most recent appraisal of such collateral. Back
tests are performed for each collateral class, e.g., residential real estate or
commercial real estate, and may lead to additional adjustments to the value of
unliquidated collateral of similar class.
Mortgage servicing rights: At least quarterly, MSRs are evaluated for impairment
based upon the fair value of the MSRs as compared to carrying amount. If the
carrying amount of an individual tranche exceeds fair value, impairment is
recorded, and the respective individual tranche is carried at fair value. If the
carrying amount of an individual tranche does not exceed fair value, impairment
is reversed if previously recognized and the carrying value of the individual
tranche is based on the amortization method. The valuation model utilizes
assumptions that market participants would use in estimating future net
servicing income and can generally be validated against available market data
(Level 2).
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Assets and liabilities measured at fair value on a recurring basis, including
financial assets and liabilities for which the Bank has elected the fair value
option, are summarized below:
Fair Value Measurements at
December 31, 2022 Using:
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable Total
Assets Inputs Inputs Fair
(in thousands) (Level 1) (Level 2) (Level 3) Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S.
Government agencies $ 193,385 $ 217,756 $ - $ 411,141
Private label mortgage-backed
security - - 2,127 2,127
Mortgage-backed securities -
residential - 171,873 - 171,873
Collateralized mortgage obligations - 21,368 - 21,368 Corporate bonds - 10,001 - 10,001 Trust preferred security - - 3,855 3,855 Total available-for-sale debt securities $ 193,385 $ 420,998
$ 5,982 $ 620,365
Equity securities with readily determinable fair value: Freddie Mac preferred stock $ - $ 111 $ - $ 111 Total equity securities with readily determinable fair value $ - $ 111 $ - $ 111 Mortgage loans held for sale $ - $ 1,302 $ - $ 1,302 Consumer loans held for sale - - 4,706 4,706
Consumer loans held for investment - -
2 2
Rate lock loan commitments - 2 - 2
Mandatory forward contracts - - - -
Interest rate swap agreements - 8,127 - 8,127
Financial liabilities:
Rate lock loan commitments $ - $ - $ - $ -
Mandatory forward contracts - 67 - 67
Interest rate swap agreements - 8,127 - 8,127
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Fair Value Measurements at
December 31, 2021 Using:
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable Total
Assets Inputs Inputs Fair
(in thousands) (Level 1) (Level 2) (Level 3) Value
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities and U.S.
Government agencies $ 70,112 $ 167,347 $ - $ 237,459
Private label mortgage-backed security - - 2,731 2,731
Mortgage-backed securities -
residential - 210,749 - 210,749
Collateralized mortgage obligations - 30,294 - 30,294
Corporate bonds - 10,046 - 10,046
Trust preferred security - - 3,847 3,847
Total available-for-sale debt
securities $ 70,112 $
418,436 $ 6,578 $ 495,126
Equity securities with readily determinable fair value: Freddie Mac preferred stock $ - $ 170 $ - $ 170 Community Reinvestment Act mutual fund 2,450 - - 2,450 Total equity securities with readily determinable fair value $ 2,450 $ 170 $ - $ 2,620 Mortgage loans held for sale $ - $ 29,393 $ - $ 29,393 Consumer loans held for sale - - 19,747 19,747 Consumer loans held for investment - - 170 170 Rate lock loan commitments - 1,404 - 1,404 Mandatory forward contracts - 66 - 66 Interest rate swap agreements - 5,786 - 5,786 Financial liabilities: Interest rate swap agreements - 5,786 - 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 years ended December 31, 2022 and 2021.
Private Label Mortgage-Backed Security
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):
Years Ended December 31, (in thousands) 2022 2021 2020 Balance, beginning of period $ 2,731 $ 2,957 $
3,495
Total gains or losses included in earnings: Net change in unrealized gain (29) 63 (35) Principal paydowns (575) (289) (503) Balance, end of period $ 2,127 $ 2,731 $ 2,957
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.
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The following tables present quantitative information about recurring Level 3
fair value measurements as of December 31, 2022 and 2021:
Fair Valuation
December 31, 2022 (dollars in
thousands) Value Technique Unobservable Inputs Range
Private label mortgage-backed
security $ 2,127 Discounted cash flow (1) Constant prepayment rate 4.5% - 4.7%
(2) Probability of default 1.8% - 9.3%
(3) Loss severity 25% - 35%
Fair Valuation
December 31, 2021 (dollars in thousands) Value Technique Unobservable Inputs Range
Private label mortgage-backed security $ 2,731 Discounted cash flow
(1) Constant prepayment rate 4.5% - 5.7%
(2) Probability of default 1.8% - 9.3%
(3) Loss severity 50% - 75%
Trust Preferred Security
The Company invested in its TRUP in November 2015. The following table presents
a reconciliation of the Company's TRUP measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the years ending
December 31, 2022, 2021, and 2020:
Years Ended December 31, (in thousands) 2022 2021 2020
Balance, beginning of period $ 3,847 $ 3,800 $
4,000
Total gains or losses included in earnings: Discount accretion 57 53
56
Net change in unrealized gain (49) (6) (256) Balance, end of period $ 3,855 $ 3,847 $ 3,800
The fair value of the Company's TRUP investment is based on the most recent bid
price for this instrument, as provided by a third-party broker.
Mortgage Loans Held for Sale
The Bank has elected the fair value option for mortgage loans held for sale. These loans are intended for sale and the Bank believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with Bank policy for such instruments. None of these loans were past due 90-days-or-more nor on nonaccrual as of December 31, 2022 and 2021.
As of December 31, 2022 and 2021, the aggregate fair value, contractual balance
(including accrued interest), and unrealized gain was as follows:
December 31, (in thousands) 2022 2021
Aggregate fair value $ 1,302 $ 29,393
Contractual balance 1,265 28,668
Unrealized (loss) gain 37 725
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The total amount of gains and losses from changes in fair value of mortgage
loans held for sale included in earnings for 2022, 2021, and 2020 are presented
in the following table:
Years Ended December 31, (in thousands) 2022 2021 2020
Interest income $ 519 $ 1,081 $ 1,362 Change in fair value (688) (1,361) 1,552 Total included in earnings $ (169) $ (280) $ 2,914 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 December 31, 2022 and 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:
Fair Valuation
December 31, 2022 (dollars in
thousands) Value Technique
Unobservable Inputs Rate
Consumer loans held for sale $ 4,706 Contract Terms (1) Net Premium
0.15%
(2) Discounted Sales 10.00%
Fair Valuation
December 31, 2021 (dollars in
thousands) Value Technique
Unobservable Inputs Rate
Consumer loans held for sale $ 19,747 Contract Terms (1) Net Premium 1.4%
(2) Discounted Sales 5.00%
The aggregate fair value, contractual balance, and unrealized gain on consumer
loans held for sale, at fair value, were as follows:
December 31, (in thousands) 2022 2021
Aggregate fair value $ 4,706 $ 19,747 Contractual balance 4,734 19,633 Unrealized (loss) gain (28) 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:
Years Ended December 31, (in thousands) 2022 2021 2020
Interest income $ 9,970 $ 7,708 $ 1,808
Change in fair value (142) 100 9
Total included in earnings $ 9,828 $ 7,808 $ 1,817
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Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at
December 31, 2022 Using:
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable Total
Assets Inputs Inputs Fair
(in thousands) (Level 1) (Level 2) (Level 3) Value
Collateral-dependent loans:
Residential real estate:
Owner occupied $ - $ - $ 1,456 $ 1,456
Commercial real estate - - 906 906
Total collateral-dependent loans* $ - $
- $ 2,362 $ 2,362
Other real estate owned: Commercial real estate $ - $ - $ 1,581 $ 1,581 Total other real estate owned $ - $
- $ 1,581 $ 1,581
Fair Value Measurements at
December 31, 2021 Using:
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable Total
Assets Inputs Inputs Fair
(in thousands) (Level 1) (Level 2) (Level 3) Value
Collateral-dependent loans:
Residential real estate:
Owner occupied $ - $ - $ 1,626 $ 1,626
Commercial real estate - - 2,841 2,841
Home equity - - 378 378
Total collateral-dependent loans* $ - $
- $ 4,845 $ 4,845
Other real estate owned: Residential real estate $ - $ - $ 1,792 $ 1,792 Total other real estate owned $ - $
- $ 1,792 $ 1,792
* The difference between the carrying value and the fair value of collateral
dependent or impaired loans measured at fair value is reconciled in a subsequent
table of this Footnote.
The following tables present quantitative information about Level 3 fair value
measurements for financial instruments measured at fair value on a non-recurring
basis as of December 31, 2022 and 2021:
Range
Fair Valuation Unobservable (Weighted
December 31, 2022 (dollars
in thousands) Value Technique Inputs Average)
Collateral-dependent loans $ 1,456 Sales comparison approach Adjustments
0% - 41% (11%)
- residential real estate determined for
owner occupied differences
between comparable
sales
Collateral-dependent loans $ 906 Sales comparison approach Adjustments
16% (16%)
- commercial real estate determined for
differences
between comparable
sales
Other real estate owned - $ 1,581 Sales comparison approach Adjustments
39% (39%)
commercial real estate determined for
differences
between comparable
sales
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Range
Fair Valuation Unobservable (Weighted
December 31, 2021 (dollars
in thousands) Value Technique Inputs Average)
Collateral-dependent loans - $ 1,626 Sales comparison approach Adjustments 0% - 51% (10%)
residential real estate determined for
owner occupied differences
between comparable
sales
Collateral-dependent loans - $ 2,841 Sales comparison approach Adjustments 12% - 13% (12%)
commercial real estate determined for
differences
between comparable
sales
Collateral-dependent loans - $ 378 Sales comparison approach Adjustments 2%-4% (3%)
home equity determined for
differences
between comparable
sales
Other real estate owned - $ 1,792 Sales comparison approach Adjustments 33% (33%)
commercial real estate
determined for
differences
between comparable
sales
Collateral Dependent Loans
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.
Years Ended December 31, (in thousands) 2022 2021 2020
Provision on collateral-dependent loans $ 7 $ 960 $ 559
Other Real Estate Owned
Other real estate owned, which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is determined from external appraisals or BPOs using judgments and estimates of external professionals. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3.
Details of other real estate owned carrying value and write downs follow:
Years Ended December 31, (in thousands) 2022 2021
2020
Other real estate owned carried at fair value $ 1,581 $ 1,792 $ 2,003 Other real estate owned carried at cost - -
496
Total carrying value of other real estate
owned $ 1,581 $ 1,792 $ 2,499
Other real estate owned write-downs during
the years ended $ 211 $ 211 $ 105
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Financial Instruments
The carrying amounts and estimated exit price fair values of financial
instruments, as of December 31, 2022 and 2021 follow:
Fair Value Measurements at
December 31, 2022:
Total
Carrying Fair
(in thousands) Value Level 1 Level 2 Level 3 Value
Assets:
Cash and cash equivalents $ 313,689 $ 313,689 $
- $ - $ 313,689
Available-for-sale debt securities 620,365 193,385 420,998
5,982 620,365 Held-to-maturity debt securities 87,386 - 87,357 - 87,357 Equity securities with readily determinable fair values 111 - 111 - 111 Mortgage loans held for sale, at fair value 1,302 - 1,302 - 1,302 Consumer loans held for sale, at fair value 4,706 - - 4,706 4,706 Consumer loans held for sale, at the lower of cost or fair value 13,169 - - 13,169 13,169 Loans, net 4,445,389 - - 4,276,423 4,276,423 Federal Home Loan Bank stock 9,146 - - - NA Accrued interest receivable 13,572 - 2,462 11,110 13,572 Mortgage servicing rights 8,769 - 17,592 - 17,592 Mandatory forward contracts - - - - - Interest rate swap agreements 8,127 - 8,127 - 8,127
Liabilities:
Noninterest-bearing deposits $ 1,908,768 $ - $ 1,908,768 $ - $ 1,908,768
Transaction deposits 2,398,853 - 2,398,853 - 2,398,853
Time deposits 230,224 - 223,912 - 223,912
Securities sold under agreements
to repurchase and other short-term
borrowings 216,956 - 216,956 - 216,956
Federal Home Loan Bank advances 95,000 - 93,044 - 93,044
Accrued interest payable 239 - 239 - 239
Rate lock loan commitments - - - - -
Interest rate swap agreements 8,127 - 8,127 - 8,127
NA - Not applicable
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Fair Value Measurements at
December 31, 2021:
Total
Carrying Fair
(in thousands) Value Level 1 Level 2 Level 3 Value
Assets:
Cash and cash equivalents $ 756,971 $ 756,971 $
- $ - $ 756,971
Available-for-sale debt securities 495,126 70,112 418,436
6,578 495,126 Held-to-maturity debt securities 44,299 - 44,764 - 44,764 Equity securities with readily determinable fair values 2,620 2,450 170 - 2,620 Mortgage loans held for sale, at fair value 29,393 - 29,393 - 29,393 Consumer loans held for sale, at fair value 19,747 - - 19,747 19,747 Consumer loans held for sale, at the lower of cost or fair value 2,937 - - 2,937 2,937 Loans, net 4,431,985 - - 4,445,244 4,445,244 Federal Home Loan Bank stock 10,311 - - - NA Accrued interest receivable 9,877 - 1,441 8,436 1,441 Mortgage servicing rights 9,196 - 11,540 - 11,540 Rate lock loan commitments 1,404 - 1,404 - 1,404 Mandatory forward contracts 66 - 66 - 66 Interest rate swap agreements 5,786 - 5,786 - 5,786
Liabilities:
Noninterest-bearing deposits $ 1,989,679 $ - $ 1,989,679 $ - $ 1,989,679 Transaction deposits 2,553,424 - 2,553,424 - 2,553,424 Time deposits 296,213 - 298,236 - 298,236 Securities sold under agreements to repurchase and other short-term borrowings 290,967 - 290,967 - 290,967 Federal Home Loan Bank advances 25,000 - 25,000 - 25,000 Accrued interest payable 159 - 159 - 159 Interest rate swap agreements 5,786 -
5,786 - 5,786 NA - Not applicable
16.MORTGAGE BANKING ACTIVITIES
Mortgage Banking activities primarily include residential mortgage originations
and servicing.
Activity for mortgage loans held for sale was as follows:
Years Ended December 31, (in thousands) 2022 2021
2020
Balance, beginning of period $ 29,393 $ 46,867 $ 19,224 Origination of mortgage loans held for sale 205,365 680,714
782,939
Proceeds from the sale of mortgage loans held for sale (238,398) (717,847)
(788,475)
Net gain on sale of mortgage loans held for
sale 4,942 19,659 33,179
Balance, end of period $ 1,302 $ 29,393 $ 46,867
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Mortgage loans serviced for others are not reported as assets. The following
table provides information for loans serviced by the Bank for the FHLMC and FNMA
as of December 31, 2022 and 2021:
December 31, (in thousands) 2022 2021
FHLMC $ 966,677 $ 1,004,199
FNMA 420,637 378,942
Total $ 1,387,314 $ 1,383,141
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and processing
foreclosures. Custodial escrow account balances maintained in connection with
serviced loans were approximately $11 million and $14 million as of December 31,
2022 and 2021.
The following table presents the components of Mortgage Banking income:
Years Ended December 31, (in thousands) 2022 2021
2020
Net gain realized on sale of mortgage loans held for sale $ 7,164 $ 23,114 $ 28,721 Net change in fair value recognized on loans held for sale (688) (1,361)
1,552
Net change in fair value recognized on rate lock loan commitments (1,402) (3,136)
3,751
Net change in fair value recognized on forward contracts (132) 1,042 (845) Net gain recognized 4,942 19,659 33,179 Loan servicing income 3,518 3,288 2,924
Amortization of mortgage servicing rights (2,264) (3,453)
(3,756)
Change in mortgage servicing rights valuation allowance - 500
(500)
Net servicing income recognized 1,254 335
(1,332) Total Mortgage Banking income $ 6,196 $ 19,994 $ 31,847
Activity for capitalized mortgage servicing rights was as follows:
Years Ended December 31, (in thousands) 2022 2021 2020
Balance, beginning of period $ 9,196 $ 7,095 $ 5,888 Additions 1,838 5,054 5,463 Amortized to expense (2,264) (3,453) (3,756) Change in valuation allowance - 500 (500) Balance, end of period $ 8,770 $ 9,196 $ 7,095
Activity in the valuation allowance for capitalized mortgage servicing rights
follows:
Years Ended December 31, (in thousands) 2022 2021 2020
Beginning valuation allowance $ - $ 500 $ -
Charge during the period - (500) 500
Ending valuation allowance $ - $ - $ 500
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Other information relating to mortgage servicing rights follows:
December 31, (in thousands) 2022
2021
Fair value of mortgage servicing rights portfolio $ 17,145 $
11,540
Monthly weighted average prepayment rate of unpaid principal balance* 127 % 208 % Discount rate 10.21 % 10.15 % Weighted average foreclosure rate 0.10 % 0.19 % Weighted average life in years 7.54
5.93
* Rates are applied to individual tranches with similar characteristics.
Estimated future amortization expense of the MSR portfolio (net of any
applicable impairment charge) follows; however, actual amortization expense will
be impacted by loan payoffs and changes in estimated lives that occur during
each respective year:
Year (in thousands)
2023 $ 1,130
2024 1,127
2025 1,124
2026 1,098
2027 1,064
2028 936
Thereafter 2,291
Total $ 8,770
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 or to purchase TBA securities and are used
to manage interest rate risk on loan commitments and mortgage loans held for
sale. Interest rate lock loan commitments represent commitments to fund loans at
a specific rate. These derivatives involve underlying items, such as interest
rates, and are designed to transfer risk. Substantially all of these instruments
expire within 90 days from the date of issuance. Notional amounts are amounts on
which calculations and payments are based, but which do not represent credit
exposure, as credit exposure is limited to the amounts required to be received
or paid.
Mandatory forward contracts also contain an element of risk in that the
counterparties may be unable to meet the terms of such agreements. In the event
the counterparties fail to deliver commitments or are unable to fulfill their
obligations, the Bank could potentially incur significant additional costs by
replacing the positions at then current market rates. The Bank manages its risk
of exposure by limiting counterparties to those banks and institutions deemed
appropriate by management and the Board of Directors. The Bank does not expect
any counterparty to default on their obligations and therefore, the Bank does
not expect to incur any cost related to counterparty default.
The Bank is exposed to interest rate risk on loans held for sale and rate lock
loan commitments. As market interest rates fluctuate, the fair value of mortgage
loans held for sale and rate lock commitments will decline or increase. To
offset this interest rate risk the Bank enters into derivatives, such as
mandatory forward contracts to sell loans or purchase TBA securities. The fair
value of these mandatory forward contracts will fluctuate as market interest
rates fluctuate, and the change in the value of these instruments is expected to
largely, though not entirely, offset the change in fair value of loans held for
sale and rate lock commitments. The objective of this activity is to minimize
the exposure to losses on rate loan lock commitments and loans held for sale due
to market interest rate fluctuations. The net effect of derivatives on earnings
will depend on risk management activities and a variety of other factors,
including: market interest rate volatility; the amount of rate lock commitments
that close; the ability to fill the forward contracts before expiration; and the
time period required to close and sell loans.
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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:
2022 2021
Notional Notional
(in thousands) Amount Fair Value Amount Fair Value
Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value $ 1,265 $ 1,302 $ 28,668 $ 29,393
Included in other assets:
Rate lock loan commitments $ 4,118 $ 2 $ 56,736 $ 1,404
Mandatory forward contracts - - 70,812 66
Included in other liabilities:
Rate lock loan commitments $ - $ - $ - $ -
Mandatory forward contracts 4,009 67 - -
17. STOCK PLANS AND STOCK BASED COMPENSATION
In January 2015, the Company's Board of Directors adopted the Republic Bancorp, Inc. 2015 Stock Incentive Plan (the "2015 Plan"), which replaced the 2005 Stock Incentive Plan. The number of authorized shares under the 2015 Plan is fixed at 3,000,000, with such number subject to adjustment in the event of certain events, such as stock dividends, stock splits, or the like. There is a minimum three-year vesting period for awards granted to employees under the 2015 Plan that vest based solely on the completion of a specified period of service, with options generally exercisable three to six years after the issue date. Stock options generally must be exercised within one year from the date the options become exercisable and have an exercise price that is at least equal to the fair market value of the Company's stock on their grant date. All shares issued under the 2015 Plan were from authorized and reserved unissued shares. The Company has a sufficient number of authorized and reserved unissued shares to satisfy all anticipated option exercises. There are no Class B stock options outstanding or available for exercise under the Company's plans.
Stock Options
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of Republic's stock and other factors. Expected dividends are based on dividend trends and the market price of Republic's stock price at grant. Republic uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant.
All share-based payments to employees, including grants of employee stock
options, are recognized as compensation expense over the service period
(generally the vesting period) in the consolidated financial statements based on
their fair values.
The fair value of stock options granted was determined using the following
weighted average assumptions as of grant date:
Years Ended December 31, 2022 2021 2020 Risk-free interest rate 1.35 % 0.20 % 0.44 % Expected dividend yield 2.50 % 3.18 % 3.53 %
Expected stock price volatility 32.12 % 31.71 % 23.71 %
Expected life of options (in years) 4 4 5
Estimated fair value per share $ 10.41 $ 6.26 $ 4.06
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The following table summarizes stock option activity from January 1, 2021
through December 31, 2022:
Weighted
Weighted Average
Options Average Remaining Aggregate
Class A Exercise Contractual Intrinsic
Shares Price Term (years) Value
Outstanding, January 1, 2022 460,502 $ 37.54
Granted 54,281 50.34
Exercised (5,250) 34.17
Forfeited or expired (44,500) 40.32
Outstanding, December 31, 2022 465,033 $ 38.81
2.25 $ 2,322,635
Unvested 414,033 $ 37.69
2.44 $ 2,319,200
Exercisable (vested) at December 31, 2022 51,000 $ 47.87 0.72 $ 3,435
Information related to the stock options during each year follows:
Years Ended December 31, 2022 2021
2020
Total intrinsic value of options exercised $ 57 $ 1,335
$ 634 Total cash received from options exercised, net of shares redeemed 52 (142)
210
Total tax benefit of options exercised 6 223
78
Loan balances of employees that were originated solely to fund stock option exercises were as follows: December 31, (in thousands) 2022 2021 Outstanding loans $ 178 $ 239 Restricted Stock Awards Restricted stock awards generally vest within three to six years after issuance, with accelerated vesting due to "change in control" or "death or disability of a participant" as defined and outlined in the 2015 Plan.
The following table summarizes all restricted stock activity from January 1,
2021 through December 31, 2022:
Restricted
Weighted-Average Weighted-Average
Stock Awards Grant Date Remaining Contractual
Class A Shares Fair Value Term (years)
Outstanding, January 1, 2022 56,059 $ 39.12
Granted 12,174 46.05
Forfeited - -
Earned and issued (3,500) 37.74
Outstanding, December 31, 2022 64,733 $ 40.49
1.23 Unvested 64,733 $ 40.49 1.23
The fair value of the restricted stock awards is based on the closing stock
price on the date of grant with the associated expense amortized to compensation
expense over the vesting period, generally three to six years. The total fair
value of restricted shares that vested during 2022, 2021 and 2020 was
approximately $186,000, $50,000, and $46,000.
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Performance Stock Units
Performance stock units are earned within one year of issuance and vest within
three years of issuance, with accelerated vesting due to "change in control" or
"death or disability of a participant" as defined and outlined in the 2015 Plan.
The following table summarizes all PSU activity from January 1, 2021 through
December 31, 2022:
Performance
Stock Units Weighted-Average
Class A Shares Grant Date Fair Value
Outstanding, January 1, 2021 - $ -
Granted 10,667 36.29
Forfeited (10,667) 36.29
Earned and issued - -
Outstanding, December 31, 2021 - $ -
Outstanding, January 1, 2022 - $ -
Granted 8,874 51.39
Forfeited (8,874) 51.39
Earned and issued - -
Outstanding, December 31, 2022 - $ -
Expense Related to Stock Incentive Plans
The Company recorded expense related to stock incentive plans for the years
ended December 31, 2022, 2021, and 2020 as follows:
Years Ended December 31, (in thousands) 2022 2021 2020
Stock option expense $ 560 $ 574 $ 463 Restricted stock award expense 937 738 396 Performance stock unit expense 152 129 - Total expense $ 1,649 $ 1,441 $ 859
Unrecognized expenses related to unvested awards under stock incentive plans are
estimated as follows:
Stock Restricted
Year (in thousands) Options Stock Awards Total
2023 $ 622 $ 565 $ 1,187
2024 267 273 540
2025 38 54 92
2026 18 27 45
2027 5 8 13
Total $ 950 $ 927 $ 1,877
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Deferred Compensation
On April 19, 2018, the shareholders of Republic approved an amendment and
restatement of the Non-Employee Director and Key Employee Deferred Compensation
Plan (the "Plan"). Prior to the Plan's 2018 amendment and restatement, only
directors participated in the plan, with the 2018 amendment and restatement
initiating key-employee participation. The Plan provides non-employee directors
and designated key employees the ability to defer compensation and have those
deferred amounts paid later in the form of Company Class A Common shares based
on the shares that could have been acquired as the deferrals were made. The
Company maintains a bookkeeping account for each director or key-employee
participant, and at the end of each fiscal quarter, deferred compensation is
converted to "stock units" equal to the amount of compensation deferred during
the quarter divided by the quarter-end fair market value of the Company's Class
A Common stock. Stock units for each participant's account are also credited
with an amount equal to the cash dividends that would have been paid on the
number of stock units in the account if the stock units were deemed to be
outstanding shares of stock. Any dividends credited are converted into
additional stock units at the end of the fiscal quarter in which the dividends
were paid.
DIRECTORS
Members of the Board of Directors may defer board and committee fees from two to
five years, with each director participant retaining a nonforfeitable interest
in his or her deferred compensation account.
The following table presents information on director deferred compensation under
the Plan for the periods presented:
Outstanding Weighted-Average
Stock Market Price
Units at Date of Deferral
Outstanding, January 1, 2022 86,800 $ 29.98
Deferred fees and dividend equivalents converted
to stock units 18,241
46.58
Stock units converted to Class A Common Shares (5,814)
49.51
Outstanding, December 31, 2022 99,227 $
31.43 Vested 99,227 $ 31.43
Director deferred compensation has been expensed as follows:
Years Ended December 31, (in thousands) 2022 2021 2020
Director deferred compensation expense $ 503 $ 417 $ 352
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KEY EMPLOYEES
Designated key employees may defer a portion of their base salaries on a pre-tax
basis under the Plan, with the Company matching employee deferrals up to a
prescribed limit. With limited exception, the Company match amount remains
unvested until December 31st of the year that is five years from the beginning
of the year that the Company match is made.
The following table presents information on key-employee deferred compensation
under the Plan for the periods presented:
Outstanding Weighted-Average Weighted-Average
Stock Market Price Remaining Contractual
Units at Date of Deferral Term (years)
Outstanding, January 1, 2022 65,318 $ 40.57
Deferred base salaries and dividend
equivalents converted to stock units 9,389 43.08
Matching stock units credited 9,315 43.08
Matching stock units forfeited (1,151) 48.25
Stock units converted to Class A
Common Shares - -
Outstanding, December 31, 2022 82,871 $ 41.03
3.13 Vested 47,742 $ 41.47 Unvested 35,129 $ 40.43 3.13
The following presents key-employee deferred compensation expense for the period
presented:
Years Ended December 31, (in thousands) 2022 2021 2020
Key-employee - base salary $ 408 $ 429 $ 408 Key-employee - employer match 317 178 158 Total $ 725 $ 607 $ 566 Employee Stock Purchase Plan On April 19, 2018, the shareholders of Republic approved the ESPP. Under the ESPP, participating employees may purchase shares of the Company Class A Common Stock through payroll withholdings at a purchase price that cannot be less than 85% of the lower of the fair market value of the Company's Class A Common Stock on the first trading day of each offering period, or on the last trading day of each offering period. Participating employees were able purchase the Company's Class A Common Stock through the ESPP at:
85% of fair market value on the last day of the three-month offering periods
? ended March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020,
March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31,
2022, June 30, 2022, September 30, 2022, and December 31, 2022.
The following presents expense under the ESPP for the period presented:
Years Ended December 31, (in thousands) 2022 2021 2020
ESPP expense $ 104 $ 104 $ 94
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18. BENEFIT PLANS
401(k) Plan
Republic maintains a 401(k) plan for eligible employees. All eligible employees
are automatically enrolled at 6% of their eligible compensation within 30 days
of their date of hire unless the eligible employee elects to enroll sooner.
Participants in the plan have the option to contribute from 1% to 75% of their
annual eligible compensation, up to the maximum allowed by the IRS. The Company
matches 100% of participant contributions up to 1% and an additional 75% for
participant contributions between 2% and 5% of each participant's annual
eligible compensation. Participants are fully vested after two years of
employment.
Republic may also contribute discretionary matching contributions in addition to
the matching contributions if the Company achieves certain operating goals.
Normal and discretionary contributions for each of the periods ended were as
follows:
Years Ended December 31, (in thousands) 2022 2021
2020
Employer matching contributions $ 3,096 $ 3,373 $ 3,205 Discretionary employer bonus matching contributions - -
117
Supplemental Executive Retirement Plan
In association with its May 17, 2016 Cornerstone acquisition, the Company inherited a SERP. The SERP requires the Company to pay monthly benefits following retirement of the SERP's four participants. The Company accrues the present value of such benefits monthly. The SERP liability was approximately $2 million as of December 31, 2022 and 2021. Expense under the SERP was $0, $232,000, and $34,000 for the years ended December 31, 2022, 2021, and 2020. 19. INCOME TAXES
Allocation of federal and state income tax between current and deferred portion
is as follows:
Years Ended December 31, (in thousands) 2022 2021 2020
Current expense:
Federal $ 24,537 $ 19,348 $ 25,762
State 5,939 4,169 2,450
Deferred expense:
Federal (4,273) (246) (7,249)
State (464) 560 (1,576)
Total $ 25,739 $ 23,831 $ 19,387
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Effective tax rates differ from federal statutory rate applied to income before
income taxes due to the following:
Years Ended December 31, 2022 2021 2020 Federal corporate tax rate 21.00 % 21.00 % 21.00 % Effect of:
State taxes, net of federal benefit 3.70 3.32
1.43 General business tax credits (1.88) (1.76) (2.01) Nontaxable income (1.00) (1.06) (0.75) Reversal of valuation allowance/establishment of net operating loss DTA - -
(0.04)
Tax benefit of vesting employee benefits (0.01) (0.20)
(0.15)
Deferred tax asset due to KY HB354 - -
(0.97) Other, net 0.22 0.08 0.38 Effective tax rate 22.03 21.38 18.89
Year-end DTAs and DTLs were due to the following:
December 31, (in thousands) 2022 2021 Deferred tax assets: Allowance for credit losses $ 17,427 $ 16,071 Operating lease liabilities 9,362 9,884 Accrued expenses 5,901 5,721 Net operating loss carryforward(1) 1,371 1,550 Acquisition fair value adjustments 101 124 Other-than-temporary impairment 567 402 Paycheck Protection Program Fees 31 337 R&D Capitalization 2,271 - Unrealized investment security losses 10,657 - Other 2,217 2,079 Total deferred tax assets 49,905 36,168
Deferred tax liabilities:
Right of use assets - operating leases (9,166) (9,673)
Depreciation and amortization
(2,835) (3,682) Federal Home Loan Bank dividends (745) (709) Deferred loan costs (2,153) (2,275) Lease Financing Receivables (1,996) (2,094) Mortgage servicing rights (2,172) (2,291) Unrealized investment securities gains - (625) Total deferred tax liabilities (19,067) (21,349) Less: Valuation allowance - - Net deferred tax asset $ 30,838 $ 14,819
The Company has federal and state net operating loss carryforwards (acquired
in its 2016 Cornerstone acquisition) of $5.9 million (federal) and $3.2
million (state). These carryforwards begin to expire in 2030 for both federal
(1) and state purposes. The use of these federal and state carryforwards is each
limited under IRC Section 382 to $722,000 annually for federal and $634,000
annually for state. Finally, the Company has state AMT credit carryforwards
of $15,000 with no expiration date.
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Unrecognized Tax Benefits
The following table shows a reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
Years Ended December 31, (in thousands) 2022 2021
2020
Balance, beginning of period $ 2,191 $ 1,941 $ 1,707 Additions based on tax related to the current period 950 433
455
Additions for tax positions of prior periods - 253
24
Reductions for tax positions of prior periods - -
(72)
Reductions due to the statute of limitations (275) (436)
(82) Settlements - - (91) Balance, end of period $ 2,866 $ 2,191 $ 1,941
Of the 2022 total, $2.4 million represented the amount of unrecognized tax
benefits that, if recognized, would favorably affect the effective income tax
rate in future periods.
It is the Company's policy to recognize interest and penalties as a component of income tax expense related to its unrecognized tax benefits. Amounts related to interest and penalties recorded in the income statements for the years ended December 31, 2022, 2021, and 2020, and accrued on the balance sheets as of December 31, 2022, 2021, and 2020 are presented below: Years Ended December 31, (in thousands) 2022 2021
2020
Interest and penalties recorded in the income statement as a component of income tax expense $ 72 $ 267 $ 57 Interest and penalties accrued on balance sheet 849 777
510
The Company files income tax returns in the U.S. federal jurisdiction. The
Company is no longer subject to U.S. federal income tax examinations by taxing
authorities for all years prior to and including 2018.
Low-Income Housing Tax Credits Investments and Obligations
The Company is a limited partner in several low-income housing partnerships whose purpose is to invest in qualified affordable housing. The Company expects to recover its remaining investments in these partnerships through the use of tax credits that are generated by the investments.
The following table summarizes information related to the Company's qualified
low-income housing investments and obligations:
December 31, (in thousands) 2022 2021
Unfunded Unfunded
Investment Accounting Method Investments Obligations Investments Obligations
Proportional
Low-income housing tax credit - Gross amortization $ 42,306 $ 43,609 $ 33,417 $ 23,383
Life-to-date amortization
(10,591) NA (6,181) NA Low-income housing tax credit - Net $ 31,715
$ 43,609 $ 27,236 $ 23,383
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20. EARNINGS PER SHARE
The Company calculates earnings per share under the two-class method. Under the
two-class method, earnings available to common shareholders for the period are
allocated between Class A Common Stock and Class B Common Stock according to
dividends declared (or accumulated) and participation rights in undistributed
earnings. The difference in earnings per share between the two classes of common
stock results from the 10% per share cash dividend premium paid on Class A
Common Stock over that paid on Class B Common Stock. See Footnote 14,
"Stockholders' Equity and Regulatory Capital Matters" of this section of the
filing.
A reconciliation of the combined Class A and Class B Common Stock numerators and
denominators of the earnings per share and diluted earnings per share
computations is presented below:
Years Ended December 31, (in thousands, except per share data) 2022 2021 2020 Net income $ 91,106 $ 87,611 $ 83,246 Dividends declared on Common Stock: Class A Shares (24,122) (22,451)
(21,433)
Class B Shares (2,679) (2,435)
(2,288)
Undistributed net income for basic earnings per share 64,305 62,725
59,525
Weighted average potential dividends on Class A shares upon exercise of dilutive options (87) (100)
(35)
Undistributed net income for diluted earnings per share $ 64,218 $ 62,625
$ 59,490
Weighted average shares outstanding: Class A Shares 17,876 18,497
18,838
Class B Shares 2,161 2,178
2,201
Effect of dilutive securities on Class A Shares outstanding 64 82
30
Weighted average shares outstanding including dilutive securities 20,101 20,757 21,069 Basic earnings per share: Class A Common Stock:
Per share dividends distributed $ 1.36 $ 1.23 $ 1.14 Undistributed earnings per share* 3.24 3.06
2.86
Total basic earnings per share - Class A Common Stock $ 4.60 $ 4.29
$ 4.00
Class B Common Stock: Per share dividends distributed $ 1.24 $ 1.12 $ 1.04 Undistributed earnings per share* 2.95 2.78
2.60
Total basic earnings per share - Class B Common Stock $ 4.19 $ 3.90 $ 3.64 Diluted earnings per share: Class A Common Stock:
Per share dividends distributed $ 1.36 $ 1.23 $ 1.14 Undistributed earnings per share* 3.23 3.05
2.85
Total diluted earnings per share - Class A Common Stock $ 4.59 $ 4.28
$ 3.99
Class B Common Stock: Per share dividends distributed $ 1.24 $ 1.12 $ 1.04 Undistributed earnings per share* 2.93 2.77
2.59
Total diluted earnings per share - Class B Common Stock $ 4.17 $ 3.89
$ 3.63
*To arrive at undistributed earnings per share, undistributed net income is first pro rated between Class A and Class B Common Shares, with Class A Common Shares receiving a 10% premium. The resulting pro-rated, undistributed net income for each class is then divided by the weighted average shares for each class.
Stock options excluded from the detailed earnings per share calculation because
their impact was antidilutive are as follows:
Years Ended December 31, 2022 2021 2020 Antidilutive stock options 178,000 144,000 338,995
Average antidilutive stock options 128,000 142,625 282,489
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21. TRANSACTIONS WITH RELATED PARTIES AND THEIR AFFILIATES
Republic leases office facilities under operating leases from limited liability companies in which Republic's Executive Chair/Chief Executive Officer and Vice Chair are partners. Rent expense and obligations under these leases are presented in Footnote 6 in this section of the filing.
Loans made to executive officers and directors of Republic and their related
interests during 2022 were as follows:
(in thousands)
Beginning balance $ 7,448
Effect of changes in composition of related parties (740)
New loans 3,728
Repayments (3,609)
Ending balance $ 6,827
Deposits from executive officers, directors, and their affiliates totaled $126
million and $123 million as of December 31, 2022 and 2021.
By an agreement dated December 14, 1989, as amended August 8, 1994, the Company entered into a split-dollar insurance agreement with a trust established by the Company's deceased former Chair, Bernard M. Trager. Pursuant to the agreement, from 1989 through 2002 the Company paid $690,000 in total annual premiums on the insurance policies held in the trust. The policies are joint-life policies payable upon the death of Mrs. Jean Trager, as the survivor of her husband Bernard M. Trager. The cash surrender value of the policies was approximately $2 million as of December 31, 2022 and 2021. Pursuant to the terms of the trust, the beneficiaries of the trust will each receive the proceeds of the policies after the repayment of any unreimbursed portion of the $690,000 annual premiums paid by the Company. The unreimbursed portion constitutes indebtedness from the trust to the Company and is secured by a collateral assignment of the policies. As of December 31, 2022 and 2021, the unreimbursed portion was $240,000 and $340,000, and the net death benefit under the policies was approximately $5 million. Upon the termination of the agreement, whether by the death of Mrs. Trager or earlier cancellation, the Company is entitled to be repaid by the trust the amount of indebtedness outstanding at that time.
22. OTHER COMPREHENSIVE INCOME
OCI components and related tax effects were as follows:
Years Ended December 31, (in thousands) 2022 2021
2020
Available-for-Sale Debt Securities: Unrealized losses on AFS debt securities $ (45,109) $ (8,908) $ 7,147 Unrealized (loss) gain on AFS debt security for which a portion of OTTI has been recognized in earnings (29) 63 (35) Net gains (losses) (45,138) (8,845) 7,112 Tax effect 11,285 2,210 (1,778) Net of tax (33,853) (6,635) 5,334 Cash Flow Hedges: Change in fair value of derivatives used for cash flow hedges - -
(177)
Reclassification amount for net derivative
losses realized in income - - 281
Net gains (losses) - - 104
Tax effect - - (27)
Net of tax - - 77
Total other comprehensive (loss) income
components, net of tax $ (33,853) $ (6,635) $ 5,411
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Amounts reclassified out of each component of accumulated OCI for the years
ended December 31, 2022, 2021, and 2020:
Amounts Reclassified From
Affected Line Items Accumulated Other
in the Consolidated Comprehensive Income (Loss)
Years Ended December 31, (in
thousands) Statements of Income 2022 2021 2020
Cash Flow Hedges:
Interest rate swap on money
market deposits Interest expense on deposits - - (138)
Interest rate swap on FHLB
advance Interest expense on FHLB advances - - (143)
Total derivative losses on
cash flow hedges Total interest expense - - (281)
Tax effect Income tax expense - - 70
Net of tax Net income - - (211)
The following is a summary of the accumulated OCI balances, net of tax:
2022
(in thousands) December 31, 2021 Change
December 31, 2022
Unrealized gain (loss) on AFS debt
securities $ 890 $ (33,824) $ (32,934)
Unrealized (loss) gain on AFS debt
security for which a portion of OTTI
has been recognized in earnings 984 (29) 955
Total unrealized gain (loss) $ 1,874 $ (33,853) $ (31,979)
2021
(in thousands) December 31, 2020 Change December 31, 2021
Unrealized gain (loss) on AFS debt
securities $ 7,571 $ (6,681) $ 890
Unrealized gain on AFS debt security
for which a portion of OTTI has been
recognized in earnings 938 46 984
Total unrealized gain (loss) $ 8,509 $ (6,635) $ 1,874
23. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS December 31, (in thousands) 2022 2021 Assets: Cash and cash equivalents $ 36,436 $ 16,881 Security available for sale 3,855 3,847 Investment in bank subsidiary 819,144 818,092 Investment in non-bank subsidiaries 2,773 2,409 Other assets 2,465 3,741 Total assets $ 864,673 $ 844,970
Liabilities and Stockholders' Equity:
Subordinated note $ - $ - Other liabilities 8,060 9,916 Stockholders' equity 856,613 835,054
Total liabilities and stockholders' equity $ 864,673 $ 844,970
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STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, (in thousands) 2022 2021
2020 Income and expenses: Dividends from subsidiary $ 59,460 $ 28,300 $ 25,980 Interest income 229 143 182 Other income 54 53 57 Less: Interest expense - 507 1,000 Less: Other expenses 819 760 691
Income before income tax benefit 58,924 27,229
24,528
Income tax benefit 124 245
344
Income before equity in undistributed net income of subsidiaries 59,048 27,474
24,872
Equity in undistributed net income of subsidiaries 32,058 60,137 58,374 Net income $ 91,106 $ 87,611 $ 83,246 Comprehensive income $ 57,253 $ 80,976 $ 88,657 STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands) 2022 2021
2020 Operating activities: Net income $ 91,106 $ 87,611 $ 83,246 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of investment security (56) (53)
(56)
Equity in undistributed net income of subsidiaries (32,058) (60,137)
(58,374)
Director deferred compensation - Parent Company 427 347 181 Change in other assets 4,571 (736) 1,609 Change in other liabilities (5,428) 1,694 54
Net cash provided by operating activities 58,562 28,726
26,660
Investing activities:
Investment in venture capital fund (337) -
-
Investment in subsidiary bank (590) (591)
(533)
Net cash used in investing activities (927) (591)
(533) Financing activities: Common Stock repurchases (12,577) (47,528) (3,935) Net proceeds from Class A Common Stock purchased through employee stock purchase plan 590 591
533
Net proceeds from Common Stock options exercised 52 (142)
-
Payoff of subordinated note, net of common security interest - (40,000)
-
Cash dividends paid (26,145) (24,699)
(23,204)
Net cash used in financing activities (38,080) (111,778)
(26,606)
Net change in cash and cash equivalents 19,555 (83,643)
(479)
Cash and cash equivalents at beginning of period 16,881 100,524
101,003
Cash and cash equivalents at end of period $ 36,436 $ 16,881 $ 100,524
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24. REVENUE FROM CONTRACTS WITH CUSTOMERS
The following tables present the Company's net revenue by reportable segment for
the years ended December 31, 2022, 2021, and 2020:
Year Ended December 31, 2022
Core Banking Republic Processing Group
Total Tax Republic
Traditional Warehouse Mortgage Core Refund Credit Total Total
(dollars in thousands) Banking Lending Banking Banking Solutions Solutions RPG Company
Net interest income (1) $ 171,543 $ 13,729 $ 519 $ 185,791 $ 21,715 $ 29,185 $ 50,900 $ 236,691
Noninterest income:
Service charges on deposit
accounts 13,388 50 - 13,438 (12) - (12) 13,426
Net refund transfer fees - - - - 17,080 - 17,080 17,080
Mortgage banking income (1) - - 6,196 6,196 - - - 6,196
Interchange fee income 12,943 - - 12,943 182 - 182 13,125
Program fees (1) - - - - 2,872 13,300 16,172 16,172
Increase in cash surrender value
of BOLI (1) 2,526 - - 2,526 - - - 2,526
Net losses on OREO (211) - - (211) - - - (211)
Contract termination fee - -
- - 5,000 - 5,000 5,000 Legal settlement - - - - 13,000 - 13,000 13,000 Other 3,002 - 136 3,138 358 - 358 3,496 Total noninterest income 31,648 50 6,332 38,030 38,480 13,300 51,780 89,810 Total net revenue $ 203,191 $ 13,779 $ 6,851 $ 223,821 $ 60,195 $ 42,485 $ 102,680 $ 326,501
Net-revenue concentration (2) 63 % 4 % 2 % 69 % 18 % 13 % 31 %
100 %
(1) This revenue is not subject to ASC 606.
Net revenue represents net interest income plus total noninterest income.
(2) Net-revenue concentration equals segment-level net revenue divided by total
Company net revenue.
Years Ended December 31, 2021
Core Banking Republic Processing Group
Total Tax Republic
Traditional Warehouse Mortgage Core Refund Credit Total Total
(dollars in thousands) Banking Lending Banking Banking Solutions Solutions RPG Company
Net interest income (1) $ 157,249 $ 25,218 $ 1,081 $ 183,548 $ 15,837 $ 23,355 $ 39,192 $ 222,740
Noninterest income:
Service charges on deposit
accounts 12,506 57 - 12,563 (10) - (10) 12,553
Net refund transfer fees - -
- - 20,248 - 20,248
20,248
Mortgage banking income (1) - - 19,994 19,994 - - - 19,994 Interchange fee income 12,777 - - 12,777 285 - 285 13,062 Program fees (1) - - - - 3,171 11,066 14,237 14,237 Increase in cash surrender value of BOLI (1) 2,242 - - 2,242 - - - 2,242 Net losses on OREO (160) - - (160) - - - (160) Other 4,127 - 191 4,318 81 - 81 4,399 Total noninterest income 31,492 57 20,185 51,734 23,775 11,066 34,841 86,575 Total net revenue $ 188,741 $ 25,275 $ 21,266 $ 235,282 $ 39,612 $ 34,421 $ 74,033 $ 309,315 Net-revenue concentration (2) 61 % 8 % 7 % 76 % 13 % 11 % 24 % 100 %
(1) This revenue is not subject to ASC 606.
Net revenue represents net interest income plus total noninterest income.
(2) Net-revenue concentration equals segment-level net revenue divided by total
Company net revenue.
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Year Ended December 31, 2020
Core Banking Republic Processing Group
Total Tax Republic
Traditional Warehouse Mortgage Core Refund Credit Total
Total
(dollars in thousands) Banking Lending Banking Banking Solutions Solutions RPG Company Net interest income (1) $ 159,381 $ 25,957 $ 1,362 $ 186,700 $ 22,972 $ 22,643 $ 45,615 $ 232,315 Noninterest income: Service charges on deposit accounts 11,571 63 - 11,634 (19) - (19) 11,615 Net refund transfer fees - - - - 20,297 - 20,297 20,297 Mortgage banking income (1) - - 31,847 31,847 - - - 31,847 Interchange fee income 10,978 - - 10,978 210 - 210 11,188 Program fees (1) - - - - 2,193 4,902 7,095 7,095 Increase in cash surrender value of BOLI (1) 1,585 - - 1,585 - - - 1,585 Net losses on OREO (40) - - (40) - - - (40) Gain on branch divestiture(1) - - - - - - - - Other 3,310 (39) 103 3,374 92 - 92 3,466 Total noninterest income 27,404 24 31,950 59,378 22,773 4,902 27,675 87,053 Total net revenue $ 186,785 $ 25,981 $ 33,312 $ 246,078 $ 45,745 $ 27,545 $ 73,290 $ 319,368 Net-revenue concentration (2) 59 % 8 % 10 % 77 % 14 % 9 % 23 % 100 %
(1) This revenue is not subject to ASC 606.
Net revenue represents net interest income plus total noninterest income.
(2) Net-revenue concentration equals segment-level net revenue divided by total
Company net revenue.
The following represents information for significant revenue streams subject to
ASC 606:
Service charges on 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 fulfilment of RT contracts are generally expensed during the
first half of the year.
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Interchange fee income - As an "issuing bank" for card transactions, the Company
earns interchange fee income on transactions executed by its cardholders with
various third-party merchants. Through third-party intermediaries, merchants
compensate the Company for each transaction for the ability to efficiently
settle the transaction, and for the Company's willingness to accept certain
risks inherent in the transaction. There is no written contract between the
merchant and the Company, but a contract is implied between the two parties by
customary business practices. Interchange fee income is recognized almost
simultaneously by the Company upon the completion of a related card transaction.
The Company compensates its cardholders by way of cash or other "rewards" for
generating card transactions. These rewards are disclosed in cardholder
agreements between the Company and its cardholders. Reward costs are accrued
over time based on card transactions generated by the cardholder. Interchange
fee income is presented net of reward costs within noninterest income.
Net gains/(losses) on other real estate - The Company routinely sells OREO it
has acquired through loan foreclosure. Net gains/(losses) on OREO reflect both
1) the gain or loss recognized upon an executed deed and 2) mark-to-market
write-downs the Company takes on its OREO inventory.
The Company generally recognizes gains or losses on OREO at the time of an
executed deed, although gains may be recognized over a financing period if the
Company finances the sale. For financed OREO sales, the Company assesses whether
the buyer is committed to perform their obligations under the contract and
whether collectability of the transaction price is probable. Once these criteria
are met, the OREO asset is derecognized and the gain or loss on sale is recorded
upon the transfer of control of the property to the buyer. In determining the
gain or loss on sale, the Company adjusts the transaction price and related
gain/(loss) on sale if a significant financing component is present.
Mark-to-market write-downs taken by the Company during the property's holding
period are generally at least 10% per year but may be higher based on updated
real estate appraisals or BPOs. Incremental expenditures to bring OREO to
salable condition are generally expensed as-incurred.
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25. SEGMENT INFORMATION
Reportable segments are determined by the type of products and services offered
and the level of information provided to the chief operating decision maker, who
uses such information to review performance of various components of the
business (such as banking centers and business units), which are then aggregated
if operating performance, products/services, and clients are similar.
As of December 31, 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.
The nature of segment operations and the primary drivers of net revenues by
reportable segment are provided below:
Reportable Segment: Nature of Operations:
Primary Drivers of Net Revenue:
Core Banking:
Traditional Banking Provides traditional banking products to Loans, investments, and deposits
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.
Warehouse Lending Provides short-term, revolving credit
Mortgage warehouse lines of credit
facilities to mortgage bankers across the
United States.
Mortgage Banking Primarily originates, sells, and services
Loan sales and servicing
long-term, single-family, first-lien
residential real estate loans primarily
to clients in the Bank's market
footprint.
Republic Processing Group:
Tax Refund Solutions TRS offers tax-related credit products Loans, refund transfers, and
and facilitates the receipt and payment prepaid cards.
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.
Republic Credit Solutions Offers consumer credit products. RCS Unsecured, consumer loans
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.
The accounting policies used for Republic's reportable segments are the same as
those described in the summary of significant accounting policies. Segment
performance is evaluated using operating income. Goodwill is allocated to the
Traditional Banking segment. Income taxes are generally allocated based on
income before income tax expense unless specific segment allocations can be
reasonably made. Transactions among reportable segments are made at carrying
value.
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Segment information for the years ended December 31, 2022, 2021, and 2020 is as
follows:
Year Ended December 31, 2022
Core Banking Republic Processing Group
Total Tax Republic
Traditional Warehouse Mortgage Core Refund Credit Total Total
(dollars in thousands) Banking Lending Banking Banking Solutions Solutions RPG Company
Net interest income $ 171,543 $ 13,729 $ 519 $ 185,791 $ 21,715 $ 29,185 $ 50,900 $ 236,691
Provision for expected credit loss
expense 1,429 (1,117) - 312 9,955 12,081 22,036 22,348
Net refund transfer fees - - - - 17,080 - 17,080 17,080
Mortgage banking income - - 6,196 6,196 - - - 6,196
Program fees - - - - 2,872 13,300 16,172 16,172
Contract termination fee - - - - 5,000 - 5,000 5,000
Legal settlement - - - - 13,000 - 13,000 13,000
Other noninterest income 31,648 50 136 31,834 528 - 528 32,362
Total noninterest income 31,648 50 6,332 38,030 38,480 13,300 51,780 89,810
Total noninterest expense 149,681 3,604 9,912 163,197 15,717 8,394 24,111 187,308
Income (loss) before income tax
expense 52,081 11,292 (3,061) 60,312 34,523 22,010 56,533
116,845
Income tax expense (benefit) 11,104 2,539 (673) 12,970 7,847 4,922 12,769 25,739
Net income (loss) $ 40,977 $ 8,753 $ (2,388) $ 47,342 $ 26,676 $ 17,088 $ 43,764 $ 91,106
Period-end assets $ 4,894,773 $ 405,052 $ 13,938 $ 5,313,763 $ 409,259 $ 112,521 $ 521,780 $ 5,835,543
Net interest margin 3.38 % 2.69 % NM 3.32 % NM NM NM 4.12 %
Net-revenue concentration* 63 % 4 % 2 % 69 % 18 % 13 % 31 % 100 %
Year Ended December 31, 2021
Core Banking Republic Processing Group
Total Tax Republic
Traditional Warehouse Mortgage Core Refund Credit Total Total
(dollars in thousands) Banking Lending Banking Banking Solutions Solutions RPG Company
Net interest income $ 157,249 $ 25,218 $ 1,081 $ 183,548 $ 15,837 $ 23,355 $ 39,192 $ 222,740
Provision for expected credit loss
expense (38) (281) - (319) 6,683 8,444 15,127 14,808
Net refund transfer fees - - - - 20,248 - 20,248 20,248
Mortgage banking income - - 19,994 19,994 - - - 19,994
Program fees - - - - 3,171 11,066 14,237 14,237
Other noninterest income 31,492 57 191 31,740 356 - 356 32,096
Total noninterest income 31,492 57 20,185 51,734 23,775 11,066 34,841 86,575
Total noninterest expense 145,376 4,210 12,356 161,942 16,344 4,779 21,123 183,065
Income before income tax expense 43,403 21,346 8,910 73,659 16,585 21,198 37,783 111,442
Income tax expense 7,685 4,962 1,960 14,607 3,964 5,260 9,224 23,831
Net income $ 35,718 $ 16,384 $ 6,950 $ 59,052 $ 12,621 $ 15,938 $ 28,559 $ 87,611
Period-end assets $ 4,717,836 $ 850,703 $ 43,929 $ 5,612,468 $ 371,647 $ 109,517 $ 481,164 $ 6,093,632
Net interest margin 3.18 % 3.37 % NM 3.20 % NM NM NM 3.79 %
Net-revenue concentration* 61 % 8 % 7 % 76 % 13 % 11 % 24 % 100 %
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Year Ended December 31, 2020
Core Banking Republic Processing Group
Total Tax Republic
Traditional Warehouse Mortgage Core Refund Credit Total Total
(dollars in thousands) Banking Lending Banking Banking Solutions Solutions RPG Company
Net interest income $ 159,381 $ 25,957 $ 1,362 $ 186,700 $ 22,972 $ 22,643 $ 45,615 $ 232,315
Provision for expected credit loss
expense 16,257 613 - 16,870 13,189 1,219 14,408 31,278
Net refund transfer fees - - - - 20,297 - 20,297 20,297
Mortgage banking income - - 31,847 31,847 - - - 31,847
Program fees - - - - 2,193 4,902 7,095 7,095
Gain on branch divestiture - - - - - - - -
Other noninterest income 27,404 24 103 27,531 283 - 283 27,814
Total noninterest income 27,404 24 31,950 59,378 22,773 4,902 27,675 87,053
Total noninterest expense 149,061 4,387 10,760 164,208 17,514 3,735 21,249 185,457
Income before income tax expense 21,467 20,981 22,552 65,000 15,042 22,591 37,633 102,633
Income tax expense 1,395 4,721 4,736 10,852 3,323 5,212 8,535 19,387
Net income $ 20,072 $ 16,260 $ 17,816 $ 54,148 $ 11,719 $ 17,379 $ 29,098 $ 83,246
Period-end assets $ 4,750,460 $ 962,692 $ 62,400 $ 5,775,552 $ 285,612 $ 107,161 $ 392,773 $ 6,168,325
Net interest margin 3.42 % 3.19 % NM 3.39 % NM NM NM 4.10 %
Net-revenue concentration* 59 % 8 % 10 % 77 % 14 % 9 % 23 % 100 %
*Net revenue represents net interest income plus total noninterest income.
Net-revenue concentration equals segment-level net revenue divided by total
Company net revenue.
NM - Not Meaningful
26. ACQUISITION OF CBANK (UNAUDITED)
On October 26, 2022, the Company, RB&T, and CBank entered into the CBank
Agreement. Upon completion of the transaction, CBank will be merged with and
into RB&T, with RB&T as the survivor of the merger. CBank is headquartered in
Cincinnati, Ohio.
Under the terms of the CBank Agreement, the Company will acquire all of CBank's
outstanding common stock in an all-cash direct merger of CBank with RB&T,
resulting in a total cash payment of approximately $51 million to CBank's
existing shareholders. Republic expects to fund the cash payment through
existing resources on-hand at RB&T. The completion of the transaction is subject
to customary closing conditions, including regulatory approval and approval by
CBank's shareholders. The CBank Agreement also contains reciprocal termination
provisions in the event the transaction does not receive the required regulatory
approvals within six months of the effective date of the CBank Agreement or if
certain minimum capital levels are not maintained by CBank as of the closing
date.
The CBank Agreement was unanimously approved by the Republic, RB&T and CBank
boards of directors on October 25, 2022. In connection with entering into the
CBank Agreement, Republic entered into customary support agreements with the
members of CBank's board of directors and other shareholders in their capacities
as shareholders of CBank (the "CBank Support Agreements"). Subject to the terms
and conditions, and non-termination, of the CBank Support Agreements, each such
shareholder agreed, among other things, to vote his or her respective shares of
CBank Common Stock in favor of the approval of the CBank Agreement and the
transaction contemplated thereby, and against alternative acquisition proposals.
The CBank Support Agreements do not prevent the shareholders, in their capacity
as directors, from exercising their fiduciary obligations in connection with
alternative acquisition proposals. The CBank Agreement provides certain
termination rights for both Republic and CBank and further provides that a
termination fee of $2,040,000 will be payable by CBank to Republic upon
termination of the CBank Agreement under certain circumstances, including
CBank's termination of the CBank Agreement to accept a Superior Proposal (as
defined in the CBank Agreement). The CBank Agreement was approved by its
shareholders on December 13, 2022.
As of January 31, 2023, CBank had approximately $257 million in assets,
consisting of approximately $221 million in gross loans, no other real estate
owned, approximately $16 million of marketable securities, approximately $14
million in cash and cash equivalents and approximately $6 million in other
assets. Also as of January 31, 2023, CBank had approximately $228 million of
liabilities, including approximately $209 million in customer deposits and $13
million in Federal Home Loan Bank advances.
173
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27.CORRECTION OF PRIOR PERIOD ERROR
The Company identified a prior period accounting error substantially in the form
of an immaterial understatement of revenue, solely related to one RCS line of
credit product. In general, three business days following the Bank's funding of
the associated advances for this RCS line of credit product, the Bank sells a
95% participation interest in the advances. The error that was identified
related to the under-recording of revenue during this first three business day
period after each advance was made when the Bank owned 100% of the advance.
The financial reporting periods affected by this error include the Company's
previously reported audited consolidated financial statements for the fiscal
year ended December 31, 2021, and the Company's previously reported interim
unaudited consolidated financial statements for each of the quarterly and fiscal
year-to-date periods ended June 30, 2021; September 30, 2021; March 31, 2022;
June 30, 2022; and September 30, 2022; and the unaudited consolidated quarterly
financial data for the quarter ending December 31, 2021 (collectively the
"previously reported financial statements"). The three month period ended
December 31, 2021 and year ended December 31, 2021 also reflected certain
immaterial revisions to reclassify certain gains and losses on the sale of the
same RCS line of credit product. These reclassifications impact noninterest
income, noninterest expense and interest income with no impact to net income.
Based on the Company's evaluation of this error in consideration of the
Financial Accounting Standards Board ("FASB) Accounting Standards Codification
("ASC") 250 and the SEC Staff's Accounting Bulletins Nos. 99 ("SAB 99") and 108
("SAB 108") and interpretations therewith, the Company concluded this error was
not material, on an individual or aggregate basis, to the Company's previously
reported financial statements and correction of the error would not be material
to the current year financial statements, including any interim periods.
However, the Company corrected this error as a voluntary immaterial revision to
the accompanying financial statements in this Annual Report on Form 10-K, as of
and for the fiscal years ended December 31, 2022, and 2021, in the periods in
which the error occurred. In addition, the Company expects to present the
corrected interim 2022 amounts in its 2023 consolidated interim financial
statements upon the filing of its Quarterly Reports on Form 10-Q on a quarterly
basis and a year-to-date basis as a voluntary immaterial revision to all
applicable 2022 periods.
For additional discussion of Management's evaluation of its internal control
over financial reporting as a result of this error, as well as Managements plans
to remediate the Company's material weaknesses, see Item 9A of this Annual
Report on Form 10-K.
174
Table of Contents
The following tables present the impact of correcting the accounting error to
the Company's previously reported financial statements.
Consolidated Income Statement
($ in thousands, except per share data) Period Ended March 31, 2022 (Unaudited)
3 Months Immaterial 3 Months
As Reported Revision Revised
Interest Income $ 63,555 $ 555 $ 64,110
Net Interest Income 62,612 555 63,167
Income before income taxes 35,814 555 36,369
Income tax expense 7,888 131 8,019
Net income 27,926 424 28,350
Basic EPS - Class A Common Stock $ 1.40 $ 0.02 $ 1.42 Basic EPS - Class B Common Stock 1.27 0.02 1.29 Diluted EPS - Class A Common Stock 1.40 0.02 1.42 Diluted EPS - Class B Common Stock 1.27 0.02
1.29
Consolidated Balance Sheet
($ in thousands) Period Ended March 31, 2022 (Unaudited)
Period End Balance Immaterial Period End Balance
As Reported Revision Revised
Total Liabilities $ 5,509,540 $ (1,247) $ 5,508,293
Total Stockholders' Equity 840,329 1,247 841,576 Consolidated Income Statement ($ in thousands, except Period Ended June 30, 2022 (Unaudited) per share data)
3 Months Immaterial 3 Months 6 Months Immaterial 6 Months
As Reported Revision Revised As Reported Revision Revised
Interest Income $ 52,320 $ 582 $ 52,902 $ 115,875 $ 1,137 $ 117,012
Net Interest Income
51,232 582 51,814 113,844 1,137 114,981
Income before income
taxes 30,440 582 31,022 66,254 1,137 67,391
Income tax expense 6,539 136 6,675 14,427 267 14,694
Net income 23,901 446 24,347 51,827 870 52,697
Basic EPS - Class A
Common Stock $ 1.20 $ 0.03 $ 1.23 $ 2.60 $ 0.05 $ 2.65
Basic EPS - Class B
Common Stock 1.09 0.03 1.12 2.37 0.04 2.41
Diluted EPS - Class A
Common Stock 1.20 0.02 1.22 2.59 0.05 2.64
Diluted EPS - Class B
Common Stock 1.09 0.02 1.11 2.36 0.04 2.40
Consolidated Balance Sheet
($ in thousands) Period Ended June 30, 2022 (Unaudited)
Period End Balance Immaterial Period End Balance
As Reported Revision Revised
Total Liabilities $ 5,270,302 $ (1,692) $ 5,268,610
Total Stockholders' Equity 842,174 1,692 843,866 Consolidated Income Statement ($ in thousands, except Period Ended September 30, 2022 (Unaudited) per share data)
3 Months Immaterial 3 Months 9 Months Immaterial 9 Months
As Reported Revision Revised As Reported Revision Revised
Interest Income $ 60,056 $ 561 $ 60,617 $ 175,931 $ 1,698 $ 177,629
Net Interest Income
58,036 561 58,597 171,880 1,698 173,578
Income before income
taxes 25,405 561 25,966 91,659 1,698 93,357
Income tax expense 5,922 148 6,070 20,349 415 20,764
Net income 19,483 413 19,896 71,310 1,283 72,593
Basic EPS - Class A
Common Stock $ 0.99 $ 0.02 $ 1.01 $ 3.60 $ 0.06 $ 3.66
Basic EPS - Class B
Common Stock 0.90 0.02 0.92 3.27 0.06 3.33
Diluted EPS - Class A
Common Stock 0.99 0.02 1.01 3.58 0.07 3.65
Diluted EPS - Class B
Common Stock 0.90 0.02 0.92 3.26 0.06 3.32
Consolidated Balance Sheet
($ in thousands) Period Ended September 30, 2022 (Unaudited)
Period End Balance Immaterial Period End Balance
As Reported Revision Revised
Total Liabilities $ 5,158,705 $ (2,105) $ 5,156,600
Total Stockholders' Equity 840,958 2,105 843,063
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Table of Contents
Consolidated Income
Statement
($ in thousands, except Period Ended June 30, 2021 (Unaudited)
per share data)
3 Months Immaterial 3 Months 6 Months Immaterial 6 Months
As Reported Revision Revised As Reported Revision Revised
Interest Income $ 51,815 $ 45 $ 51,860 $ 121,458 $ 45 $ 121,503
Net Interest Income
50,304 45 50,349 118,170 45 118,215
Income before income
taxes 30,561 45 30,606 64,305 45 64,350
Income tax expense 6,639 9 6,648 14,330 9 14,339
Net income 23,922 36 23,958 49,975 36 50,011
Basic EPS - Class A
Common Stock $ 1.16 $ - $ 1.16 $ 2.42 $ - $ 2.42
Basic EPS - Class B
Common Stock 1.05 0.01 1.06 2.20 - 2.20
Diluted EPS - Class A
Common Stock 1.16 - 1.16 2.41 - 2.41
Diluted EPS - Class B
Common Stock 1.05 - 1.05 2.19 - 2.19
Consolidated Balance Sheet
($ in thousands) Period Ended June 30, 2021 (Unaudited)
Period End Balance Immaterial Period End Balance
As Reported Revision Revised
Total Liabilities $ 5,338,220 $ (36) $ 5,338,184
Total Stockholders' Equity 845,090 36 845,126 Consolidated Income Statement ($ in thousands, except Period Ended September 30, 2021 (Unaudited) per share data)
3 Months Immaterial 3 Months 9 Months Immaterial 9 Months
As Reported Revision Revised As Reported Revision Revised
Interest Income $ 54,469 $ 497 $ 54,966 $ 175,927 $ 542 $ 176,469
Net Interest Income
53,129 497 53,626 171,299 542 171,841
Income before income
taxes 26,227 497 26,724 90,532 542 91,074
Income tax expense 6,218 124 6,342 20,548 133 20,681
Net income 20,009 373 20,382 69,984 409 70,393
Basic EPS - Class A
Common Stock $ 0.99 $ 0.02 $ 1.01 $ 3.40 $ 0.02 $ 3.42
Basic EPS - Class B
Common Stock 0.90 0.02 0.92 3.10 0.02 3.12
Diluted EPS - Class A
Common Stock 0.99 0.02 1.01 3.39 0.02 3.41
Diluted EPS - Class B
Common Stock 0.90 0.01 0.91 3.09 0.01 3.10
Consolidated Balance Sheet
($ in thousands) Period Ended September 30, 2021 (Unaudited)
Period End Balance Immaterial Period End Balance
As Reported Revision Revised
Total Liabilities $ 5,348,977 $ (409) $ 5,348,568
Total Stockholders' Equity 838,657 409 839,066
Consolidated Income Statement
($ in thousands, except per Period Ended December 31, 2021 (Unaudited) Period Ended December 31, 2021 (Unaudited)
share data)
3 Months Immaterial 3 Months 12 Months Immaterial 12 Months
As Reported Revision Revised As Reported Revision Revised
Interest Income $ 51,379 $ 558 $ 51,937 $ 226,260 $ 2,146 $ 228,406
Net Interest Income 50,341 558 50,899 220,594 2,146 222,740
Noninterest Income 16,630 449 17,079 86,859 (284) 86,575
Noninterest Expense 44,585 449 45,034 182,304 761 183,065
Income before income taxes 19,809 558 20,367 110,341 1,101 111,442
Income tax expense 3,004 145 3,149 23,552 279 23,831
Net income 16,805 413 17,218 86,789 822 87,611
Basic EPS - Class A Common Stock $ 0.84 $ 0.03 $
0.87 $ 4.25 $ 0.04 $
4.29
Basic EPS - Class B Common Stock 0.77 0.01
0.78 3.87 0.03 3.90
Diluted EPS - Class A Common
Stock 0.84 0.02 0.86 4.24 0.04 4.28
Diluted EPS - Class B Common
Stock 0.76 0.02 0.78 3.85 0.04 3.89
Consolidated Balance Sheet
($ in thousands) Period Ended December 31, 2021 (Unaudited)
Period End Balance Immaterial Period End Balance
As Reported Revision Revised
Total Liabilities $ 5,259,400 $ (822) $ 5,258,578
Total Stockholders' Equity 834,232 822 835,054
176
Table of Contents
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