REPUBLIC BANCORP INC /KY/ – 10-Q – 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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Republic should be read in conjunction with Part I Item 1
"Financial Statements."
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would," "potential," or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management's expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements, except as required by applicable law.
Broadly speaking, forward-looking statements include:
? the potential impact of the COVID pandemic on Company operations;
? projections of revenue, income, expenses, losses, earnings per share, capital
expenditures, dividends, capital structure, or other financial items;
? descriptions of plans or objectives for future operations, products, or
services;
? 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 the COVID pandemic 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;
? 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;
? inflation;
? recession;
? future acquisitions;
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? integrations of acquired businesses;
? changes in technology;
? changes in applicable laws and regulations or the interpretation and
enforcement thereof;
? changes in fiscal, monetary, regulatory, and tax policies;
? changes in accounting standards;
? monetary fluctuations;
? changes to the Company's overall internal control environment;
? success in gaining regulatory approvals when required;
? the Company's ability to qualify for future R&D federal tax credits;
? 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
Annual Report on Form 10-K for the year ended
Item 1A "Risk Factors" of the current filing.
Accounting Standards Update
For disclosure regarding the impact to the Company's financial statements of
ASUs, see Footnote 1 "Basis of Presentation and Summary of Significant
Accounting Policies" of Part I Item 1 "Financial Statements."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic's consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. A summary of the Company's significant accounting policies is set forth in Part II "Item 8. Financial Statements and Supplementary Data" of its Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . Management continually evaluates the Company's accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management's estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management. Critical accounting policies are those that management believes are the most important to the portrayal of the Company's financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.
Republic believes its critical accounting policies and estimates relate to its
ACLL and Provision.
ACLL and Provision - As ofMarch 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. 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. 64
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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 ACLL is significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company's reported earnings.
BUSINESS SEGMENT COMPOSITION
As ofMarch 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.
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company's market footprint. As ofMarch 31, 2022 , Republic had 42 full-service banking centers 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
Republic's headquarters are in
based on population.
The Bank's principal lending activities consist of the following:
Retail Mortgage Lending - Through its retail banking centers and its online Consumer Direct channel, the Bank originates single-family, residential real estate loans and HELOCs. In addition, the Bank originates HEALs through its retail banking centers. Such loans are generally collateralized by owner-occupied, residential real estate properties. For those loans originated through the Bank's retail banking centers, the collateral is predominately located in the Bank's market footprint, while loans originated through its Consumer Direct channel are generally secured by owner occupied-collateral located outside of the Bank's market footprint.
Commercial Lending - The Bank conducts commercial lending activities primarily
through Corporate Banking, Commercial Banking, Business Banking, and Retail
Banking channels.
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank'sCommercial Credit Administration Department . Clients are generally located within the Bank's market footprint or in areas nearby the market footprint. Construction and Land Development Lending - The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a 65 Table of Contents
focus for the Bank, the Bank may originate loans for the acquisition and
development of residential or commercial land into buildable lots.
Consumer Lending - Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank's markets. Aircraft Lending - InOctober 2017 , the Bank created an Aircraft Lending division. Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. Loans range between$55,000 and$3,000,000 in size and have terms up to 20 years. The aircraft loan program is open to all states, except forAlaska andHawaii . The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank's other Traditional Banking activities generally consist of the
following:
Private Banking - The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank's Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele. Treasury Management Services - The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank's Treasury Management department. Treasury Management officers work closely with commercial and retail officers to support the cash management needs of Bank clients. Internet Banking - The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking - The Bank allows clients to easily and securely access and
manage their accounts through its mobile banking application.
Other Banking Services - The Bank also provides title insurance and other
financial institution related products and services.
Bank Acquisitions - The Bank maintains an acquisition strategy to selectively
grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote
16 "Segment Information" of Part I Item 1 "Financial Statements."
(II) 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.
See additional detail regarding the Warehouse Lending segment under Footnote 16
"Segment Information" of Part I Item 1 "Financial Statements."
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(III) Mortgage Banking segment
Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and 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. See additional detail regarding the Mortgage Banking segment under Footnote 11 "Mortgage Banking Activities" and Footnote 16 "Segment Information" of Part I Item 1 "Financial Statements."
(IV) Tax Refund Solutions segment
Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout theU.S. , as well as tax-preparation software providers (collectively, the "Tax Providers"). Substantially all of the business generated by the TRS business occurs during the first half of each year. During the second half of each year, TRS generates limited revenue and incurs costs preparing for the next year's tax season. RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item "Net refund transfer fees."
The EA tax credit product is a loan that allows a taxpayer to borrow funds as an
advance of a portion of their tax refund. The EA product had the following
features during 2022 and 2021:
? 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 funds disbursement methods, including direct deposit, prepaid card, or
check, based on the taxpayer-customer's election;
? Repayment of the EA to the Bank is deducted from the taxpayer's tax refund
proceeds; and
? If an insufficient refund to repay the EA 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 Company reports fees paid for the EA product as interest income on loans. During 2021, EAs were repaid, on average, within 32 days after the taxpayer's tax return was submitted to the applicable taxing authority. EAs do not have a contractual due date but the Company considered an EA delinquent in 2022 and 2021 if it remained unpaid 35 days after the taxpayer's tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management's annual analysis of tax return processing times. Provisions on EAs are estimated when advances are made. Unpaid EAs are charged-off byJune 30th of each year, with EAs collected during the second half of each year recorded as recoveries of previously charged-off loans. Related to the overall credit losses on EAs, the Bank's ability to control losses is highly dependent upon its ability to predict the taxpayer's likelihood to receive the tax refund as claimed on the taxpayer's tax return. Each year, the Bank's EA approval model is based primarily on the prior-year's tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year's tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management's predictions if tax refund payment patterns change materially between years. In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the EAs product parameters. Further changes in EA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company's financial condition and results of
operations.
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See additional detail regarding the EA product under Footnote 4 "Loans and
Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Cancelled TRS Sale Transaction - As previously disclosed, Green Dot Corporation paid RB&T a contract termination fee of$5.0 million during the first quarter of 2022 after RB&T provided Green Dot a notice of termination of theMay 2021 Purchase Agreement for the sale of substantially all of RB&T's TRS assets and operations to Green Dot. RB&T continues to pursue other legal remedies against Green Dot related to the Sale Transaction. The Company recorded the contract termination fee within noninterest income during the first quarter of 2022.
Republic Payment Solutions division
RPS is currently managed and operated within the TRS segment. The RPS division offers general-purpose reloadable prepaid cards, payroll debit cards, and limited-purpose demand deposit accounts with linked debit cards as an issuing bank through third-party service providers. For the projected near-term, as the prepaid card program matures, the operating results of the RPS division are expected to be immaterial to the Company's overall results of operations and will be reported as part of the TRS segment. The RPS division will not be considered a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees.
Additionally, the Company's portion of interchange revenue generated by prepaid
card transactions is reported as noninterest income under "Interchange fee
income."
(V) Republic Credit Solutions segment
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.
service providers for the product and are subject to the Bank's oversight and
supervision. Together, these companies provide the Bank with certain marketing,
o 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.
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.
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RCS installment loan product - In
offering installment loans with terms ranging from 12 to 60 months to borrowers
in multiple states. The same third-party service provider for RCS's
the third-party provider 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 theU.S. through two different
third-party service providers. In one program, the Bank retains 100% of the
? receivables originated. In the other program, the Bank retains 100% of the
receivables originated in some instances, and in other instances, sells 100% of
the receivables within one month of origination. Loan balances held for sale
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."
OVERVIEW (Three Months Ended
31, 2021
Total Company net income for the first quarter of 2022 was$27.9 million , a$1.9 million , or 7%, increase from the same period in 2021. Diluted EPS increased to$1.40 for first quarter of 2022 compared to$1.25 for the same period in 2021. The increase in net income primarily reflected the benefit of a$5.0 million pre-tax contract termination fee and a positive reduction in Provision, partially offset by a decrease in net interest income and Mortgage Banking income. Compared to the first quarter of 2022, the first quarter of 2021 was significantly and positively impacted by strong fee income from the Paycheck Protection Program and higher demand for mortgage refinancing, driving strong mortgage banking income.
The following are general highlights by reportable segment:
Traditional Banking segment
? Net income decreased
compared to the same period in 2021.
? Net interest income decreased
2022 compared to the same period in 2021.
? Provision was a net charge of
to a net credit of
? Noninterest income increased
compared to the same period in 2021.
? Noninterest expense increased
compared to the same period in 2021.
?
quarter of 2022, driven primarily by strong CRE loan growth.
? Total nonperforming loans to total loans for the Traditional Banking segment
was 0.47% as of
? Delinquent loans to total loans for the Traditional Banking segment was 0.16%
as of
?Total Traditional Bank deposits increased$94 million , or 2%, during the first quarter of 2022. 69 Table of Contents Warehouse Lending segment
? Net income decreased
compared to the same period in 2021.
? Net interest income decreased
2022 compared to the same period in 2021.
? The Warehouse Provision was a net credit of
2022 compared to a net credit of
? Average committed Warehouse lines decreased to
quarter of 2022 compared to
? Average line usage was 42% during the first quarter of 2022 compared to 54%
during the same period in 2021.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 63%, during the first quarter of 2022 compared to the same period
in 2021.
Overall, Republic's proceeds from sale of secondary market loans totaled
? million during the first quarter of 2022 compared to
same period in 2021, with the Company's cash-gain-as-a-percent-of-loans-sold
decreasing to 2.29% from 3.95% from period to period.
Tax Refund Solutions segment
? Net income increased
compared to the same period in 2021.
? Net interest income increased
compared to the same period in 2021.
? Total EA originations were
compared to
Overall, TRS recorded a net charge to the Provision of
? first quarter of 2022 compared to a net charge to the Provision of
million for the same period in 2021.
Noninterest income increased
? compared to the same period in 2021. Noninterest income for the first quarter
of 2022 included a
? Net RT revenue decreased
same period in 2021.
? Noninterest expense was
TRS had multiple factors during 2021 and 2022 that impacted and will continue to impact its 2022 performance and the comparability of that performance to the same periods in 2021. By year, these factors discussed below include, but may not be limited to, the following:
2021
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 EA products.
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2022
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 cap on loan
losses from the third party to Republic for all EA products originated through
this provider;
2) TRS experienced a loss of RT and EA product volume to Green Dot directly
following the execution of the Purchase Agreement;
Although to a lesser degree than in the 2021 tax season, we believe stimulus
3) programs from the Federal Government during the latter half of 2021 negatively
impacted the 2022 tax season; and
4) The Bank received a
cancellation of the Sales Transaction.
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, government stimulus programs during 2021 negatively impacted demand for TRS EA and RT products. Conversely, the timing of theIRS tax season during the first quarter of 2022 was more in-line with non-COVID seasons than the first quarter of 2021. As a result, the Company believes that it likely received a greater percentage of its funded RT volume in the first quarter of 2022 as compared to 2021, and that it likely received a greater percentage of its EA loan repayments in the first quarter of 2022 than it did during 2021. This estimated timing, if correct, generally provided more favorable first quarter 2022 results for TRS as compared to the first quarter of 2021, but will likely provide for less favorable quarterly comparisons throughout the remainder of 2022 as compared to 2021. In addition to the more normal timing of the tax season in 2022 as compared to 2021, the first quarter 2022 tax season was also favorably impacted by a contractual change with one of the Company's large Tax Providers. As a result of the amended contract, TRS provides this tax provider a revenue share, while this tax provider covers certain overhead costs of the program and furnishes to RB&T a loan loss guaranty for EAs originated through this provider. Through this specific provider, TRS originated$172 million of EAs during the first quarter of 2022 as compared to$135 million originated during the first quarter of 2021. The net cost of the revenue share to the provider from RB&T was approximately$268,000 for the$172 million of EA volume. Under the amended contract, during the first quarter of 2022 the net benefit to TRS of the covered overhead costs and to the Provision from the loan loss guaranty was approximately$3.0 million . Negatively impacting the first quarter 2022 tax season as compared to the first quarter of 2021 was a loss of RT and EA volume by RB&T to Green Dot from certain third-party Tax Providers following the execution of the Purchase Agreement. While TRS was able to partially offset this lost volume through higher volume from other existing relationships, the loss of volume to Green Dot will have a negative impact to the overall results of TRS for 2022 and well into the future if TRS is unable to win this business back from Green Dot through its normal solicitation process. As a net result of all the factors in the preceding paragraphs, TRS experienced a significant net positive improvement to its first quarter 2022 tax results as compared to the first quarter of 2021. Because many of these factors may only be timing in nature, management believes TRS's results of operations, and more specifically RT revenue and net recoveries for previously charged-off EAs for the remainder of 2022 will likely be negative as compared to the same periods in 2021.
Republic
? Net income increased
to the same period in 2021.
? Net interest income increased
2022 compared to the same period in 2021.
Overall, RCS recorded a net charge to the Provision of
? first quarter of 2022 compared to a net credit of
in 2021.
? Noninterest income increased
2022 to the first quarter of 2022.
? Noninterest expense was
million for the same period in 2021.
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? Total nonperforming loans to total loans for the RCS segment was 0.04% as of
? Delinquent loans to total loans for the RCS segment was 6.47% as of
2022 compared to 6.48% as of
RESULTS OF OPERATIONS (Three Months Ended
Months Ended
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
See the section titled "Asset/Liability Management and Market Risk" in this
section of the filing regarding the Bank's interest rate sensitivity.
A large amount of the Company's financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These market rates trended lower with the onset of the COVID pandemic, as theFOMC reduced the FFTR to approximately 25 basis points during 2020. With the rise of inflation during the latter half of 2021 and early 2022, theFOMC increased the FFTR and announced the end to its quantitative easing program inMarch 2022 . In addition, theFOMC also signaled a more aggressive and hawkish approach to its monetary policies, including additional and larger increases to the FFTR, and monetary tightening through reducing the size of its balance sheet and selling certain types of bonds in the market. TheFOMC's actions and signals continued to place upward pressure on long-term market interest rates for bonds and loans during the first quarter of 2022. Further monetary tightening by theFederal Reserve in the future will likely cause both short-term and long-term market interest rates to increase during the remainder of 2022. Increases in market interest rates are expected to impact the various business segments of the Company differently and will be discussed in further detail in the sections below.Total Company net interest income was$62.6 million during the first quarter of 2022 and represented a decrease of$5.2 million , or 8%, from the first quarter of 2021.Total Company net interest margin decreased to 4.30% during the first quarter of 2022 compared to 4.66% for the same period in 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 decreased$5.0 million , or 12%, for the first quarter of 2022 compared to the same period in 2021. Traditional Banking's net interest margin was 2.90% for the first quarter of 2022, a decrease of 57 basis points from the same period in 2021.
Table 1 - Traditional Bank Net Interest Income and Net Interest Margin Excluding
PPP (Non-GAAP)
The Company earns fees and a coupon interest rate of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management 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. 72 Table of Contents Net Interest Income Interest-Earning Assets Net Interest Margin Three Months EndedMar. 31 , Three Months EndedMar. 31 , Three Months EndedMar. 31 , (dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change 2022 2021 %
Change
Traditional Banking - GAAP$ 36,148
3.47 % (0.57) % Less: Impact of PPP fees and interest 955 6,698 (5,743) (86) 30,601 364,765 (334,164) (92) 0.06 0.33
(0.27)
Traditional Banking ex PPP fees and interest - non-GAAP
$ 34,404 $ 789 2$ 4,953,923 $ 4,376,206 $ 577,717 13 2.84 3.14 (0.30)
The decrease in the
margin during the first quarter of 2022 was primarily attributable to the
following factors:
portfolio during the first quarter of 2022 compared to
? income during the same period in 2021. The
and interest primarily highlighted the short-term nature of this program, which
was closer to its peak during the first quarter of 2021.
To facilitate pandemic relief for the communities it serves, theTraditional Bank originated 3,700 PPP loans totaling$528 million during 2020 and another 1,900 PPP loans totaling$210 million in early 2021. As ofMarch 31, 2022 , net PPP loans of$18 million remained on theTraditional Bank's balance sheet, including$3 million in loan balances originated during 2020 and$15 million in loan balances originated during 2021.
increased
loans at the
2021 to
? growth in non-
interest.
elements, declined from 3.14% for the first quarter of 2021 to 2.84% for the
first quarter of 2022.
The decline in the net interest margin was substantially driven by the Company's internal Funds Transfer Pricing methodology in combination with the change in the timing of cash received for tax refunds at TRS during 2022 as compared to 2021. More specifically, as part of its internal FTP process, theTraditional Bank purchases the cash from the deposits of the various business segments and sells cash to the various business segments for loans funded by those segments. The FTP price (or interest) paid or earned by theTraditional Bank for those internal FTP transactions may not be indicative of the real interest earned or paid for theTraditional Bank in the actual market. As a result, theTraditional Bank often earns a lower, and sometimes negative, spread on this cash, negatively impacting its net interest margin. With the tax refund season delayed during 2021, the cash purchased by theTraditional Bank from TRS was significantly more during the first quarter of 2022 as compared to the first quarter of 2021, resulting in theTraditional Bank having substantially more cash during the first quarter of 2022 than 2021 and generating a lower overall net interest margin. As previously disclosed, both short-term and long-term market interest rates are expected to increase during 2022 as a result of expected monetary tightening by theFOMC . Additional increases in short-term interest rates and overall market 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 decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to theTraditional Bank's net interest income and net interest margin in the near term. Increases in market interest rates, however, could have a negative impact on net interest income and net interest margin if theTraditional Bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model. In addition, a flattening or inversion of the yield curve, causing the spread between long-term interest rates and short-term interest rates to decrease, could negatively impact theTraditional Bank's net interest income and net interest margin. Variables which may impact theTraditional Bank's net interest income and net interest margin in the future include, but are not limited to, the actual steepness of the yield curve, future demand for theTraditional Bank's financial products and theTraditional Bank's overall future liquidity needs. 73 Table of Contents Warehouse Lending segment
Net interest income within the Warehouse segment decreased$2.3 million , or 33%, from the first quarter of 2021 to the first quarter of 2022, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from$790 million during the first quarter of 2021 to$585 million for the first quarter of 2022, as home-mortgage refinancing dipped from historically high volume in early 2021. The Warehouse net interest margin compressed 43 basis points from 3.43% during the first quarter of 2021 to 3.09% during the first quarter of 2022, as competitive forces began driving down the contractual interest rates on theCompany's Warehouse lines during the third quarter of 2021.Committed Warehouse lines-of-credit remained at$1.4 billion fromMarch 31, 2021 toMarch 31, 2022 , while average usage rates for Warehouse lines were 42% and 54%, respectively, during the first quarters of 2022 and 2021. Additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to Warehouse's net interest income and net interest margin in the near term, however, the benefit of an increase in rates could be partially or entirely offset by a reduction in average outstanding balances driven by a decline in demand from Warehouse clients, as higher long-term interest rates generally drive lower demand for Warehouse borrowings. In addition, a lower demand for Warehouse borrowings could cause additional competitive pricing pressures for the industry, driving down the yield Warehouse earns on its lines of credits.
Tax Refund Solutions segment
TRS's net interest income increased$728,000 for the first quarter of 2022 compared to the same period in 2021. TRS's EA product earned$13.4 million in interest income during the first quarter of 2022, a$655,000 increase from the first quarter of 2021 resulting primarily from a$61 million increase in EA originations from period to period. For factors affecting the comparison of the TRS results of operations for the first quarter of 2022 and the first quarter of 2021, see section titled "OVERVIEW (Three Months EndedMarch 31, 2022 Compared to Three Months EndedMarch 31, 2021 ) - Tax Refund Solutions."
See additional detail regarding the EA product under Footnote 4 "Loans and
Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
RCS's net interest income increased$1.5 million , or 32%, from the first quarter of 2021 to the first quarter of 2022. The increase was driven primarily by an increase in fee income from RCS's LOC products. Loan fees on these products, recorded as interest income on loans, increased to$5.7 million during the first quarter of 2022 compared to$3.8 million during the same period in 2021. Interest income on RCS's LOC I product increased$917,000 , driven by a$5 million increase in average outstanding balances for this product from the first quarter of 2021 to the first quarter of 2022. Interest income on RCS'sLOC II product increased$912,000 , as the Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase. Overall product demand for the RCS segment is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact demand for its various consumer loan products. A rising interest rate environment, however, likely will impact the Company's internal FTP cost allocated to this segment. As a result, the impact of rising interest rates to RCS during 2022 will be negative to the segment's financial results, although the exact amount of the negative impact will depend on the internal FTP cost assigned, as well as, the overall volume and mix of loans it generates. 74 Table of Contents
Table 2 - Total Company Average Balance Sheets and Interest Rates
Three Months Ended March 31, 2022 Three Months Ended March 31, 2021
Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate
ASSETS
Interest-earning assets:
Federal funds sold and other
interest-earning deposits $ 861,822 $ 429 0.20 % $ 510,433 $ 154 0.12 %
Investment securities, including
FHLB stock (1) 606,182 2,111 1.39 563,985 2,017 1.43
TRS Easy Advance loans (2) 84,557 13,444 63.60 89,732 12,789 57.01
RCS LOC products (2) 26,279 5,702 86.79 16,284 3,770 92.61
Other RPG loans (3) (7) 120,917 1,984 6.56 139,729 2,789 7.98
Outstanding Warehouse lines of
credit (4) (7) 584,519 4,878 3.34 790,244 7,370 3.73
Paycheck Protection Program loans
(5) (7) 30,601 955 12.48 288,115 6,698 9.30
All other
3,421,552 33,970 3.97 Total interest-earning assets 5,823,259 63,555 4.37 5,820,074 69,557 4.78 Allowance for credit loss (69,287) (66,561) Noninterest-earning assets: Noninterest-earning cash and cash equivalents 354,165 249,842 Premises and equipment, net 35,460 39,185 Bank owned life insurance 99,532 68,257 Other assets (1) 180,779 191,497 Total assets$ 6,423,908 $ 6,302,294 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Transaction accounts$ 1,692,120 $ 97 0.02 %$ 1,485,015 $ 82 0.02 % Money market accounts 798,943 94 0.05 732,328 103 0.06 Time deposits 261,703 640 0.98 314,904 1,105 1.40 Reciprocal money market and time deposits 74,730 48 0.26 313,445 255 0.33 Brokered deposits - - - 63,325 20 0.13 Total interest-bearing deposits 2,827,496 879 0.12 2,909,017 1,565 0.22 Securities sold under agreements to repurchase and other short-term borrowings 300,169 28 0.04 192,669 9 0.02 Federal Home Loan Bank advances 23,333 36 0.62 43,167 31 0.29 Subordinated note - - - 41,240 172 1.67 Total interest-bearing liabilities 3,150,998 943 0.12 3,186,093 1,777 0.22 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,313,549
2,146,036 Other liabilities 112,331 133,953 Stockholders' equity 847,030 836,212 Total liabilities and stock-holders' equity$ 6,423,908 $ 6,302,294 Net interest income$ 62,612 $ 67,780 Net interest spread 4.25 % 4.56 % Net interest margin 4.30 % 4.66 %
(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 Easy Advances and RCS line-of-credit products is composed
entirely of loan fees.
(3) Interest income includes loan fees of
months ended
(4) Interest income includes loan fees of
months ended
(5) Interest income includes loan fees of
months ended
(6) Interest income includes loan fees of
months ended
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.
75
Table of Contents
Table 3 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities impacted
Republic's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
Table 3 - Total Company Volume/Rate Variance Analysis
Three Months Ended March 31, 2022
Compared to
Three Months Ended March 31, 2021
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ 275 $ 141 $ 134
Investment securities, including
FHLB stock 94 148 (54)
TRS Easy Advance loans* 655 2,831 (2,176)
RCS LOC I product 1,932 1,250 682
Other RPG loans (805) 363 (1,168)
Outstanding Warehouse lines of
credit (2,492) (1,942)
(550)
Paycheck Protection Program loans (5,743) (8,570)
2,827 All other Core Bank loans 82 299 (217) Net change in interest income (6,002) (5,480) (522) Interest expense: Transaction accounts 15 12 3 Money market accounts (9) 9 (18) Time deposits (465) (166) (299) Reciprocal money market and time deposits (207) (162) (45) Brokered deposits (20) (20) - Securities sold under agreements to repurchase and other short-term borrowings 19 7 12 Federal Home Loan Bank advances 5 (19) 24 Subordinated note (172) (172) - Net change in interest expense (834) (511)
(323)
Net change in net interest income
* *Since interest income for Easy Advances is composed entirely of loan fees and EAs are only offered during the first two months of each year, volume and rate measurements for this product are based on total EAs originated instead of average EA balances during the period. EA originations totaled$311 million and$250 million for the quarters endedMarch 31, 2022 and 2021. The unannualized EA yield as a function of total EA originations was 4.32% and 5.11% for the quarters endedMarch 31, 2022 and 2021. 76 Table of Contents Provision
Total Company Provision was a net charge of
of 2022 compared to a 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 the first quarter of 2022 was a net charge of$320,000 compared to a net credit of$5,000 for the first quarter of 2021. An analysis of the Provision for the first quarter of 2022 compared to the same period in 2021 follows:
For the first quarter of 2022, the Traditional Bank Provision primarily
? reflected formula reserves tied to general loan growth. Non-PPP Traditional
Bank loans grew
For the first quarter of 2021, there was a minimal net credit to the
? Traditional Bank Provision during the quarter as the
loan balances declined by approximately
As a percentage of totalTraditional Bank loans, the Traditional Banking ACLL was 1.39% as ofMarch 31, 2022 compared to 1.41% as ofDecember 31, 2021 and 1.35% as ofMarch 31, 2021 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofMarch 31, 2022 .
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in
this section of the filing under "Comparison of Financial Condition" for
additional discussion regarding the Provision and the Bank's credit quality.
Warehouse Lending segment
Warehouse recorded a net credit to the Provision of
quarter of 2022 compared to a net credit of
2021. Provision for both periods reflected changes in general reserves
consistent with changes in outstanding period-end balances.
Warehouse
2022 compared to a decrease of
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofMarch 31, 2022 ,December 31, 2021 , andMarch 31, 2021 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofMarch 31, 2022 .
Tax Refund Solutions segment
TRS recorded a net charge to the Provision of
quarter of 2022 compared to a net charge of
2021. Substantially all TRS Provision in both periods was related to its EA
product.
TRS recorded a charge to the Provision for EA loans of$8.3 million , or 2.67% of its$311 million in EAs originated during the first quarter of 2022 compared to a charge to the Provision of$16.0 million , or 6.41% of its$250 million of EAs originated during the first quarter of 2021. The decrease in Provision for the first quarter of 2022 was primarily due to the following two factors:
TRS received a contractual guaranty during 2022 that limits its EA losses for
EAs originated through one of its largest Tax Providers. Through this
1) particular provider, TRS originated
quarter of 2022. The net benefit to the Provision for TRS during the first
quarter of 2022 was approximately
In addition to its contractual guaranty discussed in the previous bullet (1),
TRS experienced delayed EA paydowns during the first quarter of 2021 with the
2) start of the
federal government stimulus programs during the first quarter of 2021, which
generally utilized resources of the
programs.
EAs are only originated during the first two months of each year, with all uncollected EAs charged off byJune 30th of each year. EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans. TRS's loss rate as ofJune 30, 2021 was 4.09% of total originations and it finished 2021 with an EA loss rate of 2.69% of total EAs originated. 77
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For factors affecting the comparison of the TRS results of operations for the
first quarter of 2022 and the first quarter of 2021, see section titled
"OVERVIEW (Three Months Ended
See additional detail regarding the EA product under Footnote 4 "Loans and
Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
As illustrated in Table 4 below, RCS recorded a net charge to the Provision of$1.4 million during the first quarter of 2022 compared to a net credit to the Provision of$375,000 for the same period in 2021. The increase in the Provision was driven primarily by a$1.7 million increase in net charge-offs on RCS's line-of-credit products. Net charge-offs for RCS's LOC I product increased to$1.7 million for the first quarter of 2022 from$672,000 during the first quarter of 2021, with government stimulus programs generally driving down usage of this product during the first quarter of 2021. Net charge-offs for RCS'sLOC II product were$672,000 for the first quarter of 2022, with no charge-offs for this product during its pilot phase during the first quarter of 2021. While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 13.63% as ofMarch 31, 2022 , 13.91% as ofDecember 31, 2021 , and 7.16% as ofMarch 31, 2021 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as ofMarch 31, 2022 .
The following table presents net charges to the RCS Provision by product:
Table 4 - RCS Provision by Product
Three Months Ended Mar. 31,
(in thousands) 2022 2021 $ Change % Change
Product:
Lines of credit $ 1,403 $ (374) $ 1,777 (475) %
Hospital receivables (8) (1) (7)
NM Total $ 1,395$ (375) $ 1,770 (472) % 78 Table of Contents
Table 5 - Summary of Loan and Lease Loss Experience
Three Months Ended
March 31,
(dollars in thousands) 2022 2021
ACLL at beginning of period $ 64,577 $ 61,067
Charge-offs:
Traditional Banking:
Commercial real estate - (428)
Consumer (263) (209)
Total Traditional Banking (263) (637)
Warehouse lines of credit - -
Total Core Banking (263) (637)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - -
Other TRS loans - (22)
Republic Credit Solutions (2,673) (766)
Total Republic Processing Group (2,673) (788)
Total charge-offs (2,936) (1,425)
Recoveries:
Traditional Banking:
Residential real estate 43 27
Commercial real estate 1 68
Commercial & industrial 9 7
Home equity 3 7
Consumer 89 146
Total Traditional Banking 145 255
Warehouse lines of credit - -
Total Core Banking 145 255
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - -
Other TRS loans 362 9
Republic Credit Solutions 275 93
Total Republic Processing Group 637 102
Total recoveries 782 357
Net loan charge-offs (2,154) (1,068)
Provision - Core Banking (74) (172)
Provision - RPG 9,307 15,509
Total Provision 9,233 15,337
ACLL at end of period $ 71,656 $ 75,336
Credit Quality Ratios -
ACLL to total loans 1.63 % 1.61 % ACLL to nonperforming loans 422 335
Net loan charge-offs to average loans 0.20 0.09
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.20 % 1.14 % ACLL to nonperforming loans 303 234
Net loan charge-offs to average loans 0.01 0.03
79
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Table 6 - Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan
Category
Net Loan Charge-Offs (Recoveries) to Average Loans
Three Months Ended
March 31,
2022 2021
Traditional Banking:
Residential real estate:
Owner occupied - % (0.01) %
Nonowner occupied - -
Commercial real estate - 0.11
Construction & land development -
- Commercial & industrial - (0.01) Paycheck Protection Program - - Lease financing receivables - - Aircraft - - Home equity (0.01) (0.01) Consumer: Credit cards 0.58 1.14 Overdrafts 90.70 29.00 Automobile loans (0.03) 0.09 Other consumer (0.26) (0.65) Total Traditional Banking 0.01 0.04 Warehouse lines of credit - - Total Core Banking 0.01 0.03Republic Processing Group : Tax Refund Solutions: Easy Advances* - - Other TRS loans (1.16) 0.17 Republic Credit Solutions 2.62 0.62
Total Republic Processing Group 0.97
0.28 Total 0.20 % 0.09 %
* Easy Advances are originated during the first two months of each year, with all EAs charged-off byJune 30th of each year. Due to their relatively short life, EA net charge-offs are typically analyzed by the Company as a percentage of total EA originations, not as a percentage of average outstanding balances. The Company's net charge-offs to average total Company loans increased from 0.09% during the first quarter of 2021 to 0.20 % during the first quarter of 2022, with net charge-offs increasing$1.1 million , or 102%, and average total Company loans decreasing$390 million , or 8%. The increase in net charge-offs was primarily driven by a$1.4 million increase in net charge-offs within the Company's RPG operations, which has historically conducted higher-risk lending activities that the Company's Core Banking operations. From the first quarter of 2021 to the first quarter of 2022, RPG experienced a$1.7 million increase in net charge-offs within its RCS segment. Net charge-offs for RCS's LOC I product increased to$1.7 million for the first quarter of 2022 from$672,000 for the first quarter of 2021, with government stimulus programs generally driving down usage of this product during the first quarter of 2021. Net charge-offs for RCS'sLOC II product were$672,000 for the first quarter of 2022, with no charge-offs for this product during its pilot phase during the first quarter of 2021.
During the first quarters of 2022 and 2021, the Company's
charge-offs to average
Noninterest Income
of 2022 compared to the same period in 2021.
The following were the most significant components comprising the total
Company's noninterest income by reportable segment:
Traditional Banking segment
Traditional Banking's noninterest income increased
first quarter of 2022 compared to the same period in 2021, driven primarily by a
80
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The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months endedMarch 31, 2022 and 2021 were$1.6 million and$1.2 million . The total daily overdraft charges, net of refunds, included in interest income for the three months endedMarch 31, 2022 and 2021 were$288,000 and$249,000 .
Mortgage Banking segment
A significant rise in long-term interest rates during the first quarter of 2022 led to a significant slowdown in the origination and subsequent sale of mortgage loans into the secondary market. As a result, Mortgage Banking income decreased from$7.2 million during the first quarter of 2021 to$2.7 million for the first quarter of 2022. For the first quarter of 2022, the Bank sold$119 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold during the quarter of 2.29%. During the first quarter of 2021, however, long-term interest rates were still near historical lows, driving secondary market loan sales of$204 million with comparable cash-gain-as-a-percent-of-loans-sold of 3.95%. With theFOMC forecasting an end to its quantitative easing program inMarch 2022 and a more aggressive and hawkish approach to its monetary policies during 2022, management believes it is likely that theCore Bank's mortgage origination volume will continue to be negatively impacted by rising interest rates causing additional declines in mortgage banking income throughout 2022.
Tax Refund Solutions segment
TRS's noninterest income increased$4.2 million , or 31%, during the first quarter of 2022 compared to the same period in 2021. As previously disclosed, Green Dot paid RB&T a contract termination fee of$5.0 million during the first quarter of 2022 after RB&T provided Green Dot a notice of termination of the Purchase Agreement for the sale of substantially all of RB&T's TRS assets and operations to Green Dot. RB&T maintains that its notice of termination of the Purchase Agreement and corresponding payment of the$5.0 million termination fee does not release Green Dot from any liability, in addition to the termination fee, related to the Sale Transaction occurring before RB&T's notice of termination. Regarding TRS's RT product, net RT revenue decreased 5% from$12.7 million during the first quarter of 2021 to$12.1 million during the same period in 2022. RT revenue for the first quarter of 2022 was negatively impacted by the departure of one of TRS's Tax Providers, who ended their relationship with the Bank following the announcement of the Purchase Agreement. The loss of this revenue was partially offset during the first quarter of 2022 by higher RT volume from TRS's remaining Tax Providers. The higher first quarter 2022 RT volume from the remaining Tax Providers was partially driven by the two-week delay in the 2021 tax season, with this year-over-year difference in volume expected to recede as the 2022 tax season winds down and the impact of the 2021 delay diminishes.
For factors affecting the comparison of the TRS results of operations for the
first quarter of 2022 and the first quarter of 2021, see section titled
"OVERVIEW (Three Months Ended
81
Table of Contents
Republic
RCS's noninterest income increased$1.8 million , or 135%, during the first quarter of 2022 compared to the same period in 2021, with program fees representing the entirety of RCS's noninterest income. The increase in RCS program fees primarily reflected higher sales volume from RCS's line of credit and installment loan products as sales volume was negatively impacted during the first quarter of 2021 by federal government stimulus programs implemented to combat the economic impact of the COVID pandemic. Proceeds from the sale of RCS loan products totaled$256 million during the first quarter of 2022, a 138% increase from the same period in 2021.
The following table presents RCS program fees by product:
Table 7 - RCS Program Fees by Product
Three Months Ended Mar. 31,
(in thousands) 2022 2021 $ Change % Change
Product:
Lines of credit $ 1,188 $ 768 $ 420 55 %
Hospital receivables 61 48 13 27
Installment loans* 1,878 513 1,365 NM
Total $ 3,127 $ 1,329 $ 1,798 135 %
* The Company has elected the fair value option for this product, with
mark-to-market adjustments recorded as a component of program fees.
Noninterest Expense
quarter of 2022 compared to the same period in 2021.
The following were the most significant components comprising the increase in
noninterest expense by reportable segment:
Traditional Banking segment
Traditional Banking noninterest expense increased$891,000 for the first quarter of 2022 compared to the same period in 2021. The following primarily drove the change in noninterest expense:
Other expenses increased
was a
? increase in fraudulent check activity during the quarter. As required by
regulation, the
types of check fraud losses as they are incurred.
Salaries and benefits expense decreased approximately
? primarily driven by a reduction in health benefits costs partially offset by
annual merit increases and a 34-count decrease in FTE's from period to period.
Mortgage Banking segment Noninterest expense at the Mortgage Banking segment decreased$431,000 , or 14%, during the first quarter of 2022 compared to the same period in 2021, primarily due to a reduction in mortgage commissions, which declined consistent with the previously discussed period-to-period decrease in mortgage origination volume. 82 Table of Contents
COMPARISON OF FINANCIAL CONDITION AS OF
Cash and Cash Equivalents
Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Republic had$1.1 billion in cash and cash equivalents as ofMarch 31, 2022 compared to$757 million as ofDecember 31, 2021 . The growth in cash balances was driven by continued growth in deposit balances, including$100 million of short-term tax refund deposits at TRS. As described in the "Investment Securities " section below, management began some deployment of its excess cash through the purchase of longer-term investment securities during the fourth quarter of 2021, with additional purchases made during the first quarter of 2022 as a result of a recent steepening of the yield curve. For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This cash earned a weighted-average yield of 0.20% during the first quarter of 2022 with a spot balance yield of 0.40% onMarch 31, 2022 . For cash held within the Bank's banking center and ATM networks, the Bank does not earn interest.Investment Securities During the first quarter of 2022, the Bank purchased$116 million in investment debt securities, allocated among$86 million inU.S. Treasuries, a$20 million MBS, and a$10 million U.S. government agency security. TheU.S. Treasuries had an expected weighted-average yield of approximately 1.51% and a weighted average life at purchase of 2.5 years. The MBS had an expected yield of approximately 1.25% and a stated maturity at purchase of 10 years. TheU.S. Government agency had an expected yield of approximately 1.39% and a maturity of 10 years. Entering the second quarter of 2022, management believes investment securities with a maturity of approximately two years offer an attractive risk-based return as compared to overnight cash at theFederal Reserve . As a result, management anticipates the Company will make additional purchases of investment securities during the second quarter of 2022 targeting a maturity of approximately two years. The overall timing of these purchases and the amount of these purchases will depend on many factors including, but not limited to, the Company's overall current and projected liquidity positions, its customers' demand for its loans and deposit products, the interest rate environment at the time, as well as the anticipated interest rate environment in the near and long term. 83
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Table 8 - Loan Portfolio Composition
(dollars in thousands) March 31, 2022 December 31,
2021 $ Change Percent Change
Traditional Banking: Residential real estate: Owner occupied$ 808,658 $ 820,731$ (12,073) (1) % Nonowner occupied 314,933 306,323 8,610 3 Commercial real estate 1,556,575 1,456,009 100,566 7 Construction & land development 129,970 129,337 633 0 Commercial & industrial 342,175 340,363 1,812 1 Paycheck Protection Program 18,276 56,014 (37,738) (67) Lease financing receivables 10,396 8,637 1,759 20 Aircraft 151,284 142,894 8,390 6 Home equity 210,364 210,578 (214) (0) Consumer: Credit cards 14,654 14,510 144 1 Overdrafts 716 683 33 5 Automobile loans 11,846 14,448 (2,602) (18) Other consumer 939 1,432 (493) (34) Total Traditional Banking 3,570,786 3,501,959 68,827 2 Warehouse lines of credit* 690,200 850,550 (160,350) (19) Total Core Banking 4,260,986 4,352,509 (91,523) (2) Republic Processing Group*: Tax Refund Solutions: Easy Advances 16,475 - 16,475 NM Other TRS loans 25,132 50,987 (25,855) (51) Republic Credit Solutions 87,650 93,066 (5,416) (6)Total Republic Processing Group 129,257 144,053 (14,796) (10) Total loans** 4,390,243 4,496,562 (106,319) (2) Allowance for credit losses (71,656) (64,577) (7,079) 11 Total loans, net$ 4,318,587 $ 4,431,985$ (113,398) (3)
*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 decreased by$106 million , or 2%, during the first quarter of 2022 to$4.4 billion as ofMarch 31, 2022 . The most significant components comprising the change in loans by reportable segment follow:
Traditional Banking segment
Period-end balances for Traditional Banking loans increased
from
change in loan balances during the first quarter of 2022:
CRE loans grew
?
division and its
Offsetting the growth above, during the first quarter of 2022, the
? PPP portfolio decreased
continued to wind down.
The CARES Act was enacted inMarch 2020 and provided for the SBA's PPP, which allowed the Bank to lend to its qualifying small business clients to assist them in their efforts to meet their cash-flow needs during the COVID pandemic. The Economic Aid Act was enacted inDecember 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 ofMarch 31 , 84
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2022, net PPP loans of
sheet, including
million
Warehouse Lending segment
Outstanding Warehouse period-end balances decreased$160 million fromDecember 31, 2021 toMarch 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 40% during 2013 to a high of 66% during 2020. As previously discussed, additional increases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to Warehouse's client demand, likely leading to a reduction in average outstanding balances as higher long-term interest rates generally drive lower demand for Warehouse borrowings. Tax Refund Solutions segment
Outstanding TRS loans decreased$9 million fromDecember 31, 2021 toMarch 31, 2022 primarily reflecting$16 million of unpaid EAs partially offset by a$25 million reduction in other TRS loans. EAs are only made during the first two months of each year, with all unpaid EAs charged off byJune 30th of each year. Other TRS loans as ofDecember 31, 2021 were primarily commercial loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by the end of the first quarter of the following year.
Republic
Outstanding RCS loans decreased
2022
RCS's LOC I product and a
Allowance for Credit Losses
As ofMarch 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$7 million from$65 million as ofDecember 31, 2021 to$72 million as ofMarch 31, 2022 . As a percent of total loans, the total Company's ACLL increased to 1.63% as ofMarch 31, 2022 compared to 1.44% as ofDecember 31, 2021 . An analysis of the ACL by reportable segment follows:
Traditional Banking segment
The Traditional Banking ACLL increased approximately
of
during the first quarter of 2022.
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Warehouse Lending segment
The Warehouse ACLL decreased to approximately $1.7 million , and the Warehouse
ACLL to total Warehouse loans remained at 0.25% when comparing March 31, 2022 to
December 31, 2021 . As of March 31, 2022 , the Warehouse ACLL was entirely
qualitative in nature with no adjustments to the qualitative reserve percentage
required for the first quarter of 2022.
Tax Refund Solutions segment
The TRS ACLL increased to$8 million as ofMarch 31, 2022 from$96,000 as ofDecember 31, 2021 , driven primarily by estimated losses on TRS's EA product. Due to the seasonal nature of the EA, estimated reserves are generally made during the first two months of the year when the product is offered, with losses charged against those reserves in the second quarter of each year. Based on the timing of EA reserves versus charge-offs, the ACLL for EAs to total remaining outstanding EAs is relatively substantial at the end of the first quarter, or 50% and 52% as ofMarch 31, 2022 andMarch 31, 2021 . The Company provided an ACLL for expected losses equal to 2.67% of total originations during the first quarter of 2022 as compared to 6.41% during the first quarter of 2021 because a lower percentage of EAs remained outstanding as ofMarch 31, 2022 compared toMarch 31, 2021 . Management believes it has adequately adjusted its expected loss rate to absorb EA losses based on information known through the date of this filing.
Republic
The RCS ACLL decreased$1 million from$13 million as ofDecember 31, 2021 to$12 million as ofMarch 31, 2022 , with this decrease driven by a decrease in RCS loan balances. RCS maintained an ACLL for two distinct credit products offered as ofMarch 31, 2022 , including its line-of-credit products and its healthcare-receivables products. As ofMarch 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 49% for its line-of-credit products. The lower reserve percentage of 0.25% was provided for RCS's healthcare receivables, as such receivables have recourse back to the third-party providers.
Asset Quality
COVID Loan Accommodations
The CARES Act provided several forms of economic relief designed to defray the impact of COVID. InApril 2020 , through its own independent relief efforts and CARES Act provisions, the Company began offering loan accommodations through deferrals and forbearances. These accommodations were generally under three-month terms for commercial clients, with residential and consumer accommodations in line with prevailing regulatory and legal parameters. Loans that received an accommodation were generally not considered troubled debt restructurings by the Company if such loans were not greater than 30 days past due as ofDecember 31, 2019 .
As of
Bank
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$10 million during the first quarter of 2022, driven primarily by commercial-purpose loans repaid or upgraded to a Pass rating during the first quarter of 2022.
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1
"Financial Statements" for additional discussion regarding Classified and
Special Mention loans.
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Table 9 - Classified and Special Mention Loans
(dollars in thousands) March 31, 2022 December 31, 2021 $ Change % Change Loss $ - $ - $ - - % Doubtful - - - - Substandard 18,681 21,714 (3,033) (14) PCD* - Substandard 1,644 1,692 (48) (3) Total Classified Loans 20,325 23,406 (3,081) (13) Special Mention 107,186 114,496 (7,310) (6) PCD* - Special Mention 776 795 (19) (2) Total Special Mention Loans 107,962
115,291 (7,329) (6)
Total Classified and Special Mention Loans$ 128,287 $ 138,697$ (10,410) (8) % Nonperforming Loans Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately$6 million and$6 million as ofMarch 31, 2022 andDecember 31, 2021 . Nonperforming loans to total loans decreased to 0.39% atMarch 31, 2022 from 0.46% atDecember 31, 2021 , as the total balance of nonperforming loans decreased by$4 million , or 17%, while total loans decreased$106 million , or 2%, during the first quarter of 2022. As presented in Tables 13 and 14 below, the decrease in nonperforming loans during 2022, including the nonaccrual loan component, was primarily driven by the refinancing of$5 million of these loans to another financial institution. The ACLL to total nonperforming loans increased to 423% as ofMarch 31, 2022 from 315% as ofDecember 31, 2021 , as the total ACLL increased$7 million , or 11%, and the balance of nonperforming loans decreased by$4 million , or 17%. The driver of the increase in ACLL was primarily EAs originated through the Company's TRS segment, while the driver of the decrease in nonperforming loans was primarily the refinancing out of the Bank of$5 million of these loans during the first quarter of 2022. 87
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Table 10 - Nonperforming Loans and Nonperforming Assets Summary
(dollars in thousands) March 31, 2022 December 31, 2021 Loans on nonaccrual status* $ 16,935 $ 20,504 Loans past due 90-days-or-more and still on accrual** 31 48 Total nonperforming loans 16,966 20,552 Other real estate owned 1,740 1,792 Total nonperforming assets $ 18,706 $ 22,344 Credit Quality Ratios -Total Company : ACLL to total loans 1.63 % 1.44 % Nonaccrual loans to total loans 0.39
0.46
ACLL to nonaccrual loans 423
315
Nonperforming loans to total loans 0.39
0.46
Nonperforming assets to total loans (including OREO) 0.43
0.50
Nonperforming assets to total assets 0.29
0.37
Credit Quality Ratios -Core Bank : ACLL to total loans 1.20 % 1.18 % Nonaccrual loans to total loans 0.40
0.47
ACLL to nonaccrual loans 303
251
Nonperforming loans to total loans 0.40
0.47
Nonperforming assets to total loans (including OREO) 0.44
0.51
Nonperforming assets to total assets 0.33
0.40
Loans on nonaccrual status include collateral-dependent loans. See Footnote 4
* "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements"
for additional discussion regarding collateral-dependent loans.
** Loans past due 90-days-or-more and still accruing consist of smaller balance
consumer loans.
Table 11 - Nonperforming Loan Composition
March 31, 2022 December 31, 2021
Percent of Percent of
Total Total
(dollars in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 11,728 1.45 % $ 12,039 1.47 %
Nonowner occupied 132 0.04 95 0.03
Commercial real estate 3,581 0.23 6,557 0.45
Construction & land development - - -
- Commercial & industrial - - 13 0.00 Paycheck Protection Program - - - - Lease financing receivables - - - - Aircraft - - - - Home equity 1,431 0.68 1,700 0.81 Consumer: Credit cards - - - - Overdrafts - - 1 0.15 Automobile loans 60 0.51 97 0.67 Other consumer 3 0.32 3 0.21 Total Traditional Banking 16,935 0.47 20,505 0.59 Warehouse lines of credit - - - - Total Core Banking 16,935 0.40 20,505 0.47Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - Other TRS loans - - - - Republic Credit Solutions 31 0.04 47 0.05
Total Republic Processing Group 31 0.02 47
0.03 Total nonperforming loans$ 16,966 0.39 %$ 20,552 0.46 % 88 Table of Contents
Table 12 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance March 31, 2022 Balance >$100 & Balance Total (dollars in thousands) No. <=$100 No. <=$500 No. >$500 No. Balance Traditional Banking: Residential real estate: Owner occupied 148$ 4,853 31$ 5,370 1$ 1,505 180$ 11,728 Nonowner occupied 4 132 - - - - 4 132 Commercial real estate - - 1 264 2 3,317 3 3,581
Construction & land development - - - - - - - - Commercial & industrial - - - - - - - - Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - - Aircraft - - - - - - - - Home equity 25 643 5 788 - - 30 1,431 Consumer: Credit cards - - - - - - - - Overdrafts NM - - - - - NM - Automobile loans 7 60 - - - - 7 60 Other consumer 3 3 - - - - 3 3
Total Traditional Banking 187 5,691 37 6,422 3 4,822 227 16,935 Warehouse lines of credit - - - - - - - - Total Core Banking 187 5,691 37 6,422
3 4,822 227 16,935
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans - - - - - - - -
Republic Credit Solutions NM 31 - - - - NM 31Total Republic Processing Group NM 31 - - - - NM 31 Total 187$ 5,722 37$ 6,422 3$ 4,822 227$ 16,966 Number of Nonperforming Loans and Recorded Investment 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 - - - - - - NM - 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 20,505Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS 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 89 Table of Contents
Table 13 - Rollforward of Nonperforming Loans
Three Months Ended
March 31,
(in thousands) 2022 2021
Nonperforming loans at the beginning of the period
23,595
Loans added to nonperforming status during the period that remained nonperforming at the end of the period 1,607
846
Loans removed from nonperforming status during the
period that were nonperforming at the beginning of
the period (see table below)
(4,799)
(1,891)
Principal balance paydowns of loans nonperforming at both period ends (378)
(499)
Net change in principal balance of other loans nonperforming at both period ends* (16)
470
Nonperforming loans at the end of the period$ 16,966 $
22,521
* Includes relatively small consumer portfolios, e.g., RCS loans.
Table 14 - Detail of Loans Removed from Nonperforming Status
Three Months Ended
March 31,
(in thousands) 2022 2021
Loans charged off $ - $ -
Loans transferred to OREO - -
Loans refinanced at other institutions (4,595)
(1,891)
Loans returned to accrual status (204)
-
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period$ (4,799) $
(1,891)
Based on the Bank's review as of
reserves are adequate to absorb expected losses on all nonperforming loans.
Delinquent Loans
Total Company delinquent loans to total loans increased to 0.37% as ofMarch 31, 2022 from 0.30% as ofDecember 31, 2021 .Core Bank delinquent loans to totalCore Bank loans decreased to 0.14% as ofMarch 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 ofMarch 31, 2022 andDecember 31, 2021 were on nonaccrual status. 90
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Table 15 - Delinquent Loan Composition*
March 31, 2022 December 31, 2021
Percent of Percent of
Total Total
(dollars in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 2,628 0.32 % $ 1,599 0.19 %
Nonowner occupied 41 0.01 - -
Commercial real estate 2,464 0.16 5,292 0.36
Construction & land development - - -
- Commercial & industrial - - 21 0.01 Paycheck Protection Program - - - - Lease financing receivables - - - - Aircraft - - - - Home equity 555 0.26 314 0.15 Consumer: Credit cards 39 0.27 30 0.21 Overdrafts 119 16.62 164 24.01 Automobile loans 17 0.14 9 0.06 Other consumer - - 1 0.07 Total Traditional Banking 5,863 0.16 7,430 0.21 Warehouse lines of credit - - - - Total Core Banking 5,863 0.14 7,430 0.17Republic Processing Group : Tax Refund Solutions: Easy Advances 4,524 27.46 - - Other TRS loans 160 0.64 - - Republic Credit Solutions 5,668 6.47 6,035 6.48
Total Republic Processing Group 10,352 8.01 6,035
4.19 Total delinquent loans$ 16,215 0.37 %$ 13,465 0.30 %
* 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 16 - Rollforward of Delinquent Loans
Three Months Ended
March 31,
(in thousands) 2022 2021
Delinquent loans at the beginning of the period$ 13,465 $ 19,947 Loans that became delinquent during the period - Easy Advances* 4,524
-
Loans added to delinquency status during the period and remained in delinquency status at the end of the period 2,103
992
Loans removed from delinquency status during the period that were in delinquency status at the beginning of the period (see table below) (3,604)
(2,017)
Principal balance paydowns of loans delinquent at both period ends (28)
(29)
Net change in principal balance of other loans delinquent at both period ends** (245)
(3,907)
Delinquent loans at the end of period$ 16,215 $
14,986
EAs do not have a contractual due date but the Company considered an EA
* delinquent in 2022 and 2021 if it remained unpaid 35 days after the taxpayer's
tax return was submitted to the applicable taxing authority.
** Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 17 - Detail of Loans Removed from Delinquent Status
Three Months Ended
March 31,
(in thousands) 2022 2021
Loans charged off $ (1) $ -
Easy Advances paid off or charged off -
-
Loans transferred to OREO -
-
Loans refinanced at other institutions (3,418)
(1,270)
Loans paid current (185)
(747)
Total loans removed from delinquency status during
the period that were in delinquency status at the
beginning of the period
$ (3,604) $
(2,017)
Collateral-Dependent Loans and Troubled Debt Restructurings
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs, if appropriate. The Bank's policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected. A TDR is a situation where, due to a borrower's financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank's TDRs involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan's interest rate, and/or extending the maturity date of the debt. Nonaccrual loans modified as TDRs remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as TDRs are evaluated for nonaccrual status based on a current evaluation of the borrower's financial condition and ability and willingness to service the modified debt.
Table 18 - Collateral-Dependent Loans and Troubled Debt Restructurings
(dollars in thousands) March 31, 2022 December 31, 2021
$ Change % Change
Cashflow-dependent TDRs $ 4,963 $ 5,960$ (997) (17) % Collateral-dependent TDRs 10,224 9,426 798 8 Total TDRs 15,187 15,386 (199) (1) Collateral-dependent loans (which are not TDRs) 10,935 14,645 (3,710) (25) Total recorded investment in TDRs and collateral-dependent loans$ 26,122 $
30,031
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1
"Financial Statements" for additional discussion regarding collateral-dependent
loans and TDRs.
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Deposits
Table 19 - Deposit Composition
(dollars in thousands) March 31, 2022 December 31, 2021 $ Change % Change Core Bank: Demand$ 1,415,655 $ 1,381,522$ 34,133 2 % Money market accounts 793,953 789,876 4,077 1 Savings 327,358 311,624 15,734 5 Individual retirement accounts (1) 42,149 43,724 (1,575) (4) Time deposits,$250 and over (1) 60,738 81,050 (20,312) (25) Other certificates of deposit (1) 139,735 154,174 (14,439) (9) Reciprocal money market and time deposits (1) 70,030 77,950 (7,920) (10) Brokered deposits (1) - - - -Total Core Bank interest-bearing deposits 2,849,618 2,839,920 9,698 0Total Core Bank noninterest-bearing deposits 1,630,926 1,579,173 51,753 3Total Core Bank deposits 4,480,544 4,419,093 61,451 1Republic Processing Group : Money market accounts 10,774 9,717 1,057 11 Total RPG interest-bearing deposits 10,774 9,717 1,057 11
Brokered prepaid card deposits 412,746 320,907 91,839 29 Other noninterest-bearing deposits 183,042 90,701 92,341 102 Total RPG noninterest-bearing deposits 595,788 411,608 184,180 45 Total RPG deposits 606,562 421,325 185,237 44 Total deposits$ 5,087,106 $ 4,840,418$ 246,688 5 % (1) Includes time deposit
notable changes during the quarter.
Total RPG deposits increased
2022, with the following primarily driving growth:
? RPG noninterest-bearing deposits growth was primarily driven by the following:
RPG's other noninterest-bearing deposits increased approximately
? due to seasonal short-term RT deposits generated within the TRS segment. These
deposits are expected to exit the Bank during the next quarter.
RPS's prepaid card balances within its RPS division of TRS increased
? million, driven primarily by tax-refund related deposits loaded onto prepaid
cards during the first quarter of 2022.
Federal Home Loan Bank Advances
The Bank held$20 million of long-term FHLB advances atMarch 31, 2022 compared to$25 million of overnight FHLB advances as ofDecember 31, 2021 . During the first quarter of 2022, the Bank extended the term on$20 million of its FHLB advances in anticipation of increasing long-term interest rates and repaid the remaining$5 million . As ofMarch 31, 2022 , the Company's$20 million of FHLB advances had a weighted average maturity of five years and a weighted average cost of 1.89%. Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others. 93 Table of Contents Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank's interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 "Interest Rate Swaps" of Part I Item 1 "Financial Statements"
for additional discussion regarding the Bank's interest rate swaps.
Liquidity
The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets, primarily in the form of cash, cash equivalents, and unincumbered investment securities. Funding and cash flows can also be realized through deposit product promotions, the sale of AFS debt securities, principal paydowns on loans and mortgage-backed securities, and proceeds realized from loans held for sale.
Table 20 - Liquid Assets and Borrowing Capacity
The Company's liquid assets and borrowing capacity included the following:
(in thousands) March 31, 2022 December 31, 2021 Cash and cash equivalents$ 1,077,158 $ 756,971 Unincumbered debt securities 281,521 219,775 Total liquid assets 1,358,679 976,746
Borrowing capacity with the FHLB 887,520
900,424
Borrowing capacity through unsecured credit lines 125,000
125,000
Total borrowing capacity 1,012,520
1,025,424
Total liquid assets and borrowing capacity$ 2,371,199 $
2,002,170
The Bank had a loan to deposit ratio (excluding brokered deposits) of 94% as ofMarch 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. As ofMarch 31, 2022 , the Bank had approximately$1.5 billion in deposits from 244 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . The 20 largest non-sweep deposit relationships represented approximately$520 million , or 10%, of the Company's total deposit balances as of as ofMarch 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 impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. As ofMarch 31, 2022 andDecember 31, 2021 , these pledged investment securities had a fair value of$331 million and$320 million . 94 Table of Contents Capital Total stockholders' equity increased from$834 million as ofDecember 31, 2021 to$840 million as ofMarch 31, 2022 . The increase in stockholders' equity was primarily attributable to net income earned during 2022 reduced primarily by cash dividends declared. Common Stock - The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and 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 RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states' banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years. As ofApril 1, 2022 , RB&T could, without prior approval, declare dividends of approximately$123 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. Republic's average stockholders' equity to average assets ratio was 13.19% as ofMarch 31, 2022 compared to 13.41% as ofDecember 31, 2021 . Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end. 95 Table of Contents
Table 21 - Capital Ratios (1)
As of March 31, 2022 As of December 31, 2021
(dollars in thousands) Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Republic Bancorp, Inc. $ 906,036 18.13 % $ 878,488 17.47 %
Republic Bank & Trust Company 873,513 17.49
861,815 17.14
Common equity tier 1 capital to risk-weighted assets Republic Bancorp, Inc.$ 843,538 16.88 %$ 823,504 16.37 % Republic Bank & Trust Company 811,075 16.24 806,831 16.05 Tier 1 (core) capital to risk-weighted assets Republic Bancorp, Inc.$ 843,538 16.88 %$ 823,504 16.37 % Republic Bank & Trust Company 811,075 16.24 806,831 16.05 Tier 1 leverage capital to average assets Republic Bancorp, Inc.$ 843,538 13.15 %$ 823,504 13.35 % Republic Bank & Trust Company 811,075 12.65 806,831 13.10
The Company and the Bank elected in 2020 to defer the impact of CECL on
regulatory capital. The deferral period is five years, with the total
(1) estimated CECL impact 100% deferred for the first two years, then phased in
over the next three years. If not for this election, the Company's regulatory
capital ratios would have been approximately 15 basis points lower than those
presented in the table above as of
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.
96
Table of Contents
As ofMarch 31, 2022 , a dynamic simulation model was run for interest rate changes from "Down 100" basis points to "Up 400" basis points. The following table illustrates the Bank's projected percent change from its Base net interest income over the period beginningApril 1, 2022 and endingMarch 31, 2023 based on instantaneous movements in interest rates from Down 100 to Up 400 basis points equally across all points on the yield curve. The Bank's dynamic earnings simulation model includes secondary market loan fees and excludesTraditional Bank loan fees.
Table 22 - Bank Interest Rate Sensitivity
Change in Rates
-100 +100 +200 +300 +400
Basis Points Basis Points
Basis Points Basis Points Basis Points
% Change from base net interest income as of March 31, 2022 2.0 % 0.2 % 2.5 % 4.9 % 7.7 % % Change from base net interest income as of December 31, 2021 1.3 % (0.6) % 0.7 % 4.7 % 9.3 % For the Down-100, Up-100, Up-200, and Up-300 scenarios, theMarch 31, 2022 simulation reflected a more positive outcome for the Bank's net interest income than the comparableDecember 31, 2021 simulation. For the Up-400 scenario, theDecember 2021 simulation reflected a more positive outcome than theMarch 2022 simulation. The changes in simulation outcomes fromDecember 2021 toMarch 2022 was primarily due to the following:
? The positive impact from the growth in interest-earning cash balances from
The negative impact from a larger projected decline in secondary market fees
? for the
2021 simulation. 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, bySeptember 11, 2022 , theBoard of Governors of theFederal Reserve System (the "Board") must issue regulations to give effect to the law, including the selection of a Board-Selected Benchmark Replacement that is based on SOFR and incorporates an applicable tenor spread adjustment and the identification of any related conforming changes. As ofMarch 31, 2022 , the Company had approximately$1.1 billion of legacy assets that reference LIBOR, with short-term Warehouse loans representing$631 million of these assets and commercial and mortgage loans primarily making up the remainder. As ofMarch 31, 2021 , of the Bank's legacy assets that reference LIBOR, approximately$434 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. 97
Table of Contents
As of
interest rate derivative contracts was approximately
million
For additional discussion regarding the Bank's net interest income, see the
sections titled "Net Interest Income" in this section of the filing under
"RESULTS OF OPERATIONS (Three months ended
months ended
TREACE MEDICAL CONCEPTS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
OFG BANCORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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