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;
? the potential impact of inflation on Company operations;
projections of revenue, income, expenses, losses, earnings per share, capital
? expenditures, dividends, capital structure, loan volume, loan growth, deposit
growth, or other financial items;
? descriptions of plans or objectives for future operations, products, or
services;
? descriptions and projections related to management strategies for loans,
deposits, investments, and borrowings;
? forecasts of future economic performance; and
? descriptions of assumptions underlying or relating to any of the foregoing.
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:
? the impact of the COVID pandemic on the Company's operations and credit losses;
? the impact of inflation on the Company's operations and credit losses;
litigation liabilities, including related costs, expenses, settlements and
? judgments, or the outcome of matters before regulatory agencies, whether
pending or commencing in the future;
? natural disasters impacting the Company's operations;
? changes in political and economic conditions;
? the discontinuation of LIBOR;
? the magnitude and frequency of changes to the FFTR implemented by the
the FRB;
long-term and short-term interest rate fluctuations and the overall steepness
? of the
interest income and Mortgage Banking operations;
? competitive product and pricing pressures in each of the Company's five
reportable segments;
? equity and fixed income market fluctuations;
? client bankruptcies and loan defaults;
? recession;
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? future acquisitions;
? integrations of acquired businesses;
? changes in technology;
? changes in applicable laws and regulations or the interpretation and
enforcement thereof;
? changes in fiscal, monetary, regulatory, and tax policies;
? changes in accounting standards;
? monetary fluctuations;
? changes to the Company's overall internal control environment;
? success in gaining regulatory approvals when required;
? the Company's ability to qualify for future R&D federal tax credits;
? the ability for Tax Providers to successfully market and realize the expected
EA and RT volume anticipated by TRS;
? information security breaches or cyber security attacks involving either the
Company or one of the Company's third-party service providers; and
other risks and uncertainties reported from time to time in the Company's
? filings with the
Annual Report on Form 10-K for the year ended
Item 1A "Risk Factors" of the current filing.
OnOctober 26, 2022 , Republic, the Bank andCBank entered into theCBank Agreement. Upon completion of the transaction,CBank will be merged with and into RB&T, with RB&T as the survivor of the merger.CBank is headquartered inCincinnati, Ohio . This document contains statements regarding the proposed acquisition transaction that are not statements of historical fact and are considered forward-looking statements within the criteria described above. These statements are likewise subject to various risks and uncertainties that may cause actual results and outcomes of the proposed transaction to differ, possibly materially, from the anticipated results or outcomes expressed or implied in these forward-looking statements. In addition to factors disclosed in reports filed by Republic with theSEC , risks and uncertainties for Republic,CBank and the combined company include, but are not limited to: the ability forCBank to receive shareholder approval for the CBank Agreement, for all parties to receive regulatory approvals as provided for in the CBank Agreement, the ability to growCBank loan and deposit balances post-acquisition, unanticipated post-acquisition loan losses for Republic onCBank -originated loans, the ability of Republic to integrate acquired operations including obtaining synergies, integration objectives and anticipated timelines, the ability of Republic to integrate, manage and keep secure our information systems, and other factors set forth as "Risk Factors" at Part II, Item 1A in the Company's Form 10-K for the period endedDecember 31, 2021 .
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, 70
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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 ofSeptember 30, 2022 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly. Management's evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast. Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix or term, delinquency level, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on 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 ofSeptember 30, 2022 , the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute "Core Bank " or "Core Banking" operations, while the last two segments collectively constitute RPG operations.
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily
to customers in the Company's market footprint. As of
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.
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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 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. Digital Experience - The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com. The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.
Other Banking Services - The Bank also provides title insurance and other
financial institution related products and services.
Bank Acquisitions - The Bank maintains an acquisition strategy to selectively
grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote
16 "Segment Information" of Part I Item 1 "Financial Statements."
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(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."
(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 a DDA Card, 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
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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, unless such collections are subject to guarantor reimbursement under a loan-loss guaranty. Related to the overall credit losses on EAs, the Bank's ability to control losses is highly dependent upon its ability to predict the taxpayer's likelihood to receive the tax refund as claimed on the taxpayer's tax return. Each year, the Bank's EA approval model is based primarily on the prior-year's tax refund payment patterns. Because the substantial majority of the EA volume occurs each year before that year's tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management's predictions if tax refund payment patterns change materially between years. In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the EAs product parameters. In addition, as part of its normal annual marketing and sales process, TRS renews existing contracts and enters into new contracts to offer EA products through additional Tax Providers. Further changes in EA product parameters and/or new contracts with new Tax Providers do not ensure positive results and could have an overall material negative impact on the performance of the EA product offering and therefore on the Company's financial condition and results of operations.
See additional detail regarding the EA product under Footnote 4 "Loans and
Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Settlement of Lawsuit Against Green Dot - OnJune 3, 2022 , the Bank and Green Dot entered into the Settlement Agreement to fully resolve the Lawsuit that the Bank filed against Green Dot in theDelaware Court of Chancery onOctober 5, 2021 .
As previously disclosed in the Company's prior
from Green Dot's inability to consummate the Sale
Transaction contemplated in the TRS Purchase Agreement through which Green Dot
would purchase all of the assets and operations of the Bank's Tax Refund
Solutions business.
In accordance with the Settlement Agreement, onJune 6, 2022 , Green Dot paid$13 million to the Bank, which was in addition to a$5 million termination fee that Green Dot paid to the Bank during the first quarter of 2022 under the terms of the TRS Purchase Agreement. OnJune 6, 2022 , the Bank and Green Dot filed a stipulation of dismissal of the Lawsuit with theDelaware Court of Chancery , which was effective to dismiss the Lawsuit when filed.
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 inJanuary 2021 . 74 Table of Contents
RCS's LOC I represented the substantial majority of RCS activity during 2022
and 2021.
third-party service providers for the product and are subject to the Bank's
oversight and supervision. Together, these companies provide the Bank with
o certain marketing, servicing, technology, and support services, while a
separate third party provides customer support, servicing, and other services
on the Bank's behalf. The Bank is the lender for this product and is marketed
as such. Further, the Bank controls the loan terms and underwriting guidelines,
and the Bank exercises consumer compliance oversight of the product.
The Bank sells participation interests in this product. These participation interests are a 90% interest in advances made to borrowers under the borrower's line-of-credit account, and the participation interests are generally sold three business days following the Bank's funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
In
RCS's existing third-party service providers, subject to the Bank's oversight
and supervision, provides the Bank with marketing services and loan servicing
o for the LOC II product. The Bank is the lender for this product and is marketed
as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this product.
The Bank sells participation interests in this product. These participation interests are a 95% interest in advances made to borrowers under the borrower's line-of-credit account, and the participation interests are generally sold three business days following the Bank's funding of the associated advances. Although the Bank retains a 5% participation interest in each advance, it maintains 100% ownership of the underlyingLOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
RCS installment loan product - 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."
RECENT DEVELOPMENTS Bank Acquisition OnOctober 26, 2022 , the Company, RB&T, andCBank entered into theCBank Agreement. Upon completion of the transaction,CBank will be merged with and into RB&T, with RB&T as the survivor of the merger.CBank is headquartered inCincinnati, Ohio .
Under the terms of the CBank Agreement, the Company will acquire all of
outstanding common stock in an all-cash direct merger of
resulting in a total cash payment of approximately
existing shareholders. Republic expects to fund the cash payment through
existing resources on-hand at RB&T. The completion of the transaction is subject
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to customary closing conditions, including regulatory approval and approval by
CBank's shareholders. The CBank Agreement also contains reciprocal termination
provisions in the event the transaction does not receive the required regulatory
approvals within six months of the effective date of the CBank Agreement or if
certain minimum capital levels are not maintained by CBank as of the closing
date.
The CBank Agreement was unanimously approved by the Republic, RB&T and CBank
boards of directors on October 25, 2022 . In connection with entering into the
CBank Agreement, Republic entered into customary support agreements with the
members of CBank's board of directors and other shareholders in their capacities
as shareholders of CBank (the "CBank Support Agreements"). Subject to the terms
and conditions, and non-termination, of the CBank Support Agreements, each such
shareholder agreed, among other things, to vote his or her respective shares of
CBank Common Stock in favor of the approval of the CBank Agreement and the
transaction contemplated thereby, and against alternative acquisition proposals.
The CBank Support Agreements do not prevent the shareholders, in their capacity
as directors, from exercising their fiduciary obligations in connection with
alternative acquisition proposals. The CBank Agreement provides certain
termination rights for both Republic and CBank and further provides that a
termination fee of $2,040,000 will be payable by CBank to Republic upon
termination of the CBank Agreement under certain circumstances, including
CBank's termination of the CBank Agreement to accept a Superior Proposal (as
defined in the CBank Agreement).
As of September 30, 2022 , CBank had approximately $271 million in assets,
consisting of approximately $214 million in gross loans, no other real estate
owned, approximately $17 million of marketable securities, approximately $35
million in cash and cash equivalents and approximately $8 million in other
assets. As of September 30, 2022 , CBank had approximately $242 million of
liabilities, including approximately $240 million in customer deposits and $1
million in Federal Home Loan Bank advances.
Tax Refund Solutions
OnOctober 19, 2022 , TRS entered into a new agreement with a large Tax Provider, for which TRS had previously only provided RTs. As part of the new agreement, TRS will be the exclusive provider of refund advance loans originated through this provider throughOctober 2025 . As a result of the new agreement, management expects to increase its calendar-year 2023 refund advance origination volume an additional$400 million to$600 million over the$311 million , in total EA loans, TRS originated during the 2022 calendar year.
OVERVIEW (Three Months Ended
Total Company net income for the third quarter of 2022 was$19.5 million , a decrease of$526,000 from the same period in 2021. Diluted EPS remained at$0.99 for the third quarter of 2022 compared to$0.99 for the same period in 2021. The decrease in net income primarily reflected the following:
? A
? A
? An offsetting
The following are general highlights by reportable segment:
Traditional Banking segment
? Net income increased
to the same period in 2021.
? Net interest income increased
2022 compared to the same period in 2021.
? Provision was a net credit of
to a net credit of
? Noninterest income increased
compared to the same period in 2021.
? Noninterest expense increased
2022 compared to the same period in 2021.
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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 38% during the third quarter of 2022 compared to 51%
during the same period in 2021.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 78%, during the third quarter of 2022 compared to the same period
in 2021.
Overall, Republic's proceeds from the sale of secondary market loans totaled
? the same period in 2021, with the Company's
cash-gain-as-a-percent-of-loans-sold decreased to 2.23% for the third quarter
of 2022 from 2.82% for the third quarter of 2021.
Tax Refund Solutions segment
? Net income decreased
to the same period in 2021.
? Net interest income increased
compared to the same period in 2021.
Overall, TRS recorded a net credit to the Provision of
? third quarter of 2022 compared to a net credit to the Provision of
for the same period in 2021.
? Noninterest income decreased
compared to the same period in 2021.
? Net RT revenue decreased
compared to the 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.
2022
TRS amended one of its existing third-party contracts to provide for a revenue
1) 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 TRS Purchase Agreement;
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Although to a lesser degree than in the 2021 tax season, Company management
3) believes stimulus programs from the Federal Government during the latter half
of 2021 negatively impacted the 2022 tax season;
4) The Bank received a
following the cancellation of the Sales Transaction; and
5) The Bank received a
As it relates to factors impacting 2021, the processing season with theIRS started approximately two weeks later than normal. As a result, RT funding volume and loan repayments from theIRS lagged normal funding patterns in non-COVID-impacted years and effectively pushed RT revenue and loan recovery activity later into the 2021 calendar year. In addition, management believes government stimulus programs during 2021 negatively impacted demand for TRS EA and RT products. In addition to the more normal timing of the tax season in 2022 as compared to 2021, the TRS business for the first nine months of 2022, in totality, was favorably impacted by a contractual change with one of the Company's large Tax Providers. As a result of the amended contract, TRS shares certain revenues with this provider. Also, under the amended contract, this provider absorbs certain overhead costs of the program and furnishes TRS a loan loss guaranty ceiling as a percentage of EAs originated by this provider. Under the terms of the loan loss guaranty, if the losses for EAs through this provider are above the loss guaranty ceiling as ofJune 30th for the current year, the provider will make a payment to TRS early in the third quarter to initially settle charge-off activity through theJune 30th date. Subsequent to the initial settlement, TRS will reimburse to this provider any EA recoveries of loans originated through this provider until such time that the loss rate reaches the loss guaranty ceiling, at which time TRS would retain all recoveries thereafter. While the overall result of this loss guaranty arrangement was a net benefit to RB&T for the nine months endedSeptember 30, 2022 , TRS's reimbursement to this provider of EA recoveries during the third quarter of 2022 above the contractual loss ceiling resulted in a negative performance comparison for the third quarter of 2022 as compared to the third quarter of 2021, when no such loss guaranty arrangement existed and TRS recorded all such recoveries as a benefit directly to income. Management believes this negative quarter-to-quarter performance comparison will exist during the fourth quarter of 2022, as well, because the EA loss rate for this provider is not expected to reach the loss guaranty ceiling during this time. 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. Also negatively impacting the third quarter 2022 tax season as compared to the third quarter of 2021 was a loss of RT volume by RB&T to Green Dot from certain third-party Tax Providers following the execution of the TRS Purchase Agreement. While TRS was able to partially offset this lost volume through higher volume from other existing relationships, the lost volume to Green Dot from this one provider had a negative impact to the overall results of TRS for 2022 and may continue to have a negative impact to the overall results of TRS beyond 2022, if TRS is unable to win this business back through its normal solicitation process. As a net result of all the factors in the preceding paragraphs, TRS experienced a significant net decrease to its third quarter 2022 tax results as compared to the third quarter of 2021. Management believes TRS's results of operations, and more specifically RT revenue and net recoveries for previously charged-off EAs for the fourth quarter of 2022, will likely be negative as compared to fourth quarter of 2021 because of these same factors.
Republic
? Net income increased
to the same period in 2021.
? Net interest income increased
compared to the same period in 2021.
Overall, RCS recorded a net charge to the Provision of
? third quarter of 2022 compared to a net charge of
period in 2021.
? Noninterest income increased
to the third quarter of 2022.
? Noninterest expense was
million for the same period in 2021.
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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 rates trended lower in the first quarter of 2020 with the onset of the COVID pandemic, as theFOMC reduced the FFTR to approximately 25 basis points. With the rise of inflation during the latter half of 2021 and a steep inflationary rise during the first nine months of 2022, representing inflationary levels not seen in approximately 40 years, theFOMC began executing a quantitative tightening program by reducing its balance sheet, selling certain types of bonds in the market, and repeatedly increasing the FFTR. TheFOMC's increases to the FFTR during the first nine months of 2022 included the following:
Table 1 - Increases to the Federal Funds Target Rate during 2022
Increase to FFTR
Date the FFTR after Increase
March 17, 2022 0.25 % 0.50 %
May 5, 2022 0.50 1.00
June 16, 2022 0.75 1.75
July 27, 2022 0.75 2.50
September 21, 2022 0.75 3.25
Along with the above increases, the FOMC continued to signal that additional
FFTR increases are likely based on the current level of inflation. The FOMC's
actions and signals continued to place upward pressure on long-term market
interest rates for bonds and loans during the third quarter of 2022. Further
monetary tightening by the Federal Reserve in the future will likely cause both
short-term and long-term market interest rates to increase during the remainder
of 2022 and potentially into 2023. 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 $58.0 million during the third quarter of
2022 and represented an increase of $4.9 million , or 9%, from the third quarter
of 2021. Total Company net interest margin increased to 4.05% during the third
quarter of 2022 compared to 3.61% 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 increased$6.3 million , or 16%, for the third quarter of 2022 compared to the same period in 2021. Traditional Banking's net interest margin was 3.63% for the third quarter of 2022, an increase of 41 basis points from the same period in 2021.
The increase in the
margin during the third quarter of 2022 was primarily attributable to the
following factors:
Excluding PPP loan fees and interest, the
income increased
3.62% from the third quarter of 2021 to the third quarter of 2022. This
? increase in net interest income and related expansion in NIM resulted primarily
from the Company's balance sheet management strategies, which benefited from
increases in the FFTR. Notable changes in specific categories included the
following:
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Average interest-earning cash was
o 0.16% during the third quarter of 2021 compared to
weighted-average yield of 2.31% for the third quarter of 2022.
Average investments grew from
o 1.39% during the third quarter of 2021 to
yield of 1.88% for the third quarter of 2022.
Average non-
o weighted-average yield of 4.00% during the third quarter of 2021 to
billion with a weighted average yield of 4.22% during the third quarter of
2022.
Offsetting the above increase, the
and interest on its PPP portfolio during the third quarter of 2022 compared to
?
short-term nature of the PPP, as approximately 97% of all fees and interest
eligible to be recognized under the program by theTraditional Bank were recognized during 2020 and 2021. 80 Table of Contents
Table 2 - Traditional Bank Net Interest Income and Net Interest Margin Excluding
PPP (Non-GAAP)
The Company earns fees and a coupon interest rate of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believesTraditional Bank net interest income excluding PPP fees and coupon interest is a more appropriate measure to analyze the performance of theTraditional Bank's net interest income and net interest margin. The following table reconcilesTraditional Bank net interest income and net interest margin toTraditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure. Net Interest Income Interest-Earning Assets Net Interest Margin Three Months EndedSep. 30 , Three Months EndedSep. 30 , Three Months EndedSep. 30 , (dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change 2022 2021 %
Change
Traditional Banking - GAAP$ 46,562
3 % 3.63 % 3.22 % 0.41 % Less: Impact of PPP fees and interest 184 5,668 (5,484) (97) 12,462 185,931 (173,469) (93) 0.01 0.35
(0.34)
Traditional Banking ex PPP fees and interest - non-GAAP
$ 34,629 $ 11,749 34$ 5,123,933 $ 4,820,267 $ 303,666 6 3.62 2.87 0.75 As previously disclosed, both short-term and long-term market interest rates are expected to continue increasing during the remainder of 2022 and potentially into 2023 because 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.
Warehouse Lending segment
Net interest income within the Warehouse segment decreased$3.3 million , or 52%, from the third quarter of 2021 to the third quarter of 2022, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from$717 million during the third quarter of 2021 to$474 million for the third quarter of 2022, driven largely by a sharp rise in long-term interest rates during 2022, which depressed mortgage-refinancing demand and resulted in a sharp drop in Warehouse line usage. In addition, the Warehouse net interest margin decreased 97 basis points from 3.51% during the third quarter of 2021 to 2.54% during the third quarter of 2022. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company's funds-transfer-pricing methodology, generally rose in tandem with the increase in short-term interest rates during the year, while its yield increases were delayed until the adjustable rates on its clients' lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited Warehouse's net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during 2022.Committed Warehouse lines-of-credit decreased from$1.4 billion as ofSeptember 30, 2021 to$1.2 billion as ofSeptember 30, 2022 , while average usage rates for Warehouse lines were 40% and 52%, respectively, during the first nine months of 2022 and 2021.Average Committed Warehouse lines-of-credit decreased to$1.3 billion from$1.4 billion for the quarter-endedSeptember 30, 2022 , while average usage rates for Warehouse lines were 38% and 51%, respectively, during the third 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. 81 Table of Contents Tax Refund Solutions segment TRS's net interest income increased$1.4 million for the third quarter of 2022 compared to the same period in 2021, driven primarily by an increase interest income on TRS's prepaid card balances as a function of the Company's FTP methodology and a rise in interest rates. For factors affecting the comparison of the TRS results of operations for the third quarter of 2022 and the third quarter of 2021, see section titled "OVERVIEW (Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 ) - Tax Refund Solutions."
Republic
RCS's net interest income increased$648,000 , or 11%, from the third quarter of 2021 to the third quarter of 2022. The increase was driven primarily by an increase in fee income from RCS's LOC products partially offset by a decrease in interest income from RCS's hospital receivables. RCS's LOC loan fees, which are recorded as interest income on loans, increased to$6.6 million during the third quarter of 2022 compared to$4.9 million during the same period in 2021. Interest income on RCS's LOC I product increased$635,000 , driven by a$3 million increase in average outstanding balances for this product from the third quarter of 2021 to the third quarter of 2022. Interest income on RCS'sLOC II product increased$540,000 , as the Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase.
Interest income from RCS's hospital receivables decreased
third quarter of 2021 to the third quarter of 2022 resulting from a
decrease in average receivables from period to period.
Overall product demand for the RCS segment is not assumed to be interest rate
sensitive and therefore management does not believe a rising interest rate
environment will impact demand for its various consumer loan products. A rising
interest rate environment, however, likely will impact the Company's internal
FTP cost allocated to this segment. As a result, the impact of rising interest
rates to RCS during 2022 and, potentially into 2023, will be negative to the
segment's financial results, although the exact amount of the negative impact
will depend on the internal FTP cost assigned, as well as, the overall volume
and mix of loans it generates.
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Table 3 - Total Company Average Balance Sheets and Interest Rates
Three Months Ended September 30, 2022 Three Months Ended September 30, 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 $ 727,626 $ 4,176 2.30 % $ 924,859 $ 359 0.16 %
Investment securities, including FHLB
stock (1) 694,781 3,274 1.88 555,934 1,928 1.39
RCS LOC products (2) 30,919 6,635 85.84 22,804 4,863 85.30
Other RPG loans (3) (7) 77,429 1,102 5.69 105,414 1,288 4.89
Outstanding Warehouse lines of credit
(4) (7) 473,923 5,491 4.63 717,036 6,698 3.74
Paycheck Protection Program loans (5)
(7) 12,462 184 5.91 185,931 5,668 12.19
All other Core Bank loans (6) (7) 3,711,436 39,194 4.22 3,373,085 33,665 3.99
Total interest-earning assets 5,728,576 60,056 4.19 5,885,063 54,469 3.70
Allowance for credit losses (65,262) (61,562)
Noninterest-earning assets:
Noninterest-earning cash and cash
equivalents 108,069 140,037
Premises and equipment, net 33,307 38,377
Bank owned life insurance 100,740
99,386 Other assets (1) 170,692 187,287 Total assets$ 6,076,122 $ 6,288,588
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities: Transaction accounts$ 1,703,020 $ 496 0.12 %$ 1,569,408 $ 91 0.02 % Money market accounts 787,523 601 0.31 822,190 96 0.05 Time deposits 238,149 702 1.18 298,179 835 1.12 Reciprocal money market and time deposits 48,432 31 0.26 188,357 124 0.26 Brokered deposits - - - 30,001 2 0.03
Total interest-bearing deposits 2,777,124 1,830 0.26 2,908,135 1,148 0.16 SSUARs and other short-term borrowings 220,149 94 0.17 242,867 20 0.03 Federal Home Loan Bank advances 20,000 96 1.92 25,000 6 0.10 Subordinated note - - - 40,791 166 1.63 Total interest-bearing liabilities 3,017,273 2,020 0.27 3,216,793 1,340 0.17 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,096,911
2,118,200 Other liabilities 110,190 104,660 Stockholders' equity 851,748 848,935 Total liabilities and stockholders' equity$ 6,076,122 $ 6,288,588 Net interest income$ 58,036 $ 53,129 Net interest spread 3.92 % 3.53 % Net interest margin 4.05 % 3.61 %
(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 RCS line-of-credit products is composed entirely of loan
fees.
(3) Interest income includes loan fees of
(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.
83
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Table 4 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 4 - Total Company Volume/Rate Variance Analysis
Three Months Ended September 30, 2022
Compared to
Three Months Ended September 30, 2021
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ 3,817 $ (93) $ 3,910
Investment securities, including
FHLB stock 1,346 552 794
RCS LOC products 1,772 1,741 31
Other RPG loans (186) (378) 192
Outstanding Warehouse lines of
credit (1,207) (2,590)
1,383
Paycheck Protection Program loans (5,484) (3,532)
(1,952) All other Core Bank loans 5,529 3,501 2,028 Net change in interest income 5,587 (799) 6,386 Interest expense: Transaction accounts 405 8 397 Money market accounts 505 (4) 509 Time deposits (133) (175) 42 Reciprocal money market and time deposits (93) (89) (4) Brokered deposits (2) (2) - SSUARs and other short-term borrowings 74 (2) 76
Federal Home Loan Bank advances 90 (2) 92 Subordinated note (166) (166) - Net change in interest expense 680 (432)
1,112
Net change in net interest income
$ 5,274 84 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 third quarter of 2022 was a net credit of$753,000 compared to a net credit of$44,000 for the third quarter of 2021. An analysis of the Provision for the third quarter of 2022 compared to the same period in 2021 follows:
? For the third quarter of 2022, the Traditional Bank Provision primarily
reflected the following:
o the third quarter of 2022 due to payoffs and paydowns of loans rated
Substandard or Special Mention, with this overall credit to the Provision
primarily driven by a favorable payoff of one large Substandard loan.
o Offsetting the above was approximately
million of non-PPP loan growth during the third quarter of 2022.
For the third quarter of 2021, the
? Provision was primarily driven by net loan loss recoveries of
quarter. Loan loss recoveries were positively impacted by a
from one borrower.
As a percentage of totalTraditional Bank loans, the Traditional Banking ACLL was 1.31% as ofSeptember 30, 2022 compared to 1.41% as ofDecember 31, 2021 and 1.42% as ofSeptember 30, 2021 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofSeptember 30, 2022 .
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in
this section of the filing under "Comparison of Financial Condition" for
additional discussion regarding the Provision and the Bank's credit quality.
Warehouse 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 declining outstanding period-end balances.
third quarter of 2022 compared to a decrease of
quarter of 2021.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofSeptember 30, 2022 ,December 31, 2021 , andSeptember 30, 2021 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofSeptember 30, 2022 .
Tax Refund Solutions segment
TRS recorded a net credit to the Provision of$1.3 million during the third quarter of 2022, decreasing its weighted average net EA loss rate from 2.85% of total EA originations as ofJune 30, 2022 , to 2.44% of total EA originations as ofSeptember 30, 2022 . TRS's net credit of$2.3 million to the Provision for the third quarter of 2021, decreased its weighted average net EA loss rate from 4.09% of total EA originations as ofJune 30, 2021 , to 3.19% of total EA originations as ofSeptember 30, 2021 . Negatively impacting the comparability of the TRS Provision from the third quarter of 2021 to the third quarter of 2022 was the previously discussed loan loss guaranty arrangement with one of TRS's Tax Providers. Under this loan loss guaranty arrangement, one large Tax Provider for TRS guarantees a certain loan loss ceiling as a percentage of EA's originated through this provider. This provider made a payment to TRS early in the third quarter of 2022 under the loss guaranty arrangement to initially settle charge-off activity throughJune 30, 2022 . During the third quarter of 2022, TRS set aside for reimbursement to this provider all EA recoveries of loans originated through this provider. TRS will continue to reimburse this provider for recoveries of EA loans originated through this provider during 2022 until such time that the loss rate reaches the loss guaranty ceiling, at which time TRS would retain all recoveries thereafter. 85 Table of Contents During the third quarter of 2021, TRS recorded a net benefit of$1.0 million for recoveries of EAs through this one provider when no loss guaranty ceiling existed. During the third quarter of 2022, TRS recorded no benefit for recoveries of EAs originated through this provider as all amounts collected during the quarter were reimbursed to the provider. Management believes all EA recoveries during the fourth quarter of 2022 that are covered under this loss guaranty arrangement will also be reimbursed to this provider. EAs are originated only during the first two months of each year, with losses on those originations initially estimated during the same origination period. All unpaid EAs are charged off byJune 30th of each year, with first quarter loss estimates trued-up to actual charge-offs incurred through a second quarter Provision charge or credit. EAs collected during the second half of each year are recorded as recoveries of previously charged-off loans unless such recovery is subject to guarantor reimbursement under a loan-loss guaranty.
For the 2022 and 2021 tax seasons, the following table presents information
regarding EA originations, second quarter losses recorded, and third quarter
Provision true-ups/loss recoveries:
Table 5 - Easy Advance Performance
(dollars in thousands) 2022 Tax Season 2021
Tax Season 2022/2021 Change
EAs originated during the first two months of the year (a)$ 311,207 $
250,045 $ 61,162
EA net charge-offs (recoveries) recorded ($): EA net losses recognized for the nine months ended September 30, (b) $ 7,583 $ 7,984 $ (401) Provision expense recorded during the six months ended June 30, (c) 8,879 10,226 (1,347) Provision true-up/EA (recoveries) for the three months ended September 30, (d)$ (1,296) $ (2,242) $ 946 EA net charge-offs (recoveries) recorded (%): EA net losses recognized for the nine months ended September 30, (b)/(a) 2.44 % 3.19 % (0.75) % Provision expense recorded during the six months ended June 30, (c)/(a) 2.85 4.09 (1.24) Provision true-up/EA (recoveries) for the three months ended September 30, (d)/(a) (0.41) % (0.90) % 0.49 % With all unpaid or unguaranteed EAs having been charged off as ofJune 30, 2022 , any payments received during the fourth quarter of 2022 for unguaranteed EAs will continue to represent recovery credits directly to income. For factors affecting the comparison of the TRS results of operations for the third quarter of 2022 and the third quarter of 2021, see section titled "OVERVIEW (Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 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
As illustrated in Table 6 below, RCS recorded a net charge to the Provision of$4.0 million during the third quarter of 2022 compared to a net charge to the Provision of$3.8 million 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$1.8 million for the third quarter of 2022 from$733,000 during the third quarter of 2021, with government stimulus programs generally driving down usage of this product during the third quarter of 2021. Net charge-offs for RCS'sLOC II product were$809,000 for the third quarter of 2022 compared to$254,000 during the third quarter of 2021. While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 14.73% as ofSeptember 30, 2022 , 13.91% as ofDecember 31, 2021 , and 9.99% as ofSeptember 30, 2021 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as ofSeptember 30, 2022 . 86
Table of Contents
The following table presents net charges to the RCS Provision by product:
Table 6 - RCS Provision by Product
Three Months Ended Sep. 30,
(dollars in thousands) 2022 2021 $ Change % Change
Product:
Lines of credit $ 3,996 $ 3,830 $ 166 4 %
Hospital receivables 12 (10) 22 NM
Total $ 4,008 $ 3,820 $ 188 5 %
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Table 7 - Summary of Loan and Lease Loss Experience
Three Months Ended
September 30,
(dollars in thousands) 2022 2021
ACLL at beginning of period $ 64,449 $ 60,291
Charge-offs:
Traditional Banking:
Commercial & industrial - (35)
Consumer (353) (279)
Total Traditional Banking (353) (314)
Warehouse lines of credit - -
Total Core Banking (353) (314)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances - -
Other TRS loans - -
Republic Credit Solutions (2,922) (1,064)
Total Republic Processing Group (2,922) (1,064)
Total charge-offs (3,275) (1,378)
Recoveries:
Traditional Banking:
Residential real estate 24 329
Commercial real estate 275 3
Commercial & industrial 124 16
Home equity 7 5
Consumer 110 128
Total Traditional Banking 540 481
Warehouse lines of credit - -
Total Core Banking 540 481
Republic Processing Group :
Tax Refund Solutions:
Easy Advances 1,296 2,242
Other TRS loans - 19
Republic Credit Solutions 266 75
Total Republic Processing Group 1,562 2,336
Total recoveries 2,102 2,817
Net loan recoveries (charge-offs) (1,173) 1,439
Provision - Core Banking (1,069) (265)
Provision - RPG 2,712 1,559
Total Provision 1,643 1,294
ACLL at end of period $ 64,919 $ 63,024
Credit Quality Ratios -
ACLL to total loans 1.51 % 1.45 % ACLL to nonperforming loans 397
301
Net loan charge-offs (recoveries) to average loans 0.11 (0.13)
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.20 % 1.22 % ACLL to nonperforming loans 308
254
Net loan charge-offs (recoveries) to average loans (0.02) (0.02)
88
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Table 8 - Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan
Category
Net Loan
Charge-Offs (Recoveries) to Average Loans
Three Months Ended
September 30,
2022 2021
Traditional Banking:
Residential real estate:
Owner occupied (0.01) % (0.15) %
Nonowner occupied - -
Commercial real estate (0.07) -
Construction & land development -
- Commercial & industrial (0.13) - Paycheck Protection Program - - Lease financing receivables - - Aircraft - - Home equity (0.01) - Consumer: Credit cards 0.15 0.51 Overdrafts 111.26 63.97 Automobile loans (0.47) (0.13) Other consumer 3.49 1.66 Total Traditional Banking - (0.02) Warehouse lines of credit - - Total Core Banking (0.02) (0.02)Republic Processing Group : Tax Refund Solutions: Easy Advances* NM NM Other TRS loans NM NM Republic Credit Solutions 2.77 0.81
Total Republic Processing Group 1.42
(1.05) Total 0.11 % (0.13) % * All loss rates above are based on net charge-offs as a function of average outstanding portfolio balances. Easy Advances are originated during the first two months of each year, with all EAs charged-off 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 swung from net recoveries to total average loans of 0.13% during the third quarter of 2021 to net charge-offs to total average loans of 0.11% during the third quarter of 2022. The 24-basis-point negative swing was driven by net charge-offs within the Company's RPG operations. From the third quarter of 2021 to the third quarter of 2022, RPG experienced a$946,000 decrease in net EA recoveries within its TRS segment. For factors affecting the comparison of the TRS results of operations for the third quarter of 2022 and the third quarter of 2021, see section titled "OVERVIEW (Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 ) - Tax Refund Solutions." From the third quarter of 2021 to the third 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$1.8 million for the third quarter of 2022 from$733,000 for the third quarter of 2021, with government stimulus programs generally driving down usage of this product during the third quarter of 2021. Net charge-offs for RCS'sLOC II product were$809,000 for the third quarter of 2022 compared to$254,000 of net charge-offs for the third quarter of 2021, with this product first piloted during the first quarter of 2021.
During the third quarters of 2022 and 2021, the Company's
charge-offs to average
89
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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$155,000 , or 2%, for the third quarter of 2022 compared to the same period in 2021, primarily driven by a$94,000 increase in Interchange Fee Income and a$135,000 increase in Service Charges on Deposit Accounts. 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 endedSeptember 30, 2022 and 2021 were$1.8 million and$1.6 million . The total daily overdraft charges, net of refunds, included in interest income for the three months endedSeptember 30, 2022 and 2021 were$337,000
and$304,000 . Mortgage Banking segment
A decrease in Mortgage banking income for the quarter was caused by a large and rapid rise in long-term interest rates during the first nine months of 2022, which led to a significant slowdown in the origination of mortgage loans to be sold into the secondary market. As ofSeptember 30, 2022 , the 30-year mortgage rate was hovering near levels not generally seen since 2008. As a result, theCore Bank sold only$39 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold of 2.23% during the third quarter of 2022 compared to sales of$182 million with comparable cash-gain-as-a-percent-of-loans-sold of 2.82% during the third quarter of 2021. With theFOMC moving forward with its quantitative tightening program 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 decreased$728,000 during the third quarter of 2022 compared to the same period in 2021, primarily driven by a$687,000 decrease in net RT fees. The decrease in net RT fees was primarily driven by 3% overall decrease in RT volume from the 2021 to the 2022 tax season, with a significant portion of that decrease driven by the loss of one of TRS's Tax Providers following the announcement of the now-cancelledMay 2021 Asset Purchase Agreement. Also impacting the decrease in net RT fees from the third quarter of 2021 to the third quarter of 2022 was the previously mentioned two-week delay in the 2021 tax season, which pushed a greater percentage of RT volume into the third quarter of 2021. For factors affecting the comparison of the TRS results of operations for the third quarter of 2022 and the third quarter of 2021, see section titled "OVERVIEW (Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 ) - Tax Refund Solutions." 90
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Republic
RCS's noninterest income increased$952,000 , or 29%, during the third 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 third 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$306 million during the third quarter of 2022, a 13% increase from the same period in 2021.
The following table presents RCS program fees by product:
Table 9 - RCS Program Fees by Product
Three Months Ended Sep. 30,
(dollars in thousands) 2022 2021 $ Change % Change
Product:
Lines of credit $ 1,828 $ 1,535 $ 293 19 %
Hospital receivables 38 62 (24) (39)
Installment loans* 2,342 1,659 683 41
Total $ 4,208 $ 3,256 $ 952 29 %
* 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
third 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
third quarter of 2022 compared to the same period in 2021. The following
primarily drove the change in noninterest expense:
? Other noninterest expense increased by
within the Other noninterest expense category were as follows:
Meals, Entertainment, and Travel expenses increased
o community outreach and business-related travel increasing to nearer
pre-pandemic levels in combination with inflationary pressures on these costs.
o Freight and supplies expense increased
impacted by additional usage and inflation-related cost increases.
Provision for losses on off-balance sheet commitments increased
o primarily by an increase in the Bank's committed but unused lines of credit
during the previous 12 months.
Losses related to client disputes for unauthorized checks as well as
o unauthorized debit and credit card transactions increased
quarter.
o The remaining increase was spread over several miscellaneous accounts, with
these expenses rising back closer to pre-pandemic levels.
Salaries and Benefits expense increased
? the third quarter of 2022. The most notable changes within this category were
as follows:
o Employee benefit expense increased a net
increase in healthcare claims.
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Direct salaries increased a net
o annual merit increases was substantially offset by a 49-count reduction in
full-time equivalent employees.
Overhead salaries increased
was allocated to the Traditional Banking segment than the Mortgage Banking
segment during the third quarter of 2022 compared to the same period in 2021.
o Overhead salaries are allocated to the Traditional Banking and the Mortgage
Banking segments each period based on each segment's pro rata mortgage
production, with Mortgage Banking production disproportionately and negatively
impacted during 2022 following a rise in interest rates.
Estimated bonus expense decreased
o the third quarter of 2022, as the
reduced to bring it in-line with the current expected payouts for the year.
Warehouse Lending segment
Noninterest expense at the Warehouse segment decreased
quarter of 2022 compared to the same period in 2021, primarily due to lower
incentive compensation expense recorded during 2022, generally due to lower
Warehouse client loan volumes during 2022.
Mortgage Banking segment
Noninterest expense at the Mortgage Banking segment decreased$1.3 million , or 38%, during the third quarter of 2022 compared to the same period in 2021, primarily due to a$710,000 reduction in overhead salaries allocated to the Mortgage Banking segment and a$680,000 reduction in mortgage commissions, with both reductions resulting from the previously discussed slowdown in mortgage origination volume.
Republic
Noninterest expense at the RCS segment increased
third quarter of 2022 compared to the same period in 2021, primarily due to
increased marketing of RCS's
piloted during the first quarter of 2021.
OVERVIEW (Nine Months Ended
Total Company net income for the first nine months of 2022 was$71.3 million , a$1.3 million , or 2%, increase from the same period in 2021. Diluted EPS increased to$3.58 for the first nine months of 2022 compared to$3.39 for the same period in 2021. The increase in net income primarily reflected the following:
? The benefit of a
? The benefit of a
? A
? A
? An
The following are general highlights by reportable segment:
Traditional Banking segment
? Net income decreased
compared to the same period in 2021.
? Net interest income increased
2022 compared to the same period in 2021.
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? Provision was a net credit of
compared to a net credit of
? Noninterest income increased
compared to the same period in 2021.
? Noninterest expense increased
2022 compared to the same period in 2021.
?
nine months of 2022, driven primarily by strong CRE loan growth.
? Total nonperforming loans to total loans for the Traditional Banking segment
was 0.44% as of
? Delinquent loans to total loans for the Traditional Banking segment was 0.12%
as of
?
toSeptember 30, 2022 . Warehouse Lending segment
? Net income decreased
compared to the same period in 2021.
? Net interest income decreased
of 2022 compared to the same period in 2021.
The Warehouse Provision was a net credit of
? months of 2022 compared to a net credit of
2021.
? Average committed Warehouse lines remained at
months of 2022 compared to the first nine months of 2021.
? Average line usage was 40% during the first nine months of 2022 compared to 52%
during the same period in 2021.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 67%, during the first nine months of 2022 compared to the same
period in 2021.
Overall, Republic's proceeds from sale of secondary market loans totaled
million during the first nine months of 2022 compared to
? the same period in 2021, with the Company's
cash-gain-as-a-percent-of-loans-sold decreasing to 2.23% from 3.12% from period
to period.
Tax Refund Solutions segment
? Net income increased
compared to the same period in 2021.
? Net interest income increased
of 2022 compared to the same period in 2021.
? Total EA originations were
compared to
Overall, TRS recorded a net charge to the Provision of
? first nine months 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 nine
months of 2022 included a
and a
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? Net RT revenue decreased
compared to the same period in 2021.
? Noninterest expense was
compared to
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.
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 TRS Purchase Agreement;
Although to a lesser degree than in the 2021 tax season, management believes
3) stimulus programs from the Federal Government during the latter half of 2021
negatively impacted the 2022 tax season;
4) The Bank received a
following the cancellation of the Sales Transaction; and
5) The Bank received a
upon settling its lawsuit against Green Dot.
As it relates to factors impacting 2021, the processing season with theIRS started approximately two weeks later than normal. As a result, RT funding volume and loan repayments from theIRS lagged normal funding patterns in non-COVID-impacted years and effectively pushed RT revenue and loan recovery activity later into the 2021 calendar year. In addition, management believes government stimulus programs during 2021 negatively impacted demand for TRS EA and RT products. In addition to the more normal timing of the tax season in 2022 as compared to 2021, the fiscal year 2022 tax season, in totality, was favorably impacted by a contractual amendment with one of the Company's large Tax Providers. As a result of the amended contract, TRS shares certain revenues with this provider, while this provider absorbs certain overhead costs of the program and furnishes to TRS a loan loss guaranty ceiling as a percentage of EAs originated by this provider. Through this 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 TRS was approximately$266,000 for the$172 million of EA volume, while the benefit to TRS of the overhead costs absorbed by this provider was approximately$543,000 and the net benefit to TRS of the loan loss guaranty ceiling for the first nine months of 2022 was approximately$1.3 million . Negatively impacting the first nine months of 2022 as compared to the first nine months of 2021 was a loss of RT volume by RB&T to Green Dot from certain third-party Tax Providers following the execution of the TRS Purchase Agreement. While TRS was able to partially offset this lost volume through higher volume from other existing relationships, the lost volume to Green Dot from this one provider had a negative impact to the overall results of TRS for the first nine months of 2022 and may continue to have a negative impact to the overall results of TRS beyond 2022, if TRS is unable to win this business back through its normal solicitation process.
As a net result of all the factors in the preceding paragraphs as well as the
positive impact to non-interest income of the Green Dot settlement, TRS
experienced a net positive improvement to its first nine months of 2022
operating results as compared to the first nine months of 2021.
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Republic
? Net income increased
compared to the same period in 2021.
? Net interest income increased
of 2022 compared to the same period in 2021.
Overall, RCS recorded a net charge to the Provision of
? first nine months of 2022 compared to a net charge of
period in 2021.
? Noninterest income increased
of 2022 to the first nine months of 2022.
? Noninterest expense was
million for the same period in 2021.
? 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 7.60% as of September
30, 2022 compared to 6.48% as of
RESULTS OF OPERATIONS (Nine 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 rates trended lower in the first quarter of 2020 with the onset of the COVID pandemic, as theFOMC reduced the FFTR to approximately 25 basis points. With the rise of inflation during the latter half of 2021 and a steep inflationary rise during the first half of 2022, representing inflationary levels not seen in approximately 40 years, theFOMC began executing a quantitative tightening program by reducing its balance sheet, selling certain types of bonds in the market, and repeatedly increasing the FFTR. TheFOMC's increases to the FFTR during the first nine months of 2022 included the following: 95
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Table 10 - Increases to the Federal Funds Target Rate during 2022
Increase to FFTR
Date the FFTR after Increase
March 17, 2022 0.25 % 0.50 %
May 5, 2022 0.50 1.00
June 16, 2022 0.75 1.75
July 27, 2022 0.75 2.50
September 21, 2022 0.75 3.25
The FOMC's actions and signals continued to place upward pressure on long-term
market interest rates for bonds and loans during the third quarter of 2022.
Further monetary tightening by the Federal Reserve in the future will likely
cause both short-term and long-term market interest rates to increase during the
remainder of 2022 and, potentially, into 2023. 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.
months of 2022 and represented an increase of
months of 2021.
first nine months of 2022 compared to 3.86% 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 increased$2.2 million , or 2%, for the first nine months of 2022 compared to the same period in 2021. Traditional Banking's net interest margin was 3.20% for the first nine months of 2022, a decrease of one basis point from the same period in 2021.
The increase in the
months of 2022 was primarily attributable to the following factors:
increased
non-PPP loans at the
months of 2021 to
? benefit of growth in non-
increase in the
related fees and interest.
excluding the PPP-related elements, increased from 2.93% for the first nine
months of 2021 to 3.18% for the first nine months of 2022.
Increases in the FFTR during 2022 continued to benefit the
high level of interest-earning cash on its balance sheet, as well as its loan
? and investment portfolio yields. As a result, the
interest earning assets, excluding PPP, increased 19 basis points from the
first nine months of 2021 to the first nine months of 2022.
portfolio during the first nine months of 2022 compared to
? similar income during the same period in 2021. The
PPP fees and interest primarily highlighted the short-term nature of this
program, which was closer to its peak during the first nine months of 2022.
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Table 11 - Traditional Bank Net Interest Income and Net Interest Margin
Excluding PPP (Non-GAAP)
The Company earns fees and a coupon interest rate of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believesTraditional Bank net interest income excluding PPP fees and coupon interest is a more appropriate measure to analyze the performance of theTraditional Bank's net interest income and net interest margin. The following table reconcilesTraditional Bank net interest income and net interest margin toTraditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure. Net Interest Income Interest-Earning Assets Net Interest Margin Nine Months EndedSep. 30 , Nine Months EndedSep. 30 , Nine Months EndedSep. 30 , (dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change 2022 2021 %
Change
Traditional Banking - GAAP$ 121,868 $ 119,677 $ 2,191 2 %$ 5,081,360 $ 4,966,562 $ 114,798 2 % 3.20 % 3.21 % (0.01) % Less: Impact of PPP fees and interest 1,307 16,949 (15,642) (92) 19,844 299,458 (279,614) (93) 0.02 0.28
(0.26)
Traditional Banking ex PPP fees and interest - non-GAAP
2.93
0.25
As previously disclosed, both short-term and long-term market interest rates are expected to continue to increase during 2022 and, potentially, into 2023 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.
Warehouse Lending segment
Net interest income within the Warehouse segment decreased$8.0 million , or 41%, from the first nine months of 2021 to the first nine months of 2022, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from$745 million during the first nine months of 2021 to$545 million for the first nine months of 2022, driven largely by the sharp rise in long-term interest rates during 2022, which depressed mortgage-refinancing demand and resulted in a sharp drop in Warehouse line usage. In addition, the Warehouse net interest margin decreased 68 basis points from 3.47% during the first nine months of 2021 to 2.79% during the first nine months of 2022. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company's funds-transfer-pricing methodology, generally rose in tandem with the increase in short-term interest rates during the year, while its yield increases were delayed until the adjustable rates on its clients' lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited Warehouse's net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during 2022.Committed Warehouse lines-of-credit decreased from$1.4 billion as ofSeptember 30, 2021 to$1.2 billion as ofSeptember 30, 2022 , while average usage rates for Warehouse lines were 40% and 52%, respectively, during the first nine months 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. 97 Table of Contents Tax Refund Solutions segment
TRS's net interest income increased$3.2 million for the first nine months of 2022 compared to the same period in 2021, driven by an increase in EA fees, an increase in outstanding commercial loan balances, and an increase in interest income on TRS's prepaid card balances as a function of the Company's FTP methodology and a rise in interest rates. TRS's EA product earned$13.6 million in interest income during the first nine months of 2022, a$447,000 increase from the first nine months of 2021 resulting primarily from a$61 million increase in EA originations from period to period. For factors affecting the comparison of the TRS results of operations for the first nine months of 2022 and the first nine months of 2021, see section titled "OVERVIEW (Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 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."
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Republic
RCS's net interest income increased$3.5 million , or 22%, from the first nine months of 2021 to the first nine months of 2022. The increase was driven primarily by an increase in fee income from RCS's LOC products partially offset by a decrease in interest income from RCS's hospital receivables. RCS's LOC loan fees, which are recorded as interest income on loans, increased to$18.1 million during the first nine months of 2022 compared to$12.6 million during the same period in 2021. Interest income on RCS's LOC I product increased$2.6 million , driven by a$5 million increase in average outstanding balances for this product from the first nine months of 2021 to the first nine months of 2022. Interest income on RCS'sLOC II product increased$2.3 million , as the Company first piloted this product during the first nine months of 2021 with limited outstanding balances during the pilot phase. Interest income from RCS's hospital receivables decreased$1.4 million from the first nine months 2021 to the same period in 2022 resulting from a$33 million decrease in average receivables from period to period. Overall product demand for the RCS segment is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact demand for its various consumer loan products. A rising interest rate environment, however, likely will impact the Company's internal FTP cost allocated to this segment. As a result, the impact of rising interest rates to RCS during 2022 will be negative to the segment's financial results, although the exact amount of the negative impact will depend on the internal FTP cost assigned, as well as the overall volume and mix of loans it generates. 99
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Table 12 - Total Company Average Balance Sheets and Interest Rates
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 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 $ 800,643 $ 6,243
1.04 %
Investment securities, including FHLB
stock (1)
664,455 8,151 1.64 560,780 5,857 1.39 TRS Easy Advance loans (2) 31,946 13,606
56.79 35,203 13,159 49.84 RCS LOC products (2) 28,123 18,119 85.90 18,648 12,552 89.75 Other RPG loans (3) (7) 96,448 4,392 6.07 116,709 5,196 5.94Outstanding Warehouse lines of credit (4) (7) 545,301 15,444 3.78 744,522 20,892 3.74 Paycheck Protection Program loans (5) (7) 19,844 1,307 8.78 299,458 16,949 7.55 All other Core Bank loans (6) (7) 3,611,777 108,669 4.01 3,349,804 100,546 4.00 Total interest-earning assets 5,798,537 175,931 4.05 5,917,982 175,927 3.96 Allowance for credit loss (68,847) (67,415) Noninterest-earning assets: Noninterest-earning cash and cash equivalents 210,637 177,667 Premises and equipment, net 34,355
38,891 Bank owned life insurance 100,146 88,414 Other assets (1) 171,819 188,250 Total assets$ 6,246,647 $ 6,343,789
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities: Transaction accounts$ 1,698,005 $ 762 0.06 %$ 1,551,690 $ 266 0.02 % Money market accounts 791,625 863 0.15 776,448 292 0.05 Time deposits 244,412 1,916 1.05 305,456 2,871 1.25 Reciprocal money market and time deposits 60,627 113 0.25 273,312 585 0.29 Brokered deposits - - - 38,864 23 0.08
Total interest-bearing deposits 2,794,669 3,654 0.17 2,945,770 4,037 0.18 SSUARs and other short-term borrowings 271,276 171 0.08 201,992 37 0.02 Federal Home Loan Bank advances 21,099 226 1.43 30,989 47 0.20 Subordinated note - - - 41,089 507 1.65 Total interest-bearing liabilities 3,087,044 4,051 0.17 3,219,840 4,628 0.19 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,201,793
2,163,334 Other liabilities 107,814 115,730 Stockholders' equity 849,996 844,885 Total liabilities and stock-holders' equity$ 6,246,647 $ 6,343,789 Net interest income$ 171,880 $ 171,299 Net interest spread 3.88 % 3.77 % Net interest margin 3.95 % 3.86 %
(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
nine months ended
(5) Interest income includes loan fees of
nine months ended
(6) Interest income includes loan fees of
nine 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.
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Table 13 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 13 - Total Company Volume/Rate Variance Analysis
Nine Months Ended September 30, 2022
Compared to
Nine Months Ended September 30, 2021
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ 5,467 $ 7 $ 5,460
Investment securities, including
FHLB stock 2,294 1,180 1,114
TRS Easy Advance loans* 447 2,897 (2,450)
RCS LOC products 5,567 6,126 (559)
Other RPG loans (804) (920) 116
Outstanding Warehouse lines of
credit (5,448) (5,641) 193
Paycheck Protection Program loans (15,642) (18,030)
2,388 All other Core Bank loans 8,123 7,882 241 Net change in interest income 4 (6,499) 6,503 Interest expense: Transaction accounts 496 27 469 Money market accounts 571 6 565 Time deposits (955) (522) (433) Reciprocal money market and time deposits (472) (405) (67) Brokered deposits (23) (23) - SSUARs and other short-term borrowings 134 16 118
Federal Home Loan Bank advances 179 (20) 199 Subordinated note (507) (507) - Net change in interest expense (577) (1,428) 851
Net change in net interest income $ 581 $ (5,071)
* 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 nine months endedSeptember 30, 2022 and 2021. The unannualized EA yield as a function of total EA originations was 4.37% and 5.26% for the nine months endedSeptember 30, 2022 and 2021. 101 Table of Contents Provision Total Company Provision was a net charge of$14.5 million for the first nine months of 2022 compared to a net charge of$12.2 million for the same period in 2021.
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 nine months of 2022 was a net credit of$287,000 compared to a net credit of$126,000 for the first nine months of 2021. An analysis of the Provision for the first nine months of 2022 compared to the same period in 2021 follows:
? For the first nine months of 2022, the Traditional Bank Provision primarily
reflected the following:
o
upgrade of Substandard and Special Mention loans.
o
tied to general formula reserves for loan growth. For the first nine months of 2021, there was a minimal net credit to the
Traditional Bank Provision, generally based on an improving economic outlook in
conjunction with limited net charge-offs incurred by the
making significant life-of-loan reserves during 2020 following the onset of the
? pandemic. The net credit recorded during the first nine months of 2021
primarily included nominal ACLL releases for the residential real estate, CRE,
and HELOC portfolios offset by additional reserves for certain Special Mention
loans with continued signs of pandemic-related hardship through
2021.
As a percentage of totalTraditional Bank loans, the Traditional Banking ACLL was 1.31% as ofSeptember 30, 2022 compared to 1.41% as ofDecember 31, 2021 and 1.42% as ofSeptember 30, 2021 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofSeptember 30, 2022 .
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in
this section of the filing under "Comparison of Financial Condition" for
additional discussion regarding the Provision and the Bank's credit quality.
Warehouse Lending segment
Warehouse recorded a net credit to the Provision of$1.0 million for the first nine months of 2022 compared to a net credit of$530,000 for the same period in 2021. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances.Outstanding Warehouse period-end balances decreased$408 million during the first nine months of 2022 compared to a decrease of$212 million during the first nine months of 2021. As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofSeptember 30, 2022 ,December 31, 2021 , andSeptember 30, 2021 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofSeptember 30, 2022 .
Tax Refund Solutions segment
TRS recorded a net charge to the Provision of$7.0 million during the first nine months of 2022 compared to a net charge of$7.9 million for the same period in 2021. Substantially all TRS Provision in both periods was related to its EA product. TRS recorded a charge to the Provision for EA loans of$7.6 million , or 2.44% of its$311 million in EAs originated during the first nine months of 2022 compared to a charge to the Provision of$8.0 million , or 3.19% of its$250 million of EAs originated during the first nine months of 2021. The decrease in Provision for the first nine months of 2022 was primarily due to the following two factors:
TRS received a contractual loan loss guaranty from one of its large Tax
1) Providers during 2022 that set a percentage ceiling on losses for EAs
originated through this provider. Through this provider, TRS originated $172
million of EAs during the
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first nine months of 2022. The net benefit to the TRS Provision for this loan
loss guaranty arrangement during the first nine months of 2022 was approximately
In addition to its contractual guaranty discussed in the previous bullet (1),
TRS experienced delayed EA paydowns during the first nine months of 2021 with
2) the start of the
federal government stimulus programs during the first nine months of 2021,
which generally utilized resources of the
the programs.
With all unpaid or unguaranteed EAs having been charged off as ofJune 30, 2022 , any payments received for unguaranteed EAs during the fourth quarter of 2022 will continue to represent recovery credits directly to income. For factors affecting the comparison of the TRS results of operations for the first nine months of 2022 and the first nine months of 2021, see section titled "OVERVIEW (Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 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
As illustrated in Table 14 below, RCS recorded a net charge to the Provision of$8.8 million during the first nine months of 2022 compared to a net charge to the Provision of$5.0 million for the same period in 2021. The increase in the Provision was driven primarily by a$7.2 million increase in net charge-offs on RCS's line-of-credit products. Net charge-offs for RCS's LOC I product increased to$5.1 million for the first nine months of 2022 from$1.9 million during the first nine months of 2021, with government stimulus programs generally driving down usage of this product during the first nine months of 2021. Net charge-offs for RCS'sLOC II product were$2.1 million for the first nine months of 2022 compared to$254,000 of net charge-offs during the first nine months of 2021. While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 14.73% as ofSeptember 30, 2022 , 13.91% as ofDecember 31, 2021 , and 9.99% as ofSeptember 30, 2021 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as ofSeptember 30, 2022 .
The following table presents net charges to the RCS Provision by product:
Table 14 - RCS Provision by Product
Nine Months Ended Sep. 30,
(in thousands) 2022 2021 $ Change % Change
Product:
Lines of credit $ 8,827 $ 5,036 $ 3,791 75 %
Hospital receivables 9 1 8 800
Total $ 8,836 $ 5,037 $ 3,799 75 %
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Table 15 - Summary of Loan and Lease Loss Experience
Nine Months Ended
September 30,
(dollars in thousands) 2022 2021
ACLL at beginning of period $ 64,577 $ 61,067
Charge-offs:
Traditional Banking:
Commercial real estate - (428)
Commercial & industrial - (35)
Consumer (861) (649)
Total Traditional Banking (861) (1,112)
Warehouse lines of credit - -
Total Core Banking (861) (1,112)
Republic Processing Group :
Tax Refund Solutions:
Easy Advances (11,505) (10,226)
Other TRS loans (154) (21)
Republic Credit Solutions (8,005) (2,427)
Total Republic Processing Group (19,664) (12,674)
Total charge-offs (20,525) (13,786)
Recoveries:
Traditional Banking:
Residential real estate 93 376
Commercial real estate 277 82
Commercial & industrial 141 27
Home equity 119 46
Consumer 305 371
Total Traditional Banking 935 902
Warehouse lines of credit - -
Total Core Banking 935 902
Republic Processing Group :
Tax Refund Solutions:
Easy Advances 3,922 2,242
Other TRS loans 665 (3)
Republic Credit Solutions 804 247
Total Republic Processing Group 5,391 2,486
Total recoveries 6,326 3,388
Net loan charge-offs (14,199) (10,398)
Provision - Core Banking (1,271) (532)
Provision - RPG 15,812 12,887
Total Provision 14,541 12,355
ACLL at end of period $ 64,919 $ 63,024
Credit Quality Ratios -
ACLL to total loans 1.51 % 1.45 % ACLL to nonperforming loans 397 301
Net loan charge-offs to average loans 0.44 0.30
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.20 % 1.22 %
ACLL to nonperforming loans 308 254
Net loan charge-offs to average loans - 0.01
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Table 16 - Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan
Category
Net Loan
Charge-Offs (Recoveries) to Average Loans
Nine Months Ended
September 30,
2022 2021
Traditional Banking:
Residential real estate:
Owner occupied (0.01) % (0.06) %
Nonowner occupied - -
Commercial real estate (0.02) 0.03
Construction & land development -
- Commercial & industrial (0.05) - Paycheck Protection Program - - Lease financing receivables - - Aircraft - - Home equity (0.07) (0.03) Consumer: Credit cards 0.21 0.74 Overdrafts 90.38 41.32 Automobile loans (0.02) (0.15) Other consumer 1.19 - Total Traditional Banking - 0.01 Warehouse lines of credit - - Total Core Banking - 0.01Republic Processing Group : Tax Refund Solutions: Easy Advances* 30.29 29.13 Other TRS loans (6.49) 0.20 Republic Credit Solutions 10.32 2.55
Total Republic Processing Group 13.89
8.27 Total 0.44 % 0.30 % * All loss rates above are based on net charge-offs as a function of average outstanding portfolio balances. Easy Advances are originated during the first two months of each year, with all EAs charged-off 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 0.30% during the first nine months of 2021 to 0.44 % during the first nine months of 2022, with net charge-offs increasing$3.8 million and average total Company loans decreasing$231 million , or 5%. The increase in net charge-offs was primarily driven by a$4.1 million increase in net charge-offs within the Company's RPG operations, which has historically conducted higher-risk lending activities than the Company's Core Banking operations. From the first nine months of 2021 to the first nine months of 2022, RPG experienced a$5.0 million increase in net charge-offs within its RCS segment. Net charge-offs for RCS's LOC I product increased to$5.1 million for the first nine months of 2022 from$1.9 million for the first nine months of 2021, with government stimulus programs generally driving down usage of this product during the first nine months of 2021. Net charge-offs for RCS'sLOC II product were$2.1 million for the first nine months of 2022 compared to$254,000 of net charge-offs for the first nine months of 2021, with this product first piloted during the first quarter of 2021. From the first nine months of 2021 to the first nine months of 2022, RPG experienced a$938,000 decrease in net charge-offs within its TRS segment, as TRS amended one of its existing Tax Provider contracts to place a cap on loan losses from EAs originated through this Tax Provider. For factors affecting the comparison of the TRS results of operations for the first nine months of 2022 and the first nine months of 2021, see section titled "OVERVIEW (Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 ) - Tax Refund Solutions."
During the first nine months of 2022 and 2021, the Company's
charge-offs to average
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Noninterest Income
months 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$364,000 , or 2%, for the first nine months of 2022 compared to the same period in 2021, driven primarily by a$783,000 increase in Service Charges on Deposit Accounts offset by a$399,000 nonrecurring gain on sale of a former banking center recorded during the first nine months of 2021. The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the nine months endedSeptember 30, 2022 and 2021 were$5.1 million and$4.0 million . The total daily overdraft charges, net of refunds, included in interest income for the nine months endedSeptember 30, 2022 and 2021 were$933,000
and$810,000 . Mortgage Banking segment
A significant rise in long-term interest rates during the first nine months of 2022 led to a significant slowdown in the origination and subsequent sale of mortgage loans into the secondary market. As a result, Mortgage Banking income decreased from$16.7 million during the first nine months of 2021 to$5.6 million for the first nine months of 2022. For the first nine months of 2022, the Bank sold$226 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold during the quarter of 2.23%. During the first nine months of 2021, however, long-term interest rates were closer to historical lows, driving secondary market loan sales of$563 million with comparable cash-gain-as-a-percent-of-loans-sold of 3.12%. With theFOMC moving forward with its quantitative tightening program during 2022 and, potentially, into 2023, 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.
Tax Refund Solutions segment
TRS's noninterest income increased$14.6 million , or 65%, during the first nine months of 2022 compared to the same period in 2021. Green Dot paid RB&T a total of$18 million in nonrecurring payments during the first nine months of 2022 related to the now-cancelled TRS Purchase Agreement. These nonrecurring payments included the following:
A contract termination fee of
? Green Dot a notice of termination of the
the sale of substantially all of RB&T's TRS assets and operations to Green Dot.
? A legal settlement of
against Green Dot.
Regarding TRS's RT product, net RT revenue decreased 17% from$19.9 million during the first nine months of 2021 to$16.6 million during the same period in 2022. The decrease was primarily driven by an 3% overall decrease in RT volume from the 2021 to the 2022 tax season, with a substantial portion of that decrease driven by the loss of one of TRS's tax providers following the announcement of the now-cancelledMay 2021 Asset Purchase Agreement. For factors affecting the comparison of the TRS results of operations for the first nine months of 2022 and the first nine months of 2021, see section titled "OVERVIEW (Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 ) - Tax Refund Solutions." 106
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Republic
RCS's noninterest income increased$3.3 million , or 46%, during the first nine months of 2022 compared to the same period in 2021, with program fees representing the entirety of RCS's noninterest income. The increase in RCS program fees primarily reflected higher sales volume from RCS's line of credit and installment loan products as sales volume was negatively impacted during the first nine months of 2021 by federal government stimulus programs implemented to combat the economic impact of the COVID pandemic. Proceeds from the sale of RCS loan products totaled$832 million during the first nine months of 2022, an 49% increase from the same period in 2021.
The following table presents RCS program fees by product:
Table 17 - RCS Program Fees by Product
Nine Months Ended Sep. 30,
(dollars in thousands) 2022 2021 $ Change
% Change Product: Lines of credit $ 4,647$ 3,433 $ 1,214 35 % Hospital receivables 125 133 (8) (6) Installment loans* 5,712 3,630 2,082 57 Total$ 10,484 $ 7,196 $ 3,288 46 %
* 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
first nine months 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$4.1 million for the first nine months of 2022 compared to the same period in 2021. The following primarily drove the change in noninterest expense:
? Other noninterest expense increased by
fluctuations within the Other noninterest expense category were as follows:
Losses related to client disputes for unauthorized checks as well as
o unauthorized debit and credit card transactions increased
first nine months of the year.
Meals, Entertainment, and Travel expenses increased
o community outreach and business-related travel increasing to nearer
pre-pandemic levels in combination with inflationary pressures on these costs.
o Freight and supplies expense increased
impacted by additional usage and inflation-related cost increases.
Provision for losses on off-balance sheet commitments increased
o primarily by an increase in the Bank's committed but unused lines of credit
during the previous 12 months.
o The remaining increase was spread over several miscellaneous accounts, with
these expenses rising back closer to pre-pandemic levels.
Salaries and Benefits expense increased a net
? million for the first nine months of 2022. The most notable changes within this
category were as follows:
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Direct salaries increased a net
o annual merit increases was substantially offset by a 49-count reduction in
full-time equivalent employees.
Overhead salaries increased
was allocated to the Traditional Banking segment than the Mortgage Banking
segment during the first nine months 2022 compared to the same period in 2021.
o Overhead salaries are allocated to the Traditional Banking and the Mortgage
Banking segments each period based on each segment's pro rata mortgage
production, with Mortgage Banking production disproportionately and negatively
impacted during 2022 following a rise in interest rates.
Mortgage Banking segment
Noninterest expense at the Mortgage Banking segment decreased$1.9 million , or 20%, during the first nine months of 2022 compared to the same period in 2021, primarily due to a$796,000 reduction in overhead salaries allocated to the Mortgage Banking segment and a$2.1 million reduction in mortgage commissions offset by a$1.7 million reduction in credits to deferred salary expense. The Company records a credit offset to salary expense for each loan it originates and recognizes the cost of that credit as an adjustment to the loan's yield over its estimated life. The amount of credit benefit to salary expense during a given quarter is determined by the overall loan origination volume during that quarter. With the dramatic decrease in mortgage origination volume during 2022, the overall credit benefit recognized by the Mortgage Banking segment during the first nine months of 2022 decreased substantially as compared to the first nine months of 2021 when mortgage origination volume was much higher.
Republic
Noninterest expense at the RCS segment increased$2.4 million , or 72%, during the first nine months of 2022 compared to the same period in 2021, primarily due to increased marketing of RCS'sLOC II product. The LOC II product was first piloted during the first quarter of 2021.
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$754 million in cash and cash equivalents as ofSeptember 30, 2022 compared to$757 million as ofDecember 31, 2021 . Although the Company deployed some of its excess cash through the purchase of long-term investment securities during the fourth quarter of 2021 and the first nine months of 2022 as a result of movements in the yield curve, it has maintained an overall general strategy of keeping a large amount of cash on balance sheet for interest rate risk protection. This strategy benefitted theTraditional Bank's net interest income during the first nine months of 2022 as theFOMC began raising the FFTR. For additional discussion regarding the Bank's net interest income, see the sections titled "Net Interest Income" in this section of the filing under "RESULTS OF OPERATIONS (Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 ) and "RESULTS OF OPERATIONS (Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 ). For cash held at the FRB, the Bank earns a yield on amounts exceeding required reserves. This cash earned a weighted-average yield of 1.04% during the first nine months of 2022 with a spot balance yield of 3.15% onSeptember 30, 2022 . For cash held within the Bank's banking center and ATM networks, the Bank does not earn interest. 108 Table of ContentsInvestment Securities
Table 18 - Purchases of
Nine Months
Ended
Purchase Yield to Average (in thousands) Cost Maturity Life Purchases by Class for the Three Months EndedMarch 31, 2022 U.S. Treasury $ 85,614 1.51 % 2.5 yrs U.S. Government Agencies 10,028 1.39 10.0 Mortgage-backed securities - residential 20,134 1.25 10.0 Total$ 115,776 1.45 4.4 yrs Purchases by Class for the Three Months EndedJune 30, 2022 U.S. Treasury $ 74,043 2.62 % 2.1 yrs Total $ 74,043 2.62 2.1 yrs Purchases by Class for the Three Months EndedSeptember 30, 2022 U.S. Government Agencies $ 55,001 3.98 % 2.6 yrs Total $ 55,001 3.98 2.6 yrs Total Purchases for the Nine Months Ended September 30, 2022$ 244,820 2.37 % 3.3 yrs During the third quarter, management generally targeted purchases of investment securities with maturities of approximately two years. While the Company will likely continue to replace some of its maturing investments with new purchases, it will likely maintain a general policy of limited growth in the total securities portfolio in the near-term as long as its yield on interest-earning cash continues to rise in proportion to future FFTR increases. The overall timing and amount of any purchases will depend on many factors including, but not limited to, the Company's overall current and projected liquidity positions, its customers' demand for its loans and deposit products, the interest rate environment at the time, as well as the anticipated interest rate environment in the near and long term. 109
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Table 19 - Loan Portfolio Composition
(dollars in thousands) September 30, 2022 December
31, 2021 $ Change % Change
Traditional Banking: Residential real estate: Owner occupied $ 863,899 $ 820,731$ 43,168 5 % Nonowner occupied 321,037 306,323 14,714 5 Commercial real estate 1,571,593 1,456,009 115,584 8 Construction & land development 147,418 129,337 18,081 14 Commercial & industrial 404,971 340,363 64,608 19 Paycheck Protection Program 7,855 56,014 (48,159) (86) Lease financing receivables 11,333
8,637 2,696 31 Aircraft 166,313 142,894 23,419 16 Home equity 229,038 210,578 18,460 9 Consumer: Credit cards 14,897 14,510 387 3 Overdrafts 723 683 40 6 Automobile loans 7,890 14,448 (6,558) (45) Other consumer 973 1,432 (459) (32) Total Traditional Banking 3,747,940 3,501,959 245,981 7 Warehouse lines of credit* 442,238 850,550 (408,312) (48) Total Core Banking 4,190,178 4,352,509 (162,331) (4) Republic Processing Group*: Tax Refund Solutions: Easy Advances - - - NM Other TRS loans 295 50,987 (50,692) (99)
Republic Credit Solutions 98,977 93,066 5,911 6Total Republic Processing Group 99,272
144,053 (44,781) (31)
Total loans** 4,289,450 4,496,562 (207,112) (5) Allowance for credit losses (64,919) (64,577) (342) 1 Total loans, net $ 4,224,531 $ 4,431,985$ (207,454) (5)
*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$207 million , or 5%, during the first nine months of 2022 to$4.3 billion as ofSeptember 30, 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$246 million , or 7%, fromDecember 31, 2021 toSeptember 30, 2022 . The following primarily drove the change in loan balances during the first nine months of 2022:
CRE loans grew
? during the first nine months of 2022, as the
strong loan demand within its Corporate Lending division, its Private, CRE, and
Commercial Banking division, and its
With mortgage refinance volume at all-time record levels during 2020 and 2021,
balances of 1-4 family loans, including HELOCs, generally declined as the vast
majority of the volume of refinancings was sold into the secondary market. This
? trend began to change in 2022, however, as a significant rise in long-term,
fixed-rate mortgages caused portfolio level ARM loans to become generally more
attractive than secondary market loans. As a result, residential real estate
loans increased
increased$18 million during the same period. 110 Table of Contents
Offsetting the growth above, during the first nine months of 2022, the Core
? Bank's PPP portfolio decreased
program 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 ofSeptember 30, 2022 , net PPP loans of$8 million remained on theTraditional Bank's balance sheet. Warehouse Lending segmentOutstanding Warehouse period-end balances decreased$408 million fromDecember 31, 2021 toSeptember 30, 2022 . Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank's Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on 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$51 million fromDecember 31, 2021 toSeptember 30, 2022 primarily reflecting a$51 million reduction in other TRS loans. 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 nine months of the following year.
Allowance for Credit Losses
As ofSeptember 30, 2022 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly. The Company's ACLL remained at$65 million fromDecember 31, 2021 toSeptember 30, 2022 . As a percent of total loans, the total Company's ACLL increased to 1.51% as ofSeptember 30, 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 decreased approximately$177,000 to$49 million as ofSeptember 30, 2022 driven primarily by formula reserves tied to loan growth during the first nine months of 2022 partially offset by reserves released following the payoff or upgrade of loans graded Substandard or Special Mention. 111 Table of Contents Warehouse Lending segment The Warehouse ACLL decreased to approximately$1.0 million , and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparingSeptember 30, 2022 toDecember 31, 2021 . As ofSeptember 30, 2022 , the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first nine months of 2022.
Republic
The RCS ACLL increased
RCS maintained an ACLL for two distinct credit products offered as ofSeptember 30, 2022 , including its line-of-credit products and its healthcare-receivables products. As ofSeptember 30, 2022 , the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 56% for itsLOC II product. The lower reserve percentage of 0.25% was provided for RCS's healthcare receivables, as such receivables have recourse back to the third-party providers. Table 17 - Management's Allocation of the Allowance for Credit Losses on Loans September 30, 2022 December 31, 2021 Percent of Percent of Percent of Percent of Loans to ACLL to Loans to ACLL to Total Total Total Total (dollars in thousands) ACLL Loans* Loan Class ACLL Loans* Loan Class* Traditional Banking: Residential real estate: Owner occupied$ 8,466 21 % 0.98 %$ 8,647 19 % 1.05 Nonowner occupied 2,796 7 0.87 2,700 7 0.88 Commercial real estate 23,203 37 1.48 23,769 32 1.63
Construction & land development 3,922 3 2.66
4,128 3 3.19 Commercial & industrial 3,974 9 0.98 3,487 8 1.02 Paycheck Protection Program - - - - 1 - Lease financing receivables 119 - 1.05 91 - 1.05 Aircraft 416 4 0.25 357 3 0.25 Home equity 4,399 5 1.92 4,111 5 1.95 Consumer: - - - Credit cards 959 1 6.44 934 - 6.44 Overdrafts 723 1 100.00 683 - 100.00 Automobile loans 101 - 1.28 186 - 1.29 Other consumer 153 - 15.72 314 - 21.93 Total Traditional Banking 49,231 88 1.31 49,407 78 1.41 Warehouse lines of credit 1,105 10 0.25 2,126 19 0.25 Total Core Banking 50,336 98 1.20 51,533 97 1.18Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - Other TRS loans - - - 96 1 0.19 Republic Credit Solutions 14,583 2 14.73 12,948 2 13.91
Total Republic Processing Group 14,583 2 14.69
13,044 3 9.06 Total$ 64,919 100 1.51$ 64,577 100 1.44
* Values of less than 50 basis points are rounded down to zero.
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Asset Quality
Classified and Special Mention Loans
The Bank applies credit quality indicators, or ratings, to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated "Loss," "Doubtful," "Substandard," and PCD-Substandard are considered "Classified." Loans rated "Special Mention" or PCD-Special Mention are considered Special Mention. The Bank's Classified and Special Mention loans decreased approximately$47 million during the first nine months of 2022, driven primarily by commercial-purpose loans repaid or upgraded to a Pass rating during the first nine months of 2022.
See Footnote 4 "Loans and Allowance for Credit Losses" of Part I Item 1
"Financial Statements" for additional discussion regarding Classified and
Special Mention loans.
Table 18 - Classified and Special Mention Loans
(dollars in thousands) September 30, 2022 December 31, 2021 $ Change % Change Loss $ - $ - $ - - % Doubtful - - - - Substandard 16,893 21,714 (4,821) (22) PCD - Substandard 1,547 1,692 (145) (9) Total Classified Loans 18,440 23,406 (4,966) (21) Special Mention 72,623 114,496 (41,873) (37) PCD - Special Mention 737 795 (58) (7) Total Special Mention Loans 73,360
115,291 (41,931) (36)
Total Classified and Special Mention Loans $ 91,800 $ 138,697$ (46,897) (34) % 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$3 million and$6 million as ofSeptember 30, 2022 andDecember 31, 2021 . Nonperforming loans to total loans decreased to 0.38% atSeptember 30, 2022 from 0.46% atDecember 31, 2021 , as the total balance of nonperforming loans decreased by$4 million , or 20%, while total loans decreased$207 million , or 5%, during the first nine months of 2022. As presented in Tables 25 and 26 below, the decrease in nonperforming loans during 2022, including the nonaccrual loan component, was primarily driven by the refinancing of$8 million of these loans to another financial institution. The ACLL to total nonaccrual loans increased to 398% as ofSeptember 30, 2022 from 315% as ofDecember 31, 2021 , as the total ACLL increased$342,000 and the balance of nonaccrual loans decreased by$4 million , or 20%. The driver of the decrease in nonaccrual loans was primarily the refinancing out of the Bank of$8 million of these loans during the first nine months of 2022. 113
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Table 19 - Nonperforming Loans and Nonperforming Assets Summary
(dollars in thousands) September 30, 2022 December 31, 2021 Loans on nonaccrual status* $ 16,322 $ 20,504 Loans past due 90-days-or-more and still on accrual** 37 48 Total nonperforming loans 16,359 20,552 Other real estate owned 1,634 1,792 Total nonperforming assets $ 17,993 $ 22,344 Credit Quality Ratios -Total Company : ACLL to total loans 1.51 % 1.44 % Nonaccrual loans to total loans 0.38 0.46 ACLL to nonaccrual loans 398 315 Nonperforming loans to total loans 0.38 0.46 Nonperforming assets to total loans (including OREO) 0.42 0.50 Nonperforming assets to total assets 0.30 0.37 Credit Quality Ratios -Core Bank : ACLL to total loans 1.20 % 1.18 % Nonaccrual loans to total loans 0.39 0.47 ACLL to nonaccrual loans 308 251 Nonperforming loans to total loans 0.39 0.47 Nonperforming assets to total loans (including OREO) 0.43 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 20 - Nonperforming Loan Composition
September 30, 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 $ 13,604 1.57 % $ 12,039 1.47 %
Nonowner occupied 125 0.04 95 0.03
Commercial real estate 1,051 0.07 6,557 0.45
Construction & land development - - -
- Commercial & industrial - - 13 0.00 Paycheck Protection Program - - - - Lease financing receivables - - - - Aircraft - - - - Home equity 1,291 0.56 1,700 0.81 Consumer: Credit cards - - - - Overdrafts - - 1 0.15 Automobile loans 35 0.44 97 0.67 Other consumer 216 22.20 3 0.21 Total Traditional Banking 16,322 0.44 20,505 0.59 Warehouse lines of credit - - - - Total Core Banking 16,322 0.39 20,505 0.47Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - Other TRS loans - - - - Republic Credit Solutions 37 0.04 47 0.05
Total Republic Processing Group 37 0.04 47
0.03 Total nonperforming loans$ 16,359 0.38 %$ 20,552 0.46 % 114 Table of Contents
Table 21 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance September 30, 2022 Balance >$100 & Balance Total (dollars in thousands) No. <=$100 No. <=$500 No. >$500 No. Balance Traditional Banking: Residential real estate: Owner occupied 142$ 4,771 44$ 7,407 1$ 1,426 187$ 13,604 Nonowner occupied 4 125 - - - - 4 125 Commercial real estate - - 1 243 1 808 2 1,051
Construction & land development - - - - - - - - Commercial & industrial - - - - - - - - Paycheck Protection Program - - - - - - - - Lease financing receivables - - - -
- - - - Aircraft - - - - - - - - Home equity 27 745 3 546 - - 30 1,291 Consumer: Credit cards - - - - - - - - Overdrafts NM - - - - - NM - Automobile loans 6 35 - - - - 6 35 Other consumer 1 1 1 215 - - 2 216
Total Traditional Banking 180 5,677 49 8,411 2 2,234 231 16,322 Warehouse lines of credit - - - - - - - - Total Core Banking 180 5,677 49 8,411
2 2,234 231 16,322
Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - - - - - Other TRS loans - - - - - - - -
Republic Credit Solutions NM 37 - - - - NM 37Total Republic Processing Group NM 37 - - - - NM 37 Total 180$ 5,714 49$ 8,411 2$ 2,234 231$ 16,359 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$ 20,552 115 Table of Contents
Table 25 - Roll-forward of Nonperforming Loans
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2022 2021 2022 2021
Nonperforming loans at the beginning
of the period $ 16,210 $ 22,344 $ 20,552 $ 23,595
Loans added to nonperforming status
during the period that remained
nonperforming at the end of the period 3,554 1,248 5,778 2,641
Loans removed from nonperforming
status during the period that were
nonperforming at the beginning of the
period (see table below) (3,051) (2,233) (9,021) (4,839)
Principal balance paydowns of loans
nonperforming at both period ends (349) (384) (940) (1,098)
Net change in principal balance of
other loans nonperforming at both
period ends* (5) (32)
(10) 644
Nonperforming loans at the end of the period$ 16,359 $ 20,943 $
16,359
* Includes relatively small consumer portfolios, e.g. RCS loans.
Table 26 - Detail of Loans Removed from Nonperforming Status
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2022 2021 2022 2021
Loans charged off $ - $ - $ - $ -
Loans transferred to OREO - - - -
Loan payoffs and paydowns (2,431) (2,150) (8,125) (4,559)
Loans returned to accrual status (620) (83)
(1) (280)
Total loans removed from nonperforming status during the period that were nonperforming at the beginning of the period$ (3,051) $ (2,233) $
(8,126)
Based on the Bank's review as of
its reserves are adequate to absorb expected losses on all nonperforming loans.
Delinquent Loans
loans to total
0.17% as of
loans, all
116
Table of Contents
Table 24 - Delinquent Loan Composition*
September 30, 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 $ 3,761 0.44 % $ 1,599 0.19 %
Nonowner occupied 41 0.01 - -
Commercial real estate - - 5,292 0.36
Construction & land development - - -
- Commercial & industrial 1 0.00 21 0.01 Paycheck Protection Program - - - - Lease financing receivables - - - - Aircraft - - - - Home equity 315 0.14 314 0.15 Consumer: Credit cards 33 0.22 30 0.21 Overdrafts 157 21.72 164 24.01 Automobile loans 53 0.67 9 0.06 Other consumer 7 0.72 1 0.07 Total Traditional Banking 4,368 0.12 7,430 0.21 Warehouse lines of credit - - - - Total Core Banking 4,368 0.10 7,430 0.17Republic Processing Group : Tax Refund Solutions: Easy Advances - - - - Other TRS loans - - - - Republic Credit Solutions 7,522 7.60 6,035 6.48
Total Republic Processing Group 7,522 7.58 6,035
4.19 Total delinquent loans$ 11,890 0.28 %$ 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.
117
Table of Contents
Table 28 - Roll-forward of Delinquent Loans
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2022 2021 2022 2021
Delinquent loans at the beginning of
the period $ 11,451 $ 18,718 $ 13,465 $ 19,947
Loans added to delinquency status
during the period and remained in
delinquency status at the end of the
period 2,531 945 3,767 1,268
Loans removed from delinquency status
during the period that were in
delinquency status at the beginning of
the period (see table below) (3,466) (3,109) (6,803) (3,179)
Principal balance paydowns of loans
delinquent at both period ends (20) (34) (24) (81)
Net change in principal balance of
other loans delinquent at both period
ends* 1,394 873
1,485 (562)
Delinquent loans at the end of period
* Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 29 - Detail of Loans Removed from Delinquent Status
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2022 2021 2022 2021
Loans charged off $ - $ - $ (1) $ (1)
Easy Advances paid off or charged off - -
- - Loans transferred to OREO - - - - Loan payoffs and paydowns (2,620) (1,652) (6,186) (1,938) Loans paid current (846) (1,457) (616) (1,240) Total loans removed from delinquency status during the period that were in delinquency status at the beginning of the period$ (3,466) $ (3,109) $
(6,803)
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 30 - Collateral-Dependent Loans and Troubled Debt Restructurings
(dollars in thousands) September 30, 2022 December 31,
2021 $ Change % Change
Cashflow-dependent TDRs $ 5,430 $ 5,960$ (530) (9) % Collateral-dependent TDRs 6,278 9,426 (3,148) (33) Total TDRs 11,708 15,386 (3,678) (24) Collateral-dependent loans (which are not TDRs) 14,348 14,645 (297) (2) Total recorded investment in TDRs and collateral-dependent loans $ 26,056 $
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.
118
Table of Contents
Deposits
Table 28 - Deposit Composition
(dollars in thousands) September 30, 2022 December 31,
2021 $ Change % Change
Core Bank : Demand $ 1,398,760 $ 1,381,522$ 17,238 1 % Money market accounts 764,523 789,876 (25,353) (3) Savings 331,300 311,624 19,676 6 Individual retirement accounts (1) 40,658 43,724 (3,066) (7) Time deposits,$250 and over (1) 61,579 81,050 (19,471) (24) Other certificates of deposit (1) 135,836 154,174 (18,338) (12) Reciprocal money market and time deposits (1) 44,534 77,950 (33,416) (43)Total Core Bank interest-bearing deposits 2,777,190 2,839,920 (62,730) (2)Total Core Bank noninterest-bearing deposits 1,581,663 1,579,173 2,490 0Total Core Bank deposits 4,358,853 4,419,093 (60,240) (1)Republic Processing Group : Money market accounts 9,195 9,717 (522) (5) Total RPG interest-bearing deposits 9,195
9,717 (522) (5)
Brokered prepaid card deposits 332,655 320,907 11,748 4 Other noninterest-bearing deposits 99,805 90,701 9,104 10 Total RPG noninterest-bearing deposits 432,460 411,608 20,852 5 Total RPG deposits 441,655 421,325 20,330 5 Total deposits $ 4,800,508 $ 4,840,418$ (39,910) (1) % (1) Includes time deposit
billion
Total Core Bank deposits decreased by$60 million with a$63 million decrease interest-bearing deposits offset by a$3 million increase in noninterest-bearing deposits. The net decrease in deposit balances for the first nine months of 2022, compares unfavorably to the net growth in deposits for the previous two calendar years when deposit growth generally reached historical highs for the Company. Management believes the Company is more likely to experience slower overall growth in its deposits over the foreseeable future as the excess liquidity inthe United States is expected to decline due to the tightening of monetary and fiscal policy by the Federal Government.
Federal Home Loan Bank Advances
The Bank held$20 million of long-term FHLB advances as ofSeptember 30, 2022 compared to$25 million of overnight FHLB advances as ofDecember 31, 2021 . During the first nine months of 2022, the Bank extended the term on$20 million of its FHLB advances in anticipation of increasing long-term interest rates and repaid the remaining$5 million . As ofSeptember 30, 2022 , the Company's$20 million of FHLB advances had a weighted average maturity of five years and a weighted average cost of 1.89%. Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.
Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank's interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 12 "Interest Rate Swaps" of Part I Item 1 "Financial Statements"
for additional discussion regarding the Bank's interest rate swaps.
119
Table of Contents
Liquidity
The Bank maintains sufficient liquidity to fund routine loan demand and routine
deposit withdrawal activity. Liquidity is managed by maintaining sufficient
liquid assets, primarily in the form of cash, cash equivalents, and unincumbered
investment securities. Funding and cash flows can also be realized through
deposit product promotions, the sale of AFS debt securities, principal paydowns
on loans and mortgage-backed securities, and proceeds realized from loans held
for sale.
Table 29 - Liquid Assets and Borrowing Capacity
The Company's liquid assets and borrowing capacity included the following:
(in thousands) September 30, 2022 December 31, 2021 Cash and cash equivalents $ 754,393 $ 756,971 Unincumbered debt securities 400,183 219,775 Total liquid assets 1,154,576 976,746
Borrowing capacity with the FHLB 940,155 900,424 Borrowing capacity through unsecured credit lines 125,000 125,000 Total borrowing capacity 1,065,155 1,025,424 Total liquid assets and borrowing capacity $ 2,219,731
$ 2,002,170
The Bank had a loan to deposit ratio (excluding brokered deposits) of 96% as ofSeptember 30, 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 ofSeptember 30, 2022 , the Bank had approximately$1.2 billion in deposits from 228 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . The 20 largest non-sweep deposit relationships represented approximately$395 million , or 8%, of the Company's total deposit balances as ofSeptember 30, 2022 . These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than 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 ofSeptember 30, 2022 andDecember 31, 2021 , these pledged investment securities had a fair value of$262 million and$320 million . 120 Table of Contents Capital Total stockholders' equity increased from$834 million as ofDecember 31, 2021 to$841 million as ofSeptember 30, 2022 . The increase in stockholders' equity was primarily attributable to net income earned during 2022 reduced primarily by cash dividends declared, repurchases of Class A Common shares, and a$35 million decrease in AOCI. Common Stock - The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and 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 ofOctober 1, 2022 , RB&T could, without prior approval, declare dividends of approximately$142 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 13.61% as ofSeptember 30, 2022 and 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. 121 Table of Contents
Table 30 - Capital Ratios (1)
As of September 30, 2022 As of December 31, 2021
(dollars in thousands) Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Republic Bancorp, Inc. $ 922,001 18.55 % $ 878,488 17.47 %
Republic Bank & Trust Company 890,151 17.92
861,815 17.14
Common equity tier 1 capital to risk-weighted assets Republic Bancorp, Inc.$ 863,443 17.37 %$ 823,504 16.37 % Republic Bank & Trust Company 831,593 16.74
806,831 16.05
Tier 1 (core) capital to risk-weighted assets Republic Bancorp, Inc.$ 863,443 17.37 %$ 823,504 16.37 % Republic Bank & Trust Company 831,593 16.74
806,831 16.05
Tier 1 leverage capital to average assets Republic Bancorp, Inc.$ 863,443 14.24 %$ 823,504 13.35 % Republic Bank & Trust Company 831,593 13.66
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 10 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.
122
Table of Contents
The following table illustrates the Bank's projected percent change from its Base net interest income over the period beginningOctober 1, 2022 and endingSeptember 30, 2023 based on instantaneous movements in interest rates from Down 200 to Up 300 basis points equally across all points on the yield curve. The Bank's dynamic earnings simulation model includes secondary market loan fees and excludesTraditional Bank loan fees.
Table 31 - Bank Interest Rate Sensitivity
Change in Rates
-200 -100 +100 +200 +300
Basis Points Basis Points Basis Points Basis Points Basis Points
% Change from base net interest income
as of September 30, 2022 (8.3) % (4.2) % 3.9 % 7.7 % 11.8 %
% Change from base net interest income
as of December 31, 2021 (2.9) % 1.3 % (0.6) % 0.7 % 4.7 %
For the Down-100 and Down-200 scenarios, the September 2022 simulation reflected
a more negative outcome than the December 2021 simulation. For the Up-100,
Up-200, and Up-300 scenarios, the September 30, 2022 simulation reflected a more
positive outcome for the Bank's net interest income than the comparable December
31, 2021 simulation.
The period-to-period decline in the Down-rate scenarios was generally tied to
interest rate floors for the Bank's floating rate loans. As of December 31,
2021 , market interest rates were significantly lower than market interest rates
as of September 30, 2022 . As a result, many of the Bank's floating rate loans
were priced at their contractual interest rate floors as of December 31, 2021 .
The Bank's interest rate simulation model for December 31, 2021 , assumed that
interest rates for most of these loans would remain at their contractual
interest rate floors, even as market rates declined in the simulation. With
market interest rates significantly higher as of September 30, 2022 , the current
rates for a substantial amount of the Bank's floating rate loans are above their
contractual interest rate floors, and therefore, now have room to reprice lower
in a declining market rate environment.
As compared to the December 2021 simulation, the improvement for the September
2022 simulation outcomes for the Up-rate scenarios was generally tied to
contractual interest rate floors, as well. As previously noted, market interest
rates were significantly lower as of December 31, 2021 than market interest
rates as of September 30, 2022 , and many of the Bank's loans were already priced
at their contractual interest rate floors as of December 31, 2021 . By formula,
the interest rates for many of the Bank's floating rate loans would have been
much lower at December 31, 2021 had their contractual interest rate floors not
existed. As a result, the formula interest rate for each floating rate loan had
to increase substantially, in many cases, before the formula interest rate
surpassed the contractual interest rate floor and the loan starting repricing
higher. With most of the Bank's floating rate loans now above their contractual
interest rate floors as of September 30, 2022 , the Bank would generally benefit,
based on each loan's floating rate formula, in a rising interest rate
environment.
LIBOR Exposure
InJuly 2017 , theFinancial Conduct Authority ("FCA"), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, inNovember 2020 , theFCA announced that many tenors of LIBOR would continue to be published throughJune 2023 . In compliance with regulatory guidance, the Bank discontinued referencing LIBOR for new financial instruments during 2021 and chose SOFR to be its primary alternative reference rate for most transaction types upon the discontinuance or unavailability of LIBOR. Regarding its legacy assets that reference LIBOR, the Bank has previously disclosed that the underlying contracts for these assets may not include adequate "fallback" language to use alternative indexes and margins when LIBOR ceases. However, onMarch 15, 2022 ,President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the "LIBOR Law"), which is designed to accomplish the following:
Establish a clear and uniform process, on a nationwide basis, for replacing
? LIBOR in existing contracts the terms of which do not provide for the use of a
clearly defined or practicable replacement benchmark rate, without affecting
the ability of parties to use any appropriate benchmark rate in new contracts;
Preclude litigation related to existing contracts, the terms of which do not
? provide for the use of a clearly defined or practicable replacement benchmark
rate;
Allow existing contracts that reference LIBOR but provide for the use of a
? clearly defined and practicable replacement rate to operate according to their
terms; and
123
Table of Contents
? Address LIBOR references in federal law.
With limited exception, the LIBOR Law generally covers legacy LIBOR contracts with no or inadequate fallback provisions. Additionally, under the LIBOR Law, theBoard of Governors of theFederal Reserve System (the "Board") issued regulations giving 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 identification of any related conforming changes. As ofSeptember 30, 2022 , the Company had approximately$471 million of legacy assets that reference LIBOR, with short-term Warehouse loans representing$78 million of these assets and commercial and mortgage loans primarily making up the remainder. As ofSeptember 30, 2022 , of the Bank's legacy assets that reference LIBOR, approximately$364 million of those assets were scheduled to mature afterSeptember 30, 2023 . These amounts exclude derivative assets and liabilities on the Company's consolidated balance sheet. As ofSeptember 30, 2022 , the notional amount of the Company's LIBOR-referenced interest rate derivative contracts was approximately$185 million , with$181 million of such notional amount scheduled to mature afterJune 30, 2023 . For additional discussion regarding the Bank's net interest income, see the sections titled "Net Interest Income" in this section of the filing under "RESULTS OF OPERATIONS (Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 ) and "RESULTS OF OPERATIONS (Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 ."
Insurance, Reinsurance And Insurance Brokerage Global Market Estimated To Grow At 25% Rate
AMERICAN FINANCIAL GROUP INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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