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 inflation on Company operations;
projections of revenue, income, expenses, losses, earnings per share, capital
? expenditures, dividends, capital structure, loan volume, loan growth, deposit
growth, or other financial items;
? descriptions of plans or objectives for future operations, products, or
services;
? descriptions and projections related to management strategies for loans,
deposits, investments, and borrowings;
? forecasts of future economic performance; and
? descriptions of assumptions underlying or relating to any of the foregoing.
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following: ? the impact of inflation on the Company's operations and credit losses;
litigation liabilities, including related costs, expenses, settlements and
? judgments, or the outcome of matters before regulatory agencies, whether
pending or commencing in the future;
? natural disasters impacting the Company's operations;
? changes in political and economic conditions;
? the impact of bank failures and potential bank failures to the industry, the
Bank's deposit base and the
? 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;
? the ability of the Company to remediate its material weaknesses in its internal
control over financial reporting;
? success in gaining regulatory approvals when required;
? the Company's ability to qualify for future R&D federal tax credits;
? the ability for Tax Providers to successfully market and realize the expected
RA and RT volume anticipated by TRS;
? information security breaches or cyber security attacks involving either the
Company or one of the Company's third-party service providers; and
other risks and uncertainties reported from time to time in the Company's
? filings with the
Annual Report on Form 10-K for the year ended
Item 1A "Risk Factors" of the current filing.
Accounting Standards Update
For disclosure regarding the impact to the Company's financial statements of
ASUs, see Footnote 1 "Basis of Presentation and Summary of Significant
Accounting Policies" of Part I Item 1 "Financial Statements."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Republic's consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. A summary of the Company's significant accounting policies is set forth in Part II "Item 8. Financial Statements and Supplementary Data" of its Annual Report on Form 10-K for the year endedDecember 31, 2022 . Management continually evaluates the Company's accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management's estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management. Critical accounting policies are those that management believes are the most important to the portrayal of the Company's financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee.
Republic believes its critical accounting policies and estimates relate to its
ACLL and Provision.
ACLL and Provision - As ofMarch 31, 2023 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly. Management's evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast. 66 Table of Contents 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 ofMarch 31, 2023 , the Company was divided into five reportable segments: Traditional Banking, Warehouse Lending, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute "Core Bank " or "Core Banking" operations, while the last two segments collectively constitute RPG operations.
(I) Traditional Banking segment
The Traditional Banking segment provides traditional banking products primarily to customers in the Company's market footprint. As ofMarch 31, 2023 , Republic had 45 banking centers with locations as follows:
?
? Metropolitan
?Central Kentucky - 7 ?Georgetown - 1 ?Lexington - 5 ?Shelbyville - 1 ?Northern Kentucky - 4 ?Bellevue - 1 ?Covington - 1 ?Crestview Hills - 1 ? Florence - 1 ?Southern Indiana - 3 ?Floyds Knobs - 1 ?Jeffersonville - 1 ?New Albany - 1
?
?
? Metropolitan
Republic's headquarters are in
based on population.
The Bank's principal lending activities consist of the following:
Retail Mortgage Lending - Through its retail banking centers and its online Consumer Direct channel, the Bank originates single-family, residential real estate loans and HELOCs. In addition, the Bank originates HEALs through its retail banking centers. Such loans are generally collateralized by owner-occupied, residential real estate properties. For those loans originated through the Bank's retail banking centers, the collateral is predominately located in the Bank's market footprint, while loans originated through its Consumer Direct channel are generally secured by owner-occupied collateral located outside of the Bank's market footprint.
Commercial Lending - The Bank conducts commercial lending activities primarily
through Corporate Banking, Commercial Banking, Business Banking, and Retail
Banking channels.
In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank'sCommercial Credit Administration Department . Clients are generally located within the Bank's market footprint or in areas nearby the market footprint. 67
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Construction and Land Development Lending - The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots. Consumer Lending - Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank's markets. Aircraft Lending - Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. Loans range between$200,000 and$4,000,000 in size and have terms up to 20 years. The aircraft loan program is open to all fifty states. The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.
The Bank's other Traditional Banking activities generally consist of the
following:
Private Banking - The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank's Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele. Treasury Management Services - The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank's Treasury Management department. Treasury Management officers work closely with commercial and retail officers to support the cash management needs of Bank clients. Correspondent Lending - The Bank began acquiring single family, first lien mortgage loans for investment through its Correspondent Lending channel during the first quarter of 2023. Correspondent Lending generally involves the Bank acquiring, primarily from its Warehouse Lending clients, closed loans that meet the Bank's specifications. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium. Premiums on loans held for investment acquired through the Correspondent Lending channel will be amortized into interest income on the level-yield method over the expected life of the loan. Loans acquired through the Correspondent Lending channel are generally made to borrowers outside of the Bank's historical market footprint. Internet Banking - The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com.
Mobile Banking - The Bank allows clients to easily and securely access and
manage their accounts through its mobile banking application.
Other Banking Services - The Bank also provides title insurance and other
financial institution related products and services.
Bank Acquisitions - The Bank maintains an acquisition strategy to selectively
grow its franchise as a complement to its organic growth strategies.
See additional detail regarding the Traditional Banking segment under Footnote
17 "Segment Information" of Part I Item 1 "Financial Statements."
(II) Warehouse 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. Advances for Reverse mortgage loans and construction loans typically remain on the line longer than conventional mortgage loans. Interest income and loan
fees
are accrued for each
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individual advance during the time the advance remains on the warehouse line and
collected when the loan is sold. The Core Bank receives the sale proceeds of
each loan directly from the investor and applies the funds to pay off the
warehouse advance and related accrued interest and fees. The remaining proceeds
are credited to the mortgage-banking client.
See additional detail regarding the Warehouse Lending segment under Footnote 17
"Segment Information" of Part I Item 1 "Financial Statements."
(III) Mortgage Banking segment
Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term, single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and theFNMA . The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions. As part of the sale of loans with servicing retained, the Bank records MSRs. MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs, which the Bank expects to receive on loans sold with servicing retained by the Bank. MSRs are capitalized as separate assets. This transaction is posted to net gain on sale of loans, a component of "Mortgage Banking income" in the income statement. Management considers all relevant factors, in addition to pricing considerations from other servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially sold with servicing retained by the Bank. The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and subsequently adjusted quarterly based on the weighted average remaining life of the underlying loans. The MSR amortization is recorded as a reduction to net servicing income, a component of Mortgage Banking income. With the assistance of an independent third-party, the MSRs asset is reviewed at least quarterly for impairment based on the fair value of the MSRs using groupings of the underlying loans based on predominant risk characteristics. Any impairment of a grouping is reported as a valuation allowance. A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs would be expected to increase as prepayment speeds on the underlying loans would be expected to decline. See additional detail regarding the Mortgage Banking segment under Footnote 12 "Mortgage Banking Activities" and Footnote 17 "Segment Information" of Part I Item 1 "Financial Statements."
(IV) Tax Refund Solutions segment
Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout theU.S. , as well as tax-preparation software providers (collectively, the "Tax Providers"). The majority of all the business generated by the TRS business occurs during the first half of each year. During the second half of each year, TRS generates limited revenue and incurs costs preparing for the next year's tax season. TRS also originated$98 million of ERAs duringDecember 2022 related to tax returns that were anticipated to be filed during the first quarter 2023 tax filing season. RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item "Net refund transfer fees."
The RA credit product is a loan made in conjunction with the filing of a
taxpayer's federal tax return, which allows the taxpayer to borrow funds as an
advance of a portion of their tax refund. The RA product had the following
features during the first quarters of 2023 and 2022:
? 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;
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Multiple disbursement methods were available with most Tax Providers, including
? direct deposit, prepaid card, or check, based on the taxpayer-customer's
election;
? Repayment of the RA to the Bank is deducted from the taxpayer's tax refund
proceeds; and
? If an insufficient refund to repay the RA occurs:
o there is no recourse to the taxpayer,
o no negative credit reporting on the taxpayer, and
o no collection efforts against the taxpayer.
The ERA credit product is also a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. Unlike the RA product described immediately above, however, which is originated in conjunction with the filing of the taxpayer's federal tax return, an ERA is originated prior to the filing of the taxpayer's federal tax return and prior to the taxpayer receiving their year-end taxable income documentation, e.g., W-2. As such, the Company generally uses paystub information to estimate the tax refund and underwrite the ERA. The repayment of the ERA is incumbent upon the taxpayer client returning to the Bank's Tax Provider for the filing of their federal tax return in order for the tax refund to potentially be received by the Bank from the federal government to pay off the advance. The ERA product related to the first quarter 2023 tax filing season had the following features:
? Offered only during
? The taxpayer had the option to choose from multiple loan-amount tiers, subject
to underwriting, up to a maximum advance amount of
? No requirement that the taxpayer pays for another bank product, such as an RT;
? Multiple disbursement methods were available with most Tax Providers, including
direct deposit or prepaid card, based on the taxpayer-customer's election;
? Repayment of the ERA to the Bank is deducted from the taxpayer's tax refund
proceeds; and
? If an insufficient refund to repay the ERA occurs, including the failure to
file a federal tax return through a Republic Tax Provider:
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 RAs, including ERAs, as interest income on loans. RAs that were originated related to the first quarter 2022 tax season were repaid, on average, within 32 days after the taxpayer's tax return was submitted to the applicable taxing authority. RAs do not have a contractual due date but the Company considered a RA, related to the first quarter 2022 tax season, delinquent if it remained unpaid 35 days after the taxpayer's tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management's annual analysis of tax return processing times. Provisions on RAs are estimated when advances are made. Unpaid RAs, including ERAs, related to the first quarter tax season of a given year are charged-off byJune 30th of that year, with RAs collected during the second half of that year recorded as recoveries of previously charged-off loans. Related to the overall credit losses on RAs, including ERAs, the Bank's ability to control losses is highly dependent upon its ability to predict the taxpayer's likelihood to receive the tax refund as claimed on the taxpayer's tax return. Each year, the Bank's RA approval model is based primarily on the prior-year's tax refund payment patterns. Because the substantial majority of the RA volume occurs each year before that year's tax refund payment patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management's predictions if tax refund payment patterns change materially between years. In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the RA, including the ERA, product parameters. Further changes in the RA product parameters do not ensure positive results and could have an overall material negative impact on the performance of all RA product offerings and therefore on the Company's financial condition and results of operations.
See additional detail regarding the RA product under Footnote 5 "Loans and
Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
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Cancelled Sale Transaction - As previously disclosed, Green Dot Corporation paid RB&T a contract termination fee of$5.0 million during the first quarter of 2022 related to the cancelled Sale Transaction.
Republic Payment Solutions division
RPS is currently managed and operated within the TRS segment. The RPS division offers general-purpose reloadable prepaid cards, payroll debit cards, and limited-purpose demand deposit accounts with linked debit cards as an issuing bank through third-party service providers. Until the operating results of the RPS division are material to the Company's overall results of operations, they will be reported as part of the TRS segment. The Company does not expect to report the RPS division as a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.
The Company reports fees related to RPS programs under Program fees.
Additionally, the Company's portion of interchange revenue generated by prepaid
card transactions is reported as noninterest income under "Interchange fee
income."
(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.
RCS's LOC I represented the substantial majority of RCS activity during 2022
and 2023.
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. Furthermore, 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.
One of RCS's existing third-party service providers, subject to the Bank's
oversight and supervision, provides the Bank with marketing services and loan
o servicing for the LOC II product. The Bank is the lender for this product and
is marketed as such. Furthermore, the Bank controls the loan terms and
underwriting guidelines, and the Bank exercises consumer compliance oversight
of this product.
The Bank sells participation interests in this product. These participation interests are a 95% interest in advances made to borrowers under the borrower's line-of-credit account, and the participation interests are generally sold three business days following the Bank's funding of the associated advances. Although the Bank retains a 5% participation interest in each advance, it maintains 100% ownership of the underlyingLOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.
RCS installment loan product - Through RCS, the Bank offers installment loans
with terms ranging from 12 to 60 months to borrowers in multiple states. The
same third-party service provider for RCS's
for the installment loans. This third-party provider is subject to the Bank's
oversight and supervision and provides the Bank with marketing services and
? loan servicing for these RCS installment loans. The Bank is the lender for
these RCS installment loans and is marketed as such. Furthermore, the Bank
controls the loan terms and underwriting guidelines, and the Bank exercises
consumer compliance oversight of this RCS installment loan product. Currently,
all loan balances originated under this RCS installment loan program are
carried as "held for sale" on the Bank's balance sheet, with the intention to
sell these
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loans to a third-party, who is an affiliate of the Bank's third-party service
provider, generally within sixteen days following the Bank's origination of the
loans. Loans originated under this RCS installment loan program are carried at
fair value under a fair-value option, with the portfolio marked to market
monthly.
RCS healthcare receivables products - The Bank originates
? healthcare-receivables products across the
third-party service providers.
o For two of the programs, the Bank retains 100% of the receivables, with
recourse in the event of default.
For the remaining program, in some instances the Bank retains 100% of the
receivables originated, with recourse in the event of default, and in other
o instances, the Bank sells 100% of the receivables generally within one month of
origination. Loan balances held for sale through this program are carried at
the lower of cost or fair value.
The Company reports interest income and loan origination fees earned on RCS
loans under "Loans, including fees," while any gains or losses on sale and
mark-to-market adjustments of RCS loans are reported as noninterest income under
"Program fees."
OVERVIEW (Three Months Ended
31, 2022
for first quarters of 2023 and 2022.
The following are general highlights by reportable segment:
Traditional Banking segment
? Net income increased
compared to the same period in 2022.
? Net interest income increased
2023 compared to the same period in 2022.
? Provision was a net charge of
compared to a net charge of
? Noninterest income increased
compared to the same period in 2022.
? Noninterest expense increased
2023 compared to the same period in 2022.
?
quarter of 2023.
? Total nonperforming loans to total loans for the Traditional Banking segment
was 0.34% as of
? Delinquent loans to total loans for the Traditional Banking segment was 0.13%
as of
?
first quarter of 2023. Warehouse Lending segment
? Net income decreased
compared to the same period in 2022.
? Net interest income decreased
2023 compared to the same period in 2022.
? The Warehouse Provision was a net charge of
2023 compared to a net credit of
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? Average committed Warehouse lines decreased to
quarter of 2023 compared to
? Average line usage was 31% during the first quarter of 2023 compared to 42%
during the same period in 2022.
Mortgage Banking segment
Within the Mortgage Banking segment, mortgage banking income decreased
? million, or 70%, during the first quarter of 2023 compared to the same period
in 2022 due to a significant decline in volume.
Tax Refund Solutions segment
Net income decreased
? compared to the same period in 2022. Net income for the first quarter of 2022
included a contract termination fee related to the cancelled Sale Transaction,
which added approximately
? Net interest income increased
2023 compared to the same period in 2022.
? Total RA originations were
compared to
Overall, TRS recorded a net charge to the Provision of
? first quarter of 2023 compared to a net charge to the Provision of
for the same period in 2022.
Noninterest income decreased
? compared to the same period in 2022. Noninterest income for the first quarter
of 2022 included a pre-tax
? Net RT revenue decreased
the same period in 2022.
? Noninterest expense was
Republic
? Net income was flat at
? Net interest income increased
2023 compared to the same period in 2022.
Overall, RCS recorded a net charge to the Provision of
? first quarter of 2023 compared to a net charge of
period in 2022.
? Noninterest income decreased
to the first quarter of 2023.
? Noninterest expense was
million for the same period in 2022.
? Total nonperforming loans to total loans for the RCS segment was 0.70% as of
? Delinquent loans to total loans for the RCS segment was 10.50% as of
2023 compared to 8.53% as of
RESULTS OF OPERATIONS (Three Months Ended
Months Ended
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net
interest income is the difference between interest income on interest-earning
assets, such as loans and investment securities and the interest expense on
interest-bearing liabilities used to fund
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those assets, such as interest-bearing deposits, securities sold under
agreements to repurchase, and FHLB advances. Net interest income is impacted by
both changes in the amount and composition of interest-earning assets and
interest-bearing liabilities, as well as market interest rates.
See the section titled "Asset/Liability Management and Market Risk" in this
section of the filing regarding the Bank's interest rate sensitivity.
A large amount of the Company's financial instruments tracks closely with, or is primarily indexed to, either the FFTR, Prime, or LIBOR. These rates trended lower beginning in the first quarter of 2020 with the onset of the COVID pandemic, as theFOMC reduced the FFTR to approximately 25 basis points. During 2022 inflation rose to levels not seen in approximately 40 years. In response, theFOMC began executing a quantitative tightening program by reducing its balance sheet, selling certain types of bonds in the market, and repeatedly increasing the FFTR. TheFOMC's increases to the FFTR during 2022 and the first three months of 2023 included the following:
Table 1 - Increases to the Federal Funds Target Rate during 2022 and 2023
Increase to FFTR
Date the FFTR after Increase
March 17, 2022 0.25 % 0.50 %
May 5, 2022 0.50 1.00
June 16, 2022 0.75 1.75
July 27, 2022 0.75 2.50
September 21, 2022 0.75 3.25
November 2, 2022 0.75 4.00
December 15, 2022 0.50 4.50
February 2, 2023 0.25 4.75
March 23, 2023 0.25 5.00
The FOMC's actions and signals continued to place upward pressure on short-term
market interest rates throughout the second half of 2022 and the first quarter
of 2023. While long-term interest rates initially rose in tandem with the
increases to the FFTR through the middle part of 2022, they began to generally
decline during the second half of 2022 and into 2023 as the market generally
began to anticipate a recession to take place in 2023. As a result of the
increase in short-term interest rates and the moderation of long-term interest
rates, the yield curve has been inverted for several months, with short-term
rates generally higher than long-term rates on the yield curve. Further monetary
tightening by the FOMC in the future will likely cause short-term interest rates
to continue to increase. At this time, the future of long-term market interest
rates remains uncertain. Increases in short-term market interest rates are
expected to impact the various business segments of the Company differently and
will be discussed in further detail in the sections below.
Total Company net interest income was $92.6 million during the first quarter of
2023 and represented an increase of $29.4 million , or 47%, from the first
quarter of 2022. Total Company net interest margin increased to 6.52% during the
first quarter of 2023 compared to 4.34% for the same period in 2022.
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$14.0 million , or 39%, for the first quarter of 2023 compared to the same period in 2022. Traditional Banking's net interest margin was 4.07% for the first quarter of 2023, an increase of 117 basis points from the same period in 2022. This increase in net interest income and the related expansion in NIM resulted primarily from the benefits of theTraditional Bank's low-cost core deposit base and strong year-over-year growth in average loan balances. These benefits were partially offset by a decline in the Company's average interest-earning cash balances, with these balances near more normal, historical levels during the first quarter of 2023 as the excess liquidity from the various government stimulus programs related to COVID continued to wane 74
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throughout the industry. The following highlights some of the more impactful
items affecting net interest income during the quarter for the
? yield of 3.95% during the first quarter of 2022 to
average yield of 4.59% during the first quarter of 2023.
Average investments grew to
? during the first quarter of 2023 from
yield of 1.39% for the first quarter of 2022.
Average interest-earning cash was
? 4.55% during the first quarter of 2023 compared to
weighted-average yield of 0.20% for the first quarter of 2022.
? benefit of its average noninterest-bearing deposits, increased from 0.08%
during the first quarter of 2022 to 0.47% for the first quarter of 2023.
As previously disclosed, short-term interest rates have risen dramatically since March of 2022 as a result ofFOMC monetary actions. Short-term rates could further increase in the second quarter of 2023 as a result of continued monetary tightening by theFOMC . Over the past year, increases in short-term interest rates were generally favorable to theTraditional Bank's net interest income and net interest margin primarily as a result of the substantial amount of immediately-repricing, interest-earning cash it maintained on its balance sheet and its ability to sustain a low cost of deposits in relation to the rising FFTR. During the third quarter of 2022, however, theTraditional Bank began to use its excess cash to fund a decline in deposit balances. This trend of declining interest-earning cash to fund decreasing deposit balances continued during the first quarter of 2023. In addition, during the first quarter of 2023, theTraditional Bank's interest-bearing deposit costs began to increase more significantly during the latter part of the quarter due to customer pricing pressures. As a result of the declining cash balances and the additional customer pricing pressures, the Bank began to experience a diminishing benefit to its net interest income and net interest margin with additional increases in the FFTR during the first quarter of 2023. Management also believes theTraditional Bank will experience some net interest margin compression on a linked quarter basis during the remainder of 2023 as any positive impacts to theTraditional Bank's net interest income and net interest margin from any increase in short-term interest rates will likely be more than offset by the negative impact of lower interest-earning cash and deposit balances and the rising cost of interest-bearing deposits. Additional variables which may also impact theTraditional Bank's net interest income and net interest margin in the future include, but are not limited to, the actual steepness and shape of the yield curve, future demand for theTraditional Bank's financial products, and theTraditional Bank's overall future liquidity needs. For additional discussion of the factors impacting interest-earning cash and deposit balances as well as deposit betas, see sections titled "Cash and Cash Equivalents" and "Deposits" in the "COMPARISON OF FINANCIAL CONDITION" of this document. Warehouse Lending segment
Net interest income within the Warehouse segment decreased$2.4 million , or 54%, from the first quarter of 2022 to the first quarter of 2023, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from$585 million during the first quarter of 2022 to$330 million for the first quarter of 2023, as home-mortgage refinancing dipped from a significantly higher volume in early 2022. Driving this decrease in average outstanding balances was a decline in committed lines-of-credit to$1.0 billion as ofMarch 31, 2023 from$1.4 billion as ofMarch 31, 2022 . Concurrent with the decline in committed lines of credit, the average usage rates for Warehouse lines decreased to 31% during the first quarter of 2023 from 42% for the first quarter of 2022. The Warehouse net interest margin compressed 56 basis points from 3.09% during the first quarter of 2022 to 2.53% during the first quarter of 2023. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company's internal FTP methodology, generally rose in tandem with the increase in short-term interest rates since rates began rising inMarch 2022 , while its yield increases were delayed until the adjustable rates on its clients' lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited Warehouse's net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during the first quarter of 2022. Additional increases in 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 75
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or entirely offset by a reduction in average outstanding balances driven by a decline in demand from Warehouse clients, as higher long-term interest rates generally drive lower demand for Warehouse borrowings. In addition, a lower demand for Warehouse borrowings could cause additional competitive pricing pressures for the industry, driving down the yield Warehouse earns on its lines of credits. Tax Refund Solutions segment Net interest income within the TRS segment was up$16.4 million from the first quarter of 2022 to the first quarter of 2023. Net interest income at TRS includes income from its prepaid card products as well as the income associated with its tax-related credit products. The prepaid card product component of TRS drove a$3.1 million increase to net interest income for the segment. This increase was generally driven by a higher crediting rate applied through the Company's internal FTP. The prepaid card FTP credit yield was 3.82% for average prepaid card-related balances of$377 million during the first quarter of 2023 compared to 0.37% for average prepaid card-related balances of$397 million during the first quarter of 2022. Related to the segment's tax-related products, net interest income increased$13.3 million for the quarter. Loan-related interest and fees increased$18.0 million for the quarter and was driven primarily by a$426 million increase in RA origination volume, most of which resulted from a new contract with a large national tax preparation provider. This increase in loan revenue was partially offset by a$4.4 million increase to the segment's net cost of funds as applied through its internal FTP.
See additional detail regarding the RA product under Footnote 5 "Loans and
Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
RCS's net interest income increased$1.7 million , or 25%, from the first quarter of 2022 to the first quarter of 2023. The increase was driven primarily by an increase in fee income from RCS'sLOC II product. Loan fees on this product, recorded as interest income on loans, increased$2.0 million from the first quarter of 2022 to the first quarter of 2023. The impact of higher short-term interest rates to RCS during 2023 is expected to 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. 76
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The following table presents the average balance sheets for the three-month periods endedMarch 31, 2023 and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
Table 2 - Total Company Average Balance Sheets and Interest Rates
Three Months Ended March 31, 2023 Three Months Ended March 31, 2022
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 $ 241,211 $ 2,700
4.48 %
Investment securities, including
FHLB stock (1)
773,172 5,047 2.61 606,182 2,111 1.39 TRS Refund Advance loans (2) 249,378 31,405 50.37 84,557 13,444 63.60 RCS LOC products (2) 31,086 7,962 102.45 26,279 6,257 95.24 Other RPG loans (3) (6) 141,975 2,625 7.40 120,917 1,984 6.56Outstanding Warehouse lines of credit (4) (6) 329,716 5,720 6.94 584,519 4,878 3.34
All other
3,538,983 35,007 3.96 Total interest-earning assets 5,679,926 100,356 7.07 5,823,259 64,110 4.40 Allowance for credit loss (83,195) (69,287) Noninterest-earning assets: Noninterest-earning cash and cash equivalents 295,905 354,165 Premises and equipment, net 32,232 35,460 Bank owned life insurance 102,004 99,532 Other assets (1) 186,169 180,913 Total assets$ 6,213,041 $ 6,424,042 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Transaction accounts$ 1,644,777 $ 1,742 0.42 %$ 1,692,120 $ 96 0.02 % Money market accounts 748,623 2,106 1.13 798,943 94 0.05 Time deposits 225,847 859 1.52 261,703 641 0.98 Reciprocal money market and time deposits 43,852 171 1.56 74,730 48 0.26 Total interest-bearing deposits 2,663,099 4,878 0.73 2,827,496 879 0.12 SSUARs and other short-term borrowings 202,910 248 0.49 300,169 28 0.04Federal Home Loan Bank advances and other long-term borrowings 245,344 2,588 4.22 23,333 36 0.62
Total interest-bearing liabilities 3,111,353 7,714 0.99
3,150,998 943 0.12 Noninterest-bearing liabilities and Stockholders' equity: Noninterest-bearing deposits 2,089,162
2,312,233 Other liabilities 133,321 112,699 Stockholders' equity 879,205 848,112 Total liabilities and stock-holders' equity$ 6,213,041 $ 6,424,042 Net interest income$ 92,642 $ 63,167 Net interest spread 6.08 % 4.28 % Net interest margin 6.52 % 4.34 %
(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 Refund Advances and RCS line-of-credit products is
composed entirely of loan fees.
(3) Interest income includes loan fees of
months ended
(4) Interest income includes loan fees of
months ended
(5) Interest income includes loan fees of
months ended
Average balances for loans include the principal balance of nonaccrual loans
(6) and loans held for sale, and are inclusive of all loan premiums, discounts,
fees and costs.
77
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Table 3 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities impacted
Republic's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
Table 3 - Total Company Volume/Rate Variance Analysis
Three Months Ended March 31, 2023
Compared to
Three Months Ended March 31, 2022
Total Net Increase / (Decrease) Due to
(in thousands) Change Volume Rate
Interest income:
Federal funds sold and other
interest-earning deposits $ 2,271 $ (524) $ 2,795
Investment securities, including
FHLB stock 2,936 703 2,233
TRS Refund Advance loans 17,961 21,282 (3,321)
RCS LOC products 1,705 1,206 499
Other RPG loans 641 371 270
Outstanding Warehouse lines of
credit 842 (2,786) 3,628
All other Core Bank loans 9,890 3,940 5,950
Net change in interest income 36,246 24,192
12,054 Interest expense: Transaction accounts 1,646 (2) 1,648 Money market accounts 2,011 (7) 2,018 Time deposits 219 (98) 317 Reciprocal money market and time deposits 123 (27) 150 SSUARs and other short-term borrowings 220 (12) 232
Federal Home Loan Bank advances 2,552 1,581 971 Net change in interest expense 6,771 1,435 5,336
Net change in net interest income
$ 6,718 78 Table of Contents Provision
Total Company Provision was a net charge of
of 2023 compared to a net charge of
The following were the most significant components comprising the Company's
Provision by reportable segment:
Traditional Banking segment
The Traditional Banking Provision during the first quarter of 2023 was a net
charge of
quarter of 2022. An analysis of the Provision for the first quarter of 2023
compared to the same period in 2022 follows:
? The net charge during the first quarter of 2023 was primarily driven by the
Day-1 Provision of$2.7 million for the acquiredCBank non-PCD loans.
The remaining net charge of
? primarily from general formula reserves applied to
Bank legacy loan growth from
excludes the loans acquired from the
As a percentage of totalTraditional Bank loans, the Traditional Banking ACLL was 1.33% as ofMarch 31, 2023 compared to 1.32% as ofDecember 31, 2022 and 1.39% as ofMarch 31, 2022 . The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as ofMarch 31, 2023 .
See the sections titled "Allowance for Credit Losses" and "Asset Quality" in
this section of the filing under "Comparison of Financial Condition" for
additional discussion regarding the Provision and the Bank's credit quality.
Warehouse Lending segment
Warehouse recorded a net charge to the Provision of
quarter of 2023 compared to a net credit of
2022. Provision for both periods reflected changes in general reserves
consistent with changes in outstanding period-end balances.
Warehouse
2023 compared to a decrease of
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as ofMarch 31, 2023 ,December 31, 2021 , andMarch 31, 2022 . The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as ofMarch 31, 2023 .
Tax Refund Solutions segment
TRS recorded a net charge to the Provision of$21.8 million during the first quarter of 2023 compared to a net charge of$7.9 million for the same period in 2022. Substantially all TRS Provision in both periods was related to its RA product. TRS recorded a charge to the Provision for RAs, including ERAs, of$22.0 million , or 2.98% of its$737 million in RAs originated during the first quarter of 2023 compared to a net charge to the Provision of$8.3 million , or 2.67% of its$311 million of RAs originated during the first quarter of 2022. The$13.7 million increase in Provision for the first quarter of 2023 was primarily due to the increased volume from the previously mentioned new contract with a large national tax preparation provider which generated approximately$462 million in new RA volume during the first quarter of 2023. RAs related to a first quarter tax filing season are only originated during December of the previous year and the first two months of the current year. As is the case each year as ofMarch 31st , the Allowance related to RAs is an estimate with that estimate finalized during the second quarter when all uncollected RAs are ultimately charged off as ofJune 30th . The final charge-off figures posted during the second quarter of a calendar year can be meaningfully different (higher or lower) than itsMarch 31st estimate based on actual paydowns received during the second quarter. RAs collected during the second half of each year are recorded as recoveries of previously charged-off loans. TRS's loss rate as ofJune 30, 2022 was 2.85% of total originations and it finished 2022 with a RA loss rate of 2.20% of total RAs originated. 79
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For factors affecting the comparison of the TRS results of operations for the
first quarter of 2023 and the first quarter of 2022, see section titled
"OVERVIEW (Three Months Ended
See additional detail regarding the EA product under Footnote 5 "Loans and
Allowance for Credit Losses" of Part I Item 1 "Financial Statements."
Republic
As illustrated in Table 4 below, RCS recorded a net charge to the Provision of$1.8 million during the first quarter of 2023 compared to a net charge to the Provision of$1.4 million for the same period in 2022. The increase in the Provision was driven primarily by a$450,000 increase in net charge-offs for RCS'sLOC II product. The$450,000 , or 63%, increase in net charge-offs within the LOC II product was driven by a$6.3 million , or 126%, increase in average outstanding balances from the first quarter of 2022 to the first quarter of 2023. While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 12.34% as ofMarch 31, 2023 , 13.73% as ofDecember 31, 2022 , and 13.63% as ofMarch 31, 2022 . The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as ofMarch 31, 2023 .
The following table presents net charges to the RCS Provision by product:
Table 4 - RCS Provision by Product
Three Months Ended Mar. 31,
(dollars in thousands) 2023 2022 $ Change % Change
Product:
Lines of credit $ 1,825 $ 1,403 $ 422 30 %
Healthcare receivables 14 (8) 22 NM
Total $ 1,839 $ 1,395 $ 444 32 %
80
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Table 5 - Summary of Loan and Lease Loss Experience
Three Months Ended
March 31,
(dollars in thousands) 2023 2022
ACLL at beginning of period $ 70,413 $ 64,577
CBank Initial Recognition of ACLL 1,600 -
Charge-offs:
Traditional Banking:
Residential real estate (6) -
Consumer (325) (263)
Total Traditional Banking (331) (263)
Warehouse lines of credit - -
Total Core Banking (331) (263)
Republic Processing Group :
Tax Refund Solutions:
Refund Advances - -
Other TRS commercial & industrial loans - -
Republic Credit Solutions (3,099) (2,673)
Total Republic Processing Group (3,099) (2,673)
Total charge-offs (3,430) (2,936)
Recoveries:
Traditional Banking:
Residential real estate 15 43
Commercial real estate 47 1
Commercial & industrial 90 9
Home equity 1 3
Consumer 101 89
Total Traditional Banking 254 145
Warehouse lines of credit - -
Total Core Banking 254 145
Republic Processing Group :
Tax Refund Solutions:
Refund Advances 285 -
Other TRS commercial & industrial loans - 362
Republic Credit Solutions
233 275Total Republic Processing Group 518 637 Total recoveries 772 782 Net loan charge-offs (2,658) (2,154) Provision - Core Banking 3,119 (74) Provision - RPG 23,647 9,307 Total Provision 26,766 9,233 ACLL at end of period$ 96,121 $ 71,656
Credit Quality Ratios -
ACLL to total loans 2.01 % 1.63 % ACLL to nonperforming loans 579 422
Net loan charge-offs to average loans 0.23 0.20
Credit Quality Ratios - Core Banking:
ACLL to total loans 1.22 % 1.20 % ACLL to nonperforming loans 356 303
Net loan charge-offs to average loans 0.01 0.01
81
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Table 6 - Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan
Category
Net Loan
Charge-Offs (Recoveries) to Average Loans
Three Months Ended
March 31,
2023 2022
Traditional Banking:
Residential real estate:
Owner occupied - % - %
Nonowner occupied - -
Commercial real estate (0.01) -
Construction & land development -
- Commercial & industrial (0.09) - Lease financing receivables - - Aircraft - - Home equity - (0.01) Consumer: Credit cards 0.65 0.58 Overdrafts 95.97 90.70 Automobile loans 0.40 (0.03) Other consumer 0.84 (0.26) Total Traditional Banking 0.01 0.01 Warehouse lines of credit - - Total Core Banking 0.01 0.01Republic Processing Group : Tax Refund Solutions: Refund Advances* NM -
Other TRS commercial & industrial loans NM (1.16) Republic Credit Solutions 10.14 2.62Total Republic Processing Group 2.45
0.97 Total 0.23 % 0.20 %
* Refund Advances are originated during the first two months of each year. InDecember 2022 and the first two weeks of 2023, ERAs were originated in relation to estimated tax returns that were anticipated to be filed during the first quarter 2023 tax season. All RAs, including ERAs, are charged-off byJune 30th of each year. The Company's net charge-offs to average total Company loans increased from 0.20% during the first quarter of 2022 to 0.23% during the first quarter of 2023, with net charge-offs increasing$504,000 , or 23%, and average total Company loans increasing$310 million , or 7%. The increase in net charge-offs was primarily driven by a$468,000 increase in net charge-offs within the Company's RCS operations, which has historically conducted higher-risk lending activities that the Company's Core Banking operations. As previously noted above, the net charge-offs within the RCS division was primarily driven by an increase in the average outstanding balances for the RCS LOC II product. During the first quarters of 2023 and 2022, the Company'sCore Bank net charge-offs to averageCore Bank loans remained near zero.
Noninterest Income
of 2023 compared to the same period in 2022.
The following were the most significant components comprising the total
Company's noninterest income by reportable segment:
Traditional Banking segment
Traditional Banking's noninterest income increased$412,000 , or 6%, for the first quarter of 2023 compared to the same period in 2022. There were no notable increases within any particular noninterest income category for theTraditional Bank . The Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months endedMarch 31, 2023 and 2022 were$1.7 million and$1.6 million . The total daily overdraft charges, net of refunds, included in interest income for the three months endedMarch 31, 2023 and 2022 were$294,000 and$288,000 . 82 Table of Contents Mortgage Banking segment
A significant rise in long-term interest rates during the first quarter of 2023 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$2.7 million during the first quarter of 2022 to$817,000 for the first quarter of 2023. For the first quarter of 2023, the Bank sold$17 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold during the quarter of 1.74%. During the first two months of the first quarter of 2022, however, long-term interest rates were notably lower, driving secondary market loan sales of$119 million with comparable cash-gain-as-a-percent-of-loans-sold of 2.29%. With theFOMC ending its quantitative easing program and continuing to signal a more aggressive and hawkish approach to its monetary policies, Management believes it is likely that theCore Bank's mortgage origination volume will continue to be negatively impacted by high long-term interest rates and could experience further declines in mortgage banking income on a year-to-year basis.
Tax Refund Solutions segment
TRS's noninterest income decreased
quarter of 2023 compared to the same period in 2022. The decrease in TRS
noninterest income was primarily a result of the following factors:
? As previously disclosed, RB&T received a
during the first quarter of 2022 for the cancelled Sale Transaction.
Regarding TRS's RT product, net RT revenue decreased 10% from
? during the first quarter of 2022 to
2023. RT revenue for the first quarter of 2023 was negatively impacted by a
general decline in overall RT demand across the industry.
For factors affecting the comparison of the TRS results of operations for the
first quarter of 2023 and the first quarter of 2022, see section titled
"OVERVIEW (Three Months Ended
83
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Republic
RCS's noninterest income decreased$568,000 , or 18%, during the first quarter of 2023 compared to the same period in 2022, with program fees representing the entirety of RCS's noninterest income. The decrease in RCS program fees primarily reflected lower sales volume from RCS's installment loan product. Proceeds from the sale of RCS installment loan products totaled$210 million during the first quarter of 2023, a 18% decrease from the same period in 2022.
The following table presents RCS program fees by product:
Table 7 - RCS Program Fees by Product
Three Months Ended Mar. 31,
(dollars in thousands) 2023 2022 $ Change % Change
Product:
Lines of credit $ 1,740 $ 1,188 $ 552 46 %
Healthcare receivables 49 61 (12) (20)
Installment loans* 745 1,878 (1,133) (60)
Total $ 2,534 $ 3,127 $ (593) (19) %
* 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 quarter of 2023 compared to the same period in 2022.
The following were the most significant components comprising the increase in
noninterest expense by reportable segment:
Traditional Banking segment
Traditional Banking noninterest expense increased$2.6 million for the first quarter of 2023 compared to the same period in 2022. The most notable item driving this increase was$2.1 million of merger related expenses for theCBank acquisition. 84 Table of Contents
COMPARISON OF FINANCIAL CONDITION AS OF
Cash and Cash Equivalents
Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Republic had$249 million in period-end cash and cash equivalents as ofMarch 31, 2023 compared to$314 million as ofDecember 31, 2022 . Comparing average balances for the first quarters of 2023 and 2022, the Company had average interest-earning cash and cash equivalent balances of$241 million for the first quarter of 2023 compared to$554 million for the first quarter of 2022. The decline in average interest-earning cash balances from period to period was driven by a decrease in average deposits and an increase in average loan balances.
See Footnote 6 "Deposits" of Part I Item 1 "Financial Statements" for additional
discussion regarding Deposits
For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This cash earned a weighted-average yield of 4.48% during the first quarter of 2023 with a spot balance yield of 4.90% onMarch 31, 2023 . For cash held within the Bank's banking center and ATM networks, the Bank does not earn interest.Investment Securities Republic's investment portfolio increased$34 million fromDecember 31, 2022 toMarch 31, 2023 , driven by$50 million in portfolio purchases,$16 million of securities acquired in theCBank acquisition, and a$17 million increase in FHLB stock. These increases were offset by portfolio declines resulting from$54 million of calls and maturities of debt securities. 85
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Table 8 - Loan Portfolio Composition
(dollars in thousands) March 31, 2023 December 31,
2022 $ Change % Change
Traditional Banking: Residential real estate: Owner occupied$ 972,214 $ 911,427$ 60,787 7 % Nonowner occupied 328,529 321,358 7,171 2 Commercial real estate 1,682,573 1,599,510 83,063 5 Construction & land development 167,829 153,875 13,954 9 Commercial & industrial 478,101 413,387 64,714 16 Lease financing receivables 73,270 10,505 62,765 597 Aircraft 184,344 179,785 4,559 3 Home equity 250,050 241,739 8,311 3 Consumer: Credit cards 16,775 15,473 1,302 8 Overdrafts 775 726 49 7 Automobile loans 5,267 6,731 (1,464) (22) Other consumer 5,450 626 4,824 771 Total Traditional Banking 4,165,177 3,855,142 310,035 8 Warehouse lines of credit* 457,365 403,560 53,805 13 Total Core Banking 4,622,542
4,258,702 363,840 9
Republic Processing Group*: Tax Refund Solutions: Refund Advances 31,665 97,505 (65,840) (68) Other TRS commercial & industrial loans 8,327 51,767 (43,440) (84) Republic Credit Solutions 111,700 107,828 3,872 4Total Republic Processing Group 151,692
257,100 (105,408) (41)
Total loans** 4,774,234 4,515,802 258,432 6 Allowance for credit losses (96,121) (70,413) (25,708) 37 Total loans, net$ 4,678,113 $ 4,445,389$ 232,724 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 increased by$258 million , or 6%, during the first quarter of 2022 to$4.8 billion as ofMarch 31, 2023 . The most significant components comprising the change in loans by reportable segment follow:
Traditional Banking segment
Period-end balances for Traditional Banking loans increased
from
change in loan balances during the first quarter of 2023:
?
million in connection with the
acquired from
? as the
Lending, Private Banking and
market.
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 mid to late 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, the
residential real estate loans acquired fromCBank , increased$47 86 Table of Contents
million during the first quarter of 2023. By comparison, these two portfolios
declined by
Warehouse Lending segment
Outstanding Warehouse period-end balances increased$54 million fromDecember 31, 2022 toMarch 31, 2023 . Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank's Warehouse 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 first quarter of 2023 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on theBank's Warehouse lines have ranged from a low of 39% during 2022 to a high of 66% during 2020. As previously discussed, additional increases 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$109 million fromDecember 31, 2022 toMarch 31, 2023 primarily reflecting the substantial paydown of ERAs originated duringDecember 2022 . In addition, TRS also received substantial paydowns of commercial loans made during the fourth quarter of 2022 to third-party tax-related businesses for their cash flow needs for the first quarter tax season. RAs, including ERAs, are only made during the December of the previous year and the first two months of each year, with all unpaid RAs charged off byJune 30th of each year.
Republic
Outstanding RCS loans increased$4 million fromDecember 31, 2022 toMarch 31, 2023 primarily reflecting a$5.5 million increase in outstanding balances for RCS's healthcare receivable products.
Allowance for Credit Losses
As ofMarch 31, 2023 , the Bank maintained an ACLL for expected credit losses inherent in the Bank's loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly. The Company's ACLL increased$26 million from$70 million as ofDecember 31, 2022 to$96 million as ofMarch 31, 2023 . As a percent of total loans, the total Company's ACLL increased to 2.01% as ofMarch 31, 2023 compared to 1.56% as ofDecember 31, 2022 . An analysis of the ACL by reportable segment follows:
Traditional Banking segment
The Traditional Banking ACLL increased approximately$5 million to$55 million as ofMarch 31, 2023 driven primarily by formula reserves tied to loan growth during the first quarter of 2023, a$2.7 million Day-1 Provision for the$214 million of non-PCD loans acquired from theCBank acquisition, and a$2 million Allowance for the PCD loans acquired from theCBank acquisition. 87 Table of Contents Warehouse Lending segment The Warehouse ACLL increased to approximately$134,000 , and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparingMarch 31, 2023 toDecember 31, 2022 . As ofMarch 31, 2023 , the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first quarter of 2023.
Tax Refund Solutions segment
TRS recorded a charge to the Provision for RA loans of$22.0 million , or 2.98% of its$737 million in RAs originated during the first quarter of 2023. This compares to a net charge to the Provision of$8.3 million , or 2.67% of its$311 million of RAs originated during the first quarter of 2022. The$13.5 million increase in Provision for the first quarter of 2023 was primarily due to the increased volume from the new contract with the large national tax preparer. Including early season RAs originated during the fourth quarter of 2022, TRS had a total Allowance for RAs of$25.8 million as ofMarch 31, 2023 , representing 3.09% of all RAs originated related to the first quarter 2023 tax season. TRS's loss rate as ofJune 30, 2022 was 2.85% of total originations and TRS finished 2022 with a final RA loss rate of 2.20% of total RAs originated. RAs are only originated during December of the previous year and the first two months of the current year related to the first quarter tax season of a year. As is the case each year as ofMarch 31st , the Allowance related to RAs is an estimate with that estimate finalized during the second quarter when all uncollected RAs are ultimately charged off as ofJune 30th . The final charge-off figures posted during the second quarter of a calendar year can be meaningfully different (higher or lower) than itsMarch 31st estimate based on actual paydowns received during the second quarter. RAs collected during the second half of each year are recorded as recoveries of previously charged-off loans.
Republic
The RCS ACLL decreased$1 million from$15 million as ofDecember 31, 2022 to$14 million as ofMarch 31, 2023 , with this decrease driven by a decrease in the RCS LOC II reserve percentage and a change in the RCS loan mix as the outstanding healthcare receivable spot balance increased and the RCS LOC spot balance decreased. RCS maintained an ACLL for two distinct credit products offered as ofMarch 31, 2023 , including its line-of-credit products and its healthcare-receivables products. As ofMarch 31, 2023 , the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 51.79% for its line-of-credit products. The lower reserve percentage of 0.25% was provided for RCS's healthcare receivables, as such receivables have recourse back to the third-party providers.
Asset Quality
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 increased approximately$3 million during the first quarter of 2023, driven primarily by commercial-purpose loans repaid or upgraded to a Pass rating during the first quarter of 2023.
See Footnote 5 "Loans and Allowance for Credit Losses" of Part I Item 1
"Financial Statements" for additional discussion regarding Classified and
Special Mention loans.
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Table 9 - Classified and Special Mention Loans
(dollars in thousands) March 31, 2023 December 31, 2022 $ Change % Change Loss $ - $ - $ - - % Doubtful - - - - Substandard 19,011 17,010 2,001 12 PCD - Substandard 3,650 1,498 2,152 144 Total Classified Loans 22,661 18,508 4,153 22 Special Mention 68,622 69,246 (624) (1) PCD - Special Mention 328 718 (390) (54) Total Special Mention Loans 68,950 69,964 (1,014) (1) Total Classified and Special Mention Loans$ 91,611 $ 88,472$ 3,139 4 % 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
loan modifications (formerly TDRs) totaling approximately
million
Nonperforming loans to total loans decreased to 0.35% atMarch 31, 2023 from 0.36% atDecember 31, 2022 , as the total balance of nonperforming loans increased by$292,000 , or 2%, while total loans increased$258 million , or 6%, during the first quarter of 2023. As presented in Tables 13 and 14 below, the decrease in nonperforming loans during 2023, including the nonaccrual loan component, was primarily driven by the improvement of$1 million of these loans, which returned to accrual status. The ACLL to total nonperforming loans increased to 607% as ofMarch 31, 2023 from 452% as ofDecember 31, 2022 , as the total ACLL increased$26 million , or 37%, and the balance of nonperforming loans increased by$292,000 , or 2%. The driver of the increase in ACLL was primarily RAs originated through the Company's TRS segment and, while the driver of the decrease in nonperforming loans primarily driven by the improvement of$1 million of these loans, which returned to accrual status during the first quarter of 2023. 89
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Table 10 - Nonperforming Loans and Nonperforming Assets Summary
(dollars in thousands) March 31, 2023 December 31, 2022 Loans on nonaccrual status* $ 15,833 $ 15,562 Loans past due 90-days-or-more and still on accrual** 777 756 Total nonperforming loans 16,610 16,318 Other real estate owned 1,529 1,581 Total nonperforming assets $ 18,139 $ 17,899 Credit Quality Ratios -Total Company : ACLL to total loans 2.01 % 1.56 % Nonaccrual loans to total loans 0.33
0.34
ACLL to nonaccrual loans 607
452
Nonperforming loans to total loans 0.35
0.36
Nonperforming assets to total loans (including OREO) 0.38
0.40
Nonperforming assets to total assets 0.30
0.31
Credit Quality Ratios -Core Bank : ACLL to total loans 1.22 % 1.21 % Nonaccrual loans to total loans 0.34
0.37
ACLL to nonaccrual loans 356
332
Nonperforming loans to total loans 0.34
0.37
Nonperforming assets to total loans (including OREO) 0.38
0.40
Nonperforming assets to total assets 0.32
0.32
Loans on nonaccrual status include collateral-dependent loans. See Footnote 5
* "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements"
for additional discussion regarding collateral-dependent loans.
** Loans past due 90-days-or-more and still accruing consist of smaller balance
consumer loans.
Table 11 - Nonperforming Loan Composition
March 31, 2023 December 31, 2022
Percent of Percent of
Total Total
(dollars in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 13,046 1.34 % $ 13,388 1.47 %
Nonowner occupied 76 0.02 117 0.04
Commercial real estate 1,568 0.09 1,001 0.06
Construction & land development - -
- - Commercial & industrial - - - - Lease financing receivables - - - - Aircraft - - - - Home equity 904 0.36 815 0.34 Consumer: Credit cards - - - - Overdrafts - - - - Automobile loans 33 0.63 31 0.46 Other consumer 206 3.78 210 33.55 Total Traditional Banking 15,833 0.38 15,562 0.40 Warehouse lines of credit - - - - Total Core Banking 15,833 0.34 15,562 0.37Republic Processing Group : Tax Refund Solutions: Refund Advances - - - -
Other TRS commercial & industrial loans - - - - Republic Credit Solutions 777 0.70 756 0.70Total Republic Processing Group 777 0.51
756 0.29 Total nonperforming loans$ 16,610 0.35 %$ 16,318 0.36 % 90 Table of Contents
Table 12 - Stratification of Nonperforming Loans
Number of Nonperforming
Loans and
Balance March 31, 2023 Balance >$100 & Balance Total (dollars in thousands) No. <=$100 No. <=$500 No. >$500 No. Balance Traditional Banking: Residential real estate: Owner occupied 122$ 4,146 46$ 7,052 2$ 1,848 170$ 13,046 Nonowner occupied 3 76 - - - - 3 76 Commercial real estate - - 1 223 2 1,345 3 1,568 Construction & land development - - - - - - - - Commercial & industrial - - - - - - - -
Lease financing receivables - - - -
- - - - Aircraft - - - - - - - - Home equity 28 802 1 102 - - 29 904 Consumer: Credit cards - - - - - - - - Overdrafts NM - - - - - NM - Automobile loans 5 33 - - - - 5 33 Other consumer 1 1 1 205 - - 2 206
Total Traditional Banking 159 5,058 49 7,582 4 3,193 212 15,833 Warehouse lines of credit - - - - - - - - Total Core Banking 159 5,058 49 7,582
4 3,193 212 15,833
Republic Processing Group : Tax Refund Solutions: Refund Advances - - - - - - - - Other TRS commercial & industrial loans - - - - - - - -
Republic Credit Solutions NM - - - - 777 NM 777 Total Republic Processing Group NM - - - - 777 NM 777 Total 159$ 5,058 49$ 7,582 4$ 3,970 212$ 16,610 Number of Nonperforming
Loans and
Balance December 31, 2022 Balance >$100 & Balance Total (dollars in thousands) No. <=$100 No. <=$500 No. >$500 No. Balance Traditional Banking: Residential real estate: Owner occupied 134$ 4,650 45$ 7,353 1$ 1,385 180$ 13,388 Nonowner occupied 4 117 - - - - 4 117 Commercial real estate - - 1 232 1 769 2 1,001 Construction & land development - - - - - - - - Commercial & industrial - - - - - - - -
Lease financing receivables - - - -
- - - - Aircraft - - - - - - - - Home equity 28 711 1 104 - - 29 815 Consumer: Credit cards - - - - - - - - Overdrafts NM - - - - - NM - Automobile loans 6 31 - - - - 6 31 Other consumer - - 1 210 - - 1 210
Total Traditional Banking 172 5,509 48 7,899 2 2,154 222 15,562 Warehouse lines of credit - - - - - - - - Total Core Banking 172 5,509 48 7,899
2 2,154 222 15,562
Republic Processing Group : Tax Refund Solutions: Refund Advances - - - - - - - - Other TRS commercial & industrial loans - - - - - - - -
Republic Credit Solutions NM - - - - 756 NM 756 Total Republic Processing Group NM - - - - 756 NM 756 Total 172$ 5,509 48$ 7,899 2$ 2,910 222$ 16,318 91 Table of Contents
Table 13 - Roll-forward of Nonperforming Loans
Three Months Ended
March 31,
(in thousands) 2023 2022
Nonperforming loans at the beginning of the period
20,552
Loans added to nonperforming status during the period
that remained nonperforming at the end of the period
2,669
1,607
Loans removed from nonperforming status during the
period that were nonperforming at the beginning of
the period (see table below)
(2,015)
(4,799)
Principal balance paydowns of loans nonperforming at both period ends (383)
(378)
Net change in principal balance of other loans nonperforming at both period ends* 21
(16)
Nonperforming loans at the end of the period$ 16,610 $
16,966
* Includes relatively small consumer portfolios, e.g., RCS loans.
Table 14 - Detail of Loans Removed from Nonperforming Status
Three Months Ended
March 31,
(in thousands) 2023 2022
Loans charged off $ - $ -
Loans transferred to OREO - -
Loan payoffs and paydowns (770) (4,595)
Loans returned to accrual status (1,245)
(204)
Total loans removed from nonperforming status during
the period that were nonperforming at the beginning of
the period
$ (2,015) $
(4,799)
Based on the Bank's review as of
reserves are adequate to absorb expected losses on all nonperforming loans.
Delinquent Loans
Total Company delinquent loans to total loans increased to 0.76% as ofMarch 31, 2023 from 0.34% as ofDecember 31, 2022 .Core Bank delinquent loans to totalCore Bank loans decreased to 0.12% as ofMarch 31, 2023 from 0.14% as ofDecember 31, 2022 . With the exception of small-dollar consumer loans, allTraditional Bank loans past due 90-days-or-more as ofMarch 31, 2023 andDecember 31, 2022 were on nonaccrual status. 92
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Table 15 - Delinquent Loan Composition*
March 31, 2023 December 31, 2022
Percent of Percent of
Total Total
(dollars in thousands) Balance Loan Class Balance Loan Class
Traditional Banking:
Residential real estate:
Owner occupied $ 4,711 0.48 % $ 4,834 0.53 %
Nonowner occupied - - - -
Commercial real estate 602 0.04 604 0.04
Construction & land development - -
- - Commercial & industrial - - 177 0.04 Lease financing receivables - - - - Aircraft - - - - Home equity 63 0.03 175 0.07 Consumer: Credit cards 30 0.18 55 0.36 Overdrafts 112 14.45 160 22.04 Automobile loans 13 0.25 11 0.16 Other consumer 6 0.11 44 7.03 Total Traditional Banking 5,537 0.13 6,060 0.16 Warehouse lines of credit - - - - Total Core Banking 5,537 0.12 6,060 0.14Republic Processing Group : Tax Refund Solutions: Refund Advances 18,450 58.27 - -
Other TRS commercial & industrial loans 406 4.88 - - Republic Credit Solutions 11,731 10.50 9,200 8.53Total Republic Processing Group 30,587 20.16
9,200 3.58 Total delinquent loans$ 36,124 0.76 %$ 15,260 0.34 %
* Represents total loans 30-days-or-more past due. Delinquent status may be
determined by either the number of days past due or number of payments past due.
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Table 16 - Roll-forward of Delinquent Loans
Three Months Ended
March 31,
(in thousands) 2023 2022
Delinquent loans at the beginning of the period
Loans that became delinquent during the period - Refund
Advances*
18,450
4,524
Loans added to delinquency status during the period and
remained in delinquency status at the end of the period 2,675
2,103
Loans removed from delinquency status during the period
that were in delinquency status at the beginning of the
period (see table below)
(3,094)
(3,604)
Principal balance paydowns of loans delinquent at both period ends (31)
(28)
Net change in principal balance of other loans delinquent at both period ends* 2,864
(245)
Delinquent loans at the end of period$ 36,124 $
16,215
RAs do not have a contractual due date but the Company considered a RA
* delinquent in 2022 and 2022 if it remained unpaid 35 days after the taxpayer's
tax return was submitted to the applicable taxing authority.
** Includes relatively-small consumer portfolios, e.g., RCS loans.
Table 17 - Detail of Loans Removed from Delinquent Status
Three Months Ended
March 31,
(in thousands) 2023 2022
Loans charged off $ (1) $ (1)
Refund Advances paid off or charged off -
- Loans transferred to OREO - - Loan payoffs and paydowns (510) (3,418) Loans paid current (2,583) (185)
Total loans removed from delinquency status during
the period that were in delinquency status at the
beginning of the period
$ (3,094) $
(3,604)
Collateral-Dependent Loans and Loan Modifications
When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs, if appropriate. The Bank's policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected. A loan modification (formerly a TDR prior to the adoption of ASU 2022-02) is a situation where, due to a borrower's financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank's loan modifications involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan's interest rate, and/or extending the maturity date of the debt. Nonaccrual loans modified as loan modifications remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as loan modifications are evaluated for nonaccrual status based on a current evaluation of the borrower's financial condition and ability and willingness to service the modified debt. With the adoption of ASU 2022-02 in 2023, all loan modifications will now be recognized as collateral-dependent. As ofMarch 31, 2023 there were$1 million collateral-dependent loan modifications.
Table 18 - Collateral-Dependent Loans and Troubled Debt Restructurings
(dollars in thousands) December 31, 2022 Cashflow-dependent TDRs $ 5,761 Collateral-dependent TDRs 6,265 Total TDRs 12,026
Collateral-dependent loans (which are not TDRs)
14,186
Total recorded investment in TDRs and collateral-dependent loans $
26,212
See Footnote 5 "Loans and Allowance for Credit Losses" of Part I Item 1 "Financial Statements" for additional discussion regarding collateral-dependent loans and loan modifications and Footnote 1 "Basis of Presentation and Summary of Significant Accounting Policies" for additional discussion regarding ASU
2022-02.
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Deposits
Table 19 - Deposit Composition
(in thousands) March 31, 2023 December 31, 2022 $ Change % Change Core Bank: Demand$ 1,272,086 $ 1,336,082$ (63,996) (5) % Money market accounts 794,710 707,272 87,438 12 Savings 316,947 323,015 (6,068) (2) Reciprocal money market 123,486 28,635 94,851 331 Individual retirement accounts (1) 36,334 38,640 (2,306) (6) Time deposits,$250 and over (1) 46,687 54,855 (8,168) (15) Other certificates of deposit (1) 176,257 129,324 46,933 36 Reciprocal time deposits (1) 13,273 7,405 5,868 79Total Core Bank interest-bearing deposits 2,779,780 2,625,228 154,552 6Total Core Bank noninterest-bearing deposits 1,471,180 1,464,493 6,687 0Total Core Bank deposits 4,250,960 4,089,721 161,239 4Republic Processing Group : Money market accounts 5,931 3,849 2,082 54 Total RPG interest-bearing deposits 5,931 3,849 2,082 54
Brokered prepaid card deposits 390,052 328,655 61,397 19 Other noninterest-bearing deposits 152,725 115,620 37,105 32 Total RPG noninterest-bearing deposits 542,777 444,275 98,502 22 Total RPG deposits 548,708 448,124 100,584 22 Total deposits$ 4,799,668 $ 4,537,845$ 261,823 6 % (1) Includes time depositTotal Bank deposits increased$262 million fromDecember 31, 2022 to$4.8 billion as ofMarch 31, 2023 .Total Core Bank deposits increased by$161 million with theCBank acquisition resulting in$283 million of this growth.Core Bank legacy deposits, which excludes the deposits assumed from theCBank acquisition, decreased$122 million , or 3%, fromDecember 31, 2022 . Within theCore Bank's legacy deposits, interest-bearing deposits decreased$28 million and noninterest-bearing deposits decreased$94 million . The decline inCore Bank legacy deposits was a continuing trend from the second half of 2022. Management believes the net decrease inCore Bank interest-bearing deposits was generally due to clients' responses to the low deposit beta the Bank maintained throughout 2022 and most of the first quarter of 2023. A deposit beta measures the change in the interest rates the Bank pays for its interest-bearing deposit accounts versus the change in the federal funds target rate, which is a public index the Bank generally uses to price its non-maturity, interest-bearing deposits. A low deposit beta would indicate that the Bank has not changed the interest rates it pays on deposit accounts to the same magnitude as theFOMC has changed the FFTR. For most of the previous 12 months, the Bank has continued a general strategy to maintain a low deposit beta as part of its approach to increase its overall net interest margin and net interest income. In general, the Bank maintained a low deposit beta during this period by not applying across-the-board increases in rates to all its interest-bearing accounts as a result of increases to the FFTR. Instead, the Bank applied a nominal amount of the FFTR's increases to products on an across-the-board basis and selectively applied larger rate increases for more price-sensitive commercial accounts. This strategy played a significant part in expanding theCore Bank's net interest margin throughout 2022 and into the first quarter of 2023 as the Bank's yield on its interest earning assets generally outpaced the cost of its interest-bearing liabilities as the FFTR increased. As a result of this strategy, however, the Bank did experience a decline in both personal and business account balances during the second half of 2022 and the first quarter of 2023 as some clients moved their funds to more attractive offerings outside of the Bank. In response to this deposit outflow, the Bank expects to begin marketing select deposit products during the second quarter of 2023, such as money market accounts and short-term certificates of deposit, with higher offering rates. Management is unsure if these offering rates will reverse the recent trend of deposit outflows. Regardless, Management does believe these higher offering rates will raise theTraditional Bank's overall cost of funds and begin to cause contraction to its net interest margin on a linked-quarter basis. This strategy is subject to change depending upon several factors including, but not limited to, the Bank's overall current and projected liquidity positions, its clients' demand for its loans and deposit products, the Bank's overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term. 95
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In addition to the above, theCore Bank also experienced a$160 million decrease in its legacy noninterest-bearing deposits. Management believes two factors generally drove this overall decrease in noninterest-bearing deposits. The first is a general decline in liquidity among both businesses and consumers as the excess liquidity created during the COVID pandemic continued to wane. Second, Management believes that the substantial increase in market interest rates caused the difference between what a client can earn for an interest-bearing deposit versus the client's lack of a financial return for a noninterest-bearing deposit to become large enough to cause some clients to pursue other opportunities for their cash outside the Bank.
As a result of all the factors noted above, Management believes the Company is
more likely to experience slower overall growth and possibly, a continued
decline in its deposits over the foreseeable future.
Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
SSUARs are collateralized by securities and are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets
and are held by a safekeeping agent and the obligations to repurchase the
securities are reflected as liabilities. All securities underlying the
agreements are under the Bank's control.
SSUARs decreased$82 million , or 39%, during the first three months of 2023 to$131 million as ofMarch 31, 2023 . SSUARs generally represent large customer relationships deposited into the Bank that require security collateral above the$250,000 FDIC insurance limit of the Bank. Due to the size of the underlying relationships, large fluctuations in the underlying account balances from period to period are common. As it did with interest-bearing deposits, the Bank generally maintained a low beta strategy with its SSUARs over the past 12 months. As a result of this strategy, the Bank experienced a decline in SSUAR balances as some clients moved their funds to more attractive offerings outside of the Bank. As was noted with deposits, the Bank expects to market more attractive offering rates to its clients during the second quarter of 2023 and could do the same for its SSUAR clients. This strategy is subject to change depending upon several factors including, but not limited to, the Bank's overall current and projected liquidity positions, its clients' demand for its loans and deposit products, the Bank's overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.
Federal Home Loan Bank Advances
The Bank's total FHLB advances were$108 million as ofMarch 31, 2023 compared to$95 million as ofDecember 31, 2022 and$20 million as ofMarch 31, 2022 . Approximately$88 million of these borrowings were overnight in nature as ofMarch 31, 2023 compared to$75 million as ofDecember 31, 2022 . The Company has utilized FHLB advances over the past year to fund its deposit outflow and overall loan growth. As ofMarch 31, 2023 , the Company's$108 million of FHLB advances had a weighted-average maturity of 0.93 years and a weighted-average cost of 4.31%. Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.
Interest Rate Swaps
The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank's interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.
See Footnote 13 "Interest Rate Swaps" of Part I Item 1 "Financial Statements"
for additional discussion regarding the Bank's interest rate swaps.
Liquidity
The Bank maintains sufficient liquidity to fund routine loan demand and routine
deposit withdrawal activity. Liquidity is managed by maintaining sufficient
liquid assets, primarily in the form of cash, cash equivalents, and unencumbered
investment securities. Funding and cash flows can also be realized through
deposit product promotions, the sale of AFS debt securities, principal paydowns
on loans and mortgage-backed securities, and proceeds realized from loans held
for sale.
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Table 20 - Liquid Assets and Borrowing Capacity
The Company's liquid assets and borrowing capacity included the following:
(in thousands) March 31, 2023 December 31, 2022 Cash and cash equivalents$ 249,289 $ 313,689 Unencumbered debt securities 479,296 438,052 Total liquid assets 728,585 751,741
Available borrowing capacity with the FHLB 929,688
899,362
Available borrowing capacity through unsecured credit lines 125,000
125,000
Total available borrowing capacity 1,054,688
1,024,362
Total liquid assets and available borrowing capacity$ 1,783,273 $
1,776,103
The Bank had a loan to deposit ratio (excluding brokered deposits) of 99% as ofMarch 31, 2023 and 100% as ofDecember 31, 2022 . Republic's banking centers and its website, www.republicbank.com, provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were cancelled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs. As noted in the sections above titled "Deposits" and "Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings", the Bank implemented a general strategy during the last 12 months to maintain a low beta for its client-related interest-bearing liabilities as part of its overall strategy to increase its net interest margin and net interest income. As a result of this strategy, however, the Bank did experience a decline in both personal and business deposit balances and SSUAR balances as some clients moved their funds to more attractive offerings outside of the Bank. In response to this deposit outflow, the Bank expects to begin marketing select deposit products during the second quarter of 2023, such as money market accounts and short-term certificates of deposit, with higher offering rates. Management is unsure if these offering rates will reverse the recent trend of deposit outflows. Regardless, Management does believe these higher offering rates will raise theTraditional Bank's overall cost of funds and begin to cause contraction to its net interest margin on a linked-quarter basis. This strategy is subject to change depending upon several factors including, but not limited to, the Bank's overall current and projected liquidity positions, its clients' demand for its loans and deposit products, the Bank's overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term. As ofMarch 31, 2023 , the Bank had approximately$915 million in deposits from 194 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded$2 million . Total uninsured deposits for the Bank were$1.8 billion , or 38%, of total deposits as ofMarch 31, 2023 . The 20 largest non-sweep deposit relationships represented approximately$282 million , or 6%, of the Company's total deposit balances as of as ofMarch 31, 2023 . These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than theTraditional Bank deposits they replace, potentially decreasing the Bank's earnings. The Bank's liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. As ofMarch 31, 2023 andDecember 31, 2022 , these pledged investment securities had a fair value of$134 million and$218 million .
Capital
Total stockholders' equity increased from$857 million as ofDecember 31, 2022 to$882 million as ofMarch 31, 2023 . The increase in stockholders' equity was primarily attributable to net income earned during 2023 reduced primarily by cash dividends declared. 97 Table of Contents Common Stock - The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and ClassB Common shares have ten votes per share. ClassB Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic's capital stock. Dividend Restrictions -The Parent Company's principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states' banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years. As ofApril 1, 2023 , RB&T could, without prior approval, declare dividends of approximately$107 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 14.15% as ofMarch 31, 2023 compared to 13.41% as ofDecember 31, 2022 . Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.
Table 21 - Capital Ratios (1)
As of March 31, 2023 As of December 31, 2022
(dollars in thousands) Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Republic Bancorp, Inc. $ 933,317 17.18 % $ 941,865 17.92 %
Republic Bank & Trust Company 894,843 16.48
904,592 17.23
Common equity tier 1 capital to risk-weighted assets Republic Bancorp, Inc.$ 869,187 16.00 %$ 877,735 16.70 % Republic Bank & Trust Company 826,672 15.23 840,462 16.01 Tier 1 (core) capital to risk-weighted assets Republic Bancorp, Inc.$ 869,187 16.00 %$ 877,735 16.70 % Republic Bank & Trust Company 826,672 15.23 840,462 16.01 Tier 1 leverage capital to average assets Republic Bancorp, Inc.$ 869,187 14.74 %$ 877,735 14.81 % Republic Bank & Trust Company 826,672 13.30 840,462 14.09 98 Table of Contents 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
estimated CECL impact 100% deferred for the first two years, then phased in
(1) over the next three years. If not for this election, the Company's regulatory
capital ratios would have been approximately 6 basis points and 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.
99
Table of Contents
As ofMarch 31, 2023 , a dynamic simulation model was run for interest rate changes from "Down 200" basis points to "Up 300" basis points. The following table illustrates the Bank's projected percent change from its Base net interest income over the period beginningApril 1, 2023 and endingMarch 31, 2024 based on instantaneous movements in interest rates from Down 200 to Up 300 basis points equally across all points on the yield curve. The Bank's dynamic earnings simulation model includes secondary market loan fees and excludesTraditional Bank loan fees.
Table 22 - 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 March 31, 2023 (2.0) % (1.1) % 0.7 % 1.4 % 2.1 %
% Change from base net interest
income as of December 31, 2022 (2.8) % (0.6) % 1.8 % 3.7 % 5.7 %
The most material changes noted for the Bank's interest rate sensitivity
projections from
scenarios, while the down-rate scenarios reflected modest changes.
The period-to-period declines in the up-rate scenarios were generally tied to two main factors. First, the Company's average interest-earning cash balances further declined from December to March. As a result, the benefit the Company expects to receive from rising short-term interest rates, as a result of its immediately repricing interest-earning cash, decreased. Second, the Company increased its assumed deposit betas from December to March in anticipation of a more competitive deposit gathering and retention environment. These higher deposit betas resulted in higher projected costs for the Company's interest-bearing deposits in a rising rate environment.
For further discussion of interest-bearing deposit betas, see section titled
"Deposits" in this Form 10-Q.
LIBOR Exposure InJuly 2017 , theFinancial Conduct Authority ("FCA"), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, inNovember 2020 , theFCA announced that many tenors of LIBOR would continue to be published throughJune 2023 . In compliance with regulatory guidance, the Bank discontinued referencing LIBOR for new financial instruments during 2021 and chose SOFR to be its primary alternative reference rate for most transaction types upon the discontinuance or unavailability of LIBOR. Regarding its legacy assets that reference LIBOR, the Bank has previously disclosed that the underlying contracts for these assets may not include adequate "fallback" language to use alternative indexes and margins when LIBOR ceases. However, onMarch 15, 2022 ,President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the "LIBOR Law"), which is designed to accomplish the following:
Establish a clear and uniform process, on a nationwide basis, for replacing
? LIBOR in existing contracts, the terms of which do not provide for the use of a
clearly defined or practicable replacement benchmark rate, without affecting
the ability of parties to use any appropriate benchmark rate in new contracts;
Preclude litigation related to existing contracts, the terms of which do not
? provide for the use of a clearly defined or practicable replacement benchmark
rate;
Allow existing contracts that reference LIBOR but provide for the use of a
? clearly defined and practicable replacement rate to operate according to their
terms; and
? Address LIBOR references in federal law.
With limited exception, the LIBOR Law generally covers legacy LIBOR contracts with no or inadequate fallback provisions. Additionally, under the LIBOR Law, theBoard of Governors of theFederal Reserve System (the "FRB Board") issued final regulations inDecember 2022 that included the selection of an FRB Board-Selected Benchmark Replacement based on SOFR and incorporates an applicable tenor spread adjustment and identification of any related conforming changes. As ofMarch 31, 2023 , the Company had approximately$421 million of legacy assets that reference LIBOR, with short-term Warehouse loans representing$6 million of these assets, investment securities representing$62 million , and commercial and mortgage loans primarily making up the remainder. As ofMarch 31, 2023 , of the Bank's legacy assets that reference LIBOR, 100
Table of Contents
approximately$416 million of those assets were scheduled to mature afterJune 30, 2023 . These amounts exclude derivative assets and liabilities on the Company's consolidated balance sheet. As ofMarch 31, 2023 , the notional amount of the Company's LIBOR-referenced interest rate derivative contracts was approximately$178 million , with$178 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 ended
months ended
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