Republic Bancorp(RBCAA) - 2022 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents Republic Bancorp, Inc.'s unaudited consolidated financial statements and management's discussion for the quarter ended March 31, 2022 Item 1. Financial Statements. This section presents the unaudited consolidated financial statements of Republic Bancorp, Inc. for the quarter ended March 31, 2022, including balance sheets, income statements, comprehensive income, stockholders' equity, and cash flows, along with detailed notes on accounting policies, investment securities, loans, deposits, and other financial instruments CONSOLIDATED BALANCE SHEETS (UNAUDITED) This statement provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity as of March 31, 2022, and December 31, 2021 | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total Assets | $6,349,869 | $6,093,632 | | Cash and cash equivalents | $1,077,158 | $756,971 | | Loans, net | $4,318,587 | $4,431,985 | | Total Deposits | $5,087,106 | $4,840,418 | | Total Liabilities | $5,509,540 | $5,259,400 | | Total Stockholders' Equity | $840,329 | $834,232 | CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) This statement outlines the company's revenues, expenses, and net income for the three months ended March 31, 2022, and 2021 | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Income | $27,926 | $26,053 | | Total Interest Income | $63,555 | $69,557 | | Net Interest Income | $62,612 | $67,780 | | Provision for expected credit loss expense | $9,226 | $15,262 | | Total Noninterest Income | $31,001 | $29,037 | | Contract termination fee | $5,000 | $0 | | Basic Earnings Per Share (Class A) | $1.40 | $1.26 | | Diluted Earnings Per Share (Class A) | $1.40 | $1.25 | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) This statement presents the company's net income and other comprehensive income components, such as unrealized gains/losses on AFS debt securities, for the three months ended March 31, 2022, and 2021 | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Income | $27,926 | $26,053 | | Unrealized losses on AFS debt securities | $(21,249) | $(2,029) | | Total other comprehensive income (loss), net of tax | $(15,917) | $(1,511) | | Comprehensive Income | $12,009 | $24,542 | CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) This statement details changes in the company's stockholders' equity, including net income, OCI, and dividends, for the three months ended March 31, 2022 | Metric | March 31, 2022 (in thousands) | January 1, 2022 (in thousands) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Total Stockholders' Equity | $840,329 | $834,232 | | Net income | $27,926 | - | | Net change in AOCI | $(15,917) | - | | Dividends declared on Class A Shares | $(6,081) | - | CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) This statement categorizes cash flows into operating, investing, and financing activities, showing the net change in cash for the three months ended March 31, 2022, and 2021 | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by operating activities | $80,444 | $16,771 | | Net cash provided by investing activities | $7,188 | $199,969 | | Net cash provided by financing activities | $232,555 | $282,530 | | Net change in cash and cash equivalents | $320,187 | $499,270 | | Cash and cash equivalents at end of period | $1,077,158 | $984,857 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and additional information supporting the consolidated financial statements, covering accounting policies, specific financial instruments, and segment data 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Republic Bancorp, Inc. operates as a financial holding company through its subsidiary bank and an insurance subsidiary, structured into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking (Core Bank), Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS) (RPG); the company recorded a $5.0 million contract termination fee in Q1 2022 related to the cancelled sale of TRS assets, while recently adopted accounting standards had an immaterial impact, and new ASUs on derivatives and credit losses are being analyzed for future impact - Republic Bancorp, Inc. operates as a financial holding company with Republic Bank & Trust Company and Republic Insurance Services, Inc. (Captive)[18] - The Company is divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking (collectively "Core Bank"), Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS) (collectively "RPG")[21] - Green Dot Corporation paid RB&T a contract termination fee of $5.0 million during the first quarter of 2022 after RB&T terminated the May 2021 Purchase Agreement for the sale of substantially all of RB&T's TRS assets and operations[33] - Recently adopted ASUs (2020-06 and 2021-04) had an immaterial financial statement impact upon adoption on January 1, 2022[41] - ASU 2022-02, which eliminates Troubled Debt Restructuring (TDR) recognition and measurement guidance, is effective January 1, 2023, and its impact on financial statements is currently being analyzed[44] 2. INVESTMENT SECURITIES The company's available-for-sale (AFS) debt securities increased to $573.5 million as of March 31, 2022, from $495.1 million at December 31, 2021, but experienced a significant increase in gross unrealized losses, primarily due to changes in interest rates; held-to-maturity (HTM) debt securities slightly decreased, and the Allowance for Credit Losses on Securities (ACLS) for HTM corporate bonds decreased due to improved credit estimates Available-for-Sale Debt Securities | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Amortized Cost | $592,264 | $492,626 | | Fair Value | $573,539 | $495,126 | | Gross Unrealized Gains | $2,230 | $5,897 | | Gross Unrealized Losses | $(20,955) | $(3,397) | Held-to-Maturity Debt Securities | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Amortized Cost | $38,835 | $44,346 | | Fair Value | $39,087 | $44,764 | | Gross Unrecognized Gains | $256 | $424 | | Gross Unrecognized Losses | $(4) | $(6) | - As of March 31, 2022, 69 out of 180 securities were in an unrealized loss position, totaling $20.96 million, primarily due to interest rate changes and illiquidity, not credit quality[51][56] - The Allowance for Credit Losses on Securities (ACLS) for HTM corporate bonds decreased during Q1 2022 due to improved Probability of Default (PD) and Loss Given Default (LGD) estimates[58] Equity Securities with Readily Determinable Fair Values | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Fair Value | $2,502 | $2,620 | | Net Unrealized Gains (Losses) | $(118) | $(262) | 3. LOANS HELD FOR SALE Mortgage loans held for sale decreased significantly to $13.3 million as of March 31, 2022, from $29.4 million at December 31, 2021; consumer loans held for sale (at fair value) also decreased to $11.7 million from $19.7 million, while those held at the lower of cost or fair value slightly increased Mortgage Loans Held for Sale, at Fair Value Activity (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Balance, end of period | $13,302 | $63,636 | | Origination | $100,661 | $213,587 | | Proceeds from sale | $(119,212) | $(203,815) | | Net gain on sale | $2,460 | $6,997 | Consumer Loans Held for Sale, at Fair Value Activity (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Balance, end of period | $11,709 | $3,970 | | Origination | $96,732 | $19,090 | | Proceeds from sale | $(106,648) | $(18,930) | | Net gain on sale | $1,878 | $512 | Consumer Loans Held for Sale, at Lower of Cost or Fair Value Activity (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Balance, end of period | $3,026 | $11,701 | | Origination | $148,482 | $98,184 | | Proceeds from sale | $(149,632) | $(88,753) | | Net gain on sale | $1,239 | $792 | 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES Total loans decreased by $106.3 million, or 2%, to $4.39 billion as of March 31, 2022, primarily due to decreases in Warehouse lines of credit and PPP loans, partially offset by growth in Commercial Real Estate (CRE) loans; the Allowance for Credit Losses on Loans (ACLL) increased by $7.1 million, or 11%, to $71.7 million, while nonperforming loans and assets decreased, and delinquency ratios improved for Core Bank but increased for RPG Loan Portfolio Composition | Loan Category | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change ($) | Change (%) | | :----------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Traditional Banking | $3,570,786 | $3,501,959 | $68,827 | 2% | | Warehouse lines of credit | $690,200 | $850,550 | $(160,350) | (19)% | | Tax Refund Solutions | $41,607 | $50,987 | $(9,380) | (18)% | | Republic Credit Solutions | $87,650 | $93,066 | $(5,416) | (6)% | | Total Loans | $4,390,243 | $4,496,562 | $(106,319) | (2)% | - Net Paycheck Protection Program (PPP) loans decreased by $37.7 million (67%) to $18.3 million as of March 31, 2022; PPP fees recognized were $879 thousand in Q1 2022, down from $5.8 million in Q1 2021[73][331] Allowance for Credit Losses on Loans (ACLL) Rollforward (Q1) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Beginning Balance | $64,577 | $61,067 | | Provision | $9,233 | $15,337 | | Charge-offs | $(2,936) | $(1,425) | | Recoveries | $782 | $357 | | Ending Balance | $71,656 | $75,336 | Credit Quality Ratios - Total Company | Ratio | March 31, 2022 | December 31, 2021 | | :----------------------------- | :------------- | :---------------- | | Nonperforming loans to total loans | 0.39 % | 0.46 % | | Nonperforming assets to total assets | 0.29 % | 0.37 % | | ACLL to total loans | 1.63 % | 1.44 % | | ACLL to nonperforming loans | 423 % | 315 % | - Total nonperforming loans decreased by $3.6 million (17%) to $16.97 million as of March 31, 2022, primarily due to the refinancing of $4.6 million of these loans at other financial institutions[83][353][361] - Total delinquent loans increased to $16.2 million (0.37% of total loans) as of March 31, 2022, from $13.5 million (0.30%) at December 31, 2021; Core Bank delinquent loans decreased, while RPG delinquent loans increased significantly due to Easy Advances[90][362][364] - Total Troubled Debt Restructurings (TDRs) were $15.19 million as of March 31, 2022, with 80% performing to modified terms[100][101] Easy Advances (EAs) Originations and Provision (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Easy Advances originated | $311,207 | $250,045 | | Net charge to the Provision for Easy Advances | $8,315 | $16,019 | | Provision to total Easy Advances originated | 2.67 % | 6.41 % | 5. DEPOSITS Total deposits increased by $246.7 million, or 5%, to $5.09 billion as of March 31, 2022; this growth was primarily driven by a significant increase in Republic Processing Group (RPG) deposits, particularly brokered prepaid card deposits and other noninterest-bearing deposits, while Core Bank deposits saw minimal growth Deposit Composition | Deposit Category | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change ($) | Change (%) | | :----------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Core Bank Deposits | $4,480,544 | $4,419,093 | $61,451 | 1% | | Republic Processing Group (RPG) Deposits | $606,562 | $421,325 | $185,237 | 44% | | Total Deposits | $5,087,106 | $4,840,418 | $246,688 | 5% | - RPG noninterest-bearing deposits increased by $184.2 million, driven by $92.3 million in seasonal short-term tax refund deposits and $91.8 million in brokered prepaid card deposits[374] 6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS Securities sold under agreements to repurchase and other short-term borrowings slightly decreased to $287.8 million as of March 31, 2022, from $291.0 million at December 31, 2021; all had overnight maturities with a weighted average interest rate of 0.04% Securities Sold Under Agreements to Repurchase | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Outstanding balance at end of period | $287,818 | $290,967 | | Weighted average interest rate at end of period | 0.04 % | 0.04 % | | Average outstanding balance during the period (Q1) | $300,169 | $192,669 | 7. RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES The company's right-of-use assets increased to $42.4 million as of March 31, 2022, from $38.8 million at December 31, 2021, with operating lease liabilities also increasing to $43.2 million from $39.7 million; this reflects renewals and extensions of lease contracts, including related-party leases Right-of-Use Assets and Operating Lease Liabilities | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Right-of-use assets | $42,402 | $38,825 | | Operating lease liabilities | $43,204 | $39,672 | Operating Lease Expense and Metrics (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total operating lease expense | $1,842 | $1,792 | | Weighted average remaining term (years) | 8.61 | 7.57 | | Weighted average discount rate | 2.64 % | 3.05 % | 8. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank (FHLB) advances decreased to $20 million as of March 31, 2022, from $25 million at December 31, 2021; the company extended the term on $20 million of its FHLB advances to fixed-rate, long-term advances in anticipation of rising interest rates FHLB Advances | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total FHLB advances | $20,000 | $25,000 | | Available borrowing capacity | $888,000 | $900,000 | - The company extended $20 million of FHLB advances to fixed-rate, long-term advances (5-year maturity, 1.89% weighted average cost) and repaid $5 million, anticipating increasing long-term interest rates[117][118] Overnight FHLB Advances Activity (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Average outstanding balance | $1,711 | $40,278 | | Average interest rate | 0.15 % | 0.17 % | 9. OFF BALANCE SHEET RISKS, COMMITMENTS AND CONTINGENT LIABILITIES Total off-balance sheet commitments increased to $1.90 billion as of March 31, 2022, from $1.75 billion at December 31, 2021, primarily driven by an increase in unused warehouse lines of credit; the Allowance for Credit Losses on Off-Balance Sheet Credit Exposures (ACLC) slightly decreased, and the company also noted ongoing legal proceedings related to the cancelled TRS sale transaction Total Commitments | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Unused warehouse lines of credit | $713,800 | $565,950 | | Total commitments | $1,900,080 | $1,754,808 | Allowance for Credit Losses on Off-Balance Sheet Credit Exposures (ACLC) Rollforward (Q1) | Metric | March 31, 2022 (in thousands) | March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Beginning Balance | $1,052 | $989 | | Provision | $(12) | $26 | | Ending Balance | $1,040 | $1,015 | - The company decreased its ACLC during Q1 2022 based on a decrease in the expected loss rate for its unused commitments[129] - The company is involved in ongoing legal proceedings, including a lawsuit against Green Dot related to the cancelled TRS sale transaction[33][403] 10. FAIR VALUE The company measures various financial instruments at fair value, categorizing them into Level 1, 2, or 3 inputs; available-for-sale debt securities, mortgage loans held for sale, and consumer loans held for sale are among the assets measured at fair value, and the fair value of Level 3 assets, such as the private label mortgage-backed security and trust preferred security, relies on significant unobservable inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[131][132] Assets Measured at Fair Value (March 31, 2022) | Asset Category | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total Fair Value (in thousands) | | :----------------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------------------ | | AFS Debt Securities | $153,119 | $414,093 | $6,327 | $573,539 | | Equity Securities | $2,338 | $164 | $0 | $2,502 | | Mortgage Loans Held for Sale | $0 | $13,302 | $0 | $13,302 | | Consumer Loans Held for Sale | $0 | $0 | $11,709 | $11,709 | | Interest Rate Swap Agreements | $0 | $2,537 | $0 | $2,537 | - The private label mortgage-backed security (Level 3) had a fair value of $2.60 million (Mar 31, 2022) and relies on unobservable inputs like constant prepayment rate (4.5%-5.7%), probability of default (1.8%-9.3%), and loss severity (50%-75%)[150][152] - The Trust Preferred Security (Level 3) had a fair value of $3.73 million (Mar 31, 2022)[153] - Consumer loans held for sale (Level 3) had a fair value of $11.71 million (Mar 31, 2022) and rely on unobservable inputs such as net contractual premiums (1.4%) and discounted sales (5.00%)[158] Assets Measured at Fair Value on a Non-Recurring Basis | Asset Category | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Collateral-dependent loans | $4,662 | $4,845 | | Other real estate owned | $1,740 | $1,792 | 11. MORTGAGE BANKING ACTIVITIES Mortgage Banking income significantly decreased to $2.66 million for the three months ended March 31, 2022, from $7.19 million in the prior year, primarily due to a slowdown in mortgage originations and sales driven by rising long-term interest rates; proceeds from secondary market loan sales decreased, and the cash-gain-as-a-percent-of-loans-sold declined Mortgage Banking Income Components (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total Mortgage Banking income | $2,657 | $7,193 | | Net gain realized on sale of mortgage loans held for sale | $2,733 | $8,045 | | Proceeds from the sale of mortgage loans held for sale | $119,212 | $203,815 | | Cash-gain-as-a-percent-of-loans-sold | 2.29 % | 3.95 % | Capitalized Mortgage Servicing Rights (MSRs) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Balance, end of period | $9,502 | $9,196 | | Fair value of MSRs portfolio | $15,296 | $11,540 | Mortgage Banking Derivatives (Notional Amounts) | Derivative Type | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Rate lock loan commitments | $46,981 | $56,736 | | Mandatory forward contracts | $45,608 | $70,812 | 12. INTEREST RATE SWAPS The Bank uses non-hedge interest rate swaps to facilitate client transactions, entering into offsetting positions to minimize its own interest rate risk; the total notional amount of these swaps was $245.6 million as of March 31, 2022, with a net fair value of zero due to offsetting positions Interest Rate Swaps Summary | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total Notional Amount | $245,612 | $247,850 | | Net Fair Value | $0 | $0 | | Collateral Pledged by Bank | $873 | $6,800 | - The Bank enters into offsetting positions to minimize its interest rate risk from client-related interest rate swaps, which are not designated as hedging instruments[177] 13. EARNINGS PER SHARE Basic earnings per share for Class A Common Stock increased to $1.40 for Q1 2022 from $1.26 for Q1 2021, and diluted EPS for Class A Common Stock increased to $1.40 from $1.25; the calculation uses the two-class method, accounting for the 10% dividend premium on Class A shares Earnings Per Share (Class A Common Stock) (Q1) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Basic EPS | $1.40 | $1.26 | | Diluted EPS | $1.40 | $1.25 | Weighted Average Shares Outstanding (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Class A Shares | 17,980 | 18,798 | | Class B Shares | 2,165 | 2,199 | | Antidilutive stock options | 186 | 154 | 14. OTHER COMPREHENSIVE INCOME Other Comprehensive Income (OCI) showed a net loss of $(15.9) million for Q1 2022, a significant decline from a net loss of $(1.5) million in Q1 2021, primarily driven by increased unrealized losses on available-for-sale debt securities Other Comprehensive Income (Loss), Net of Tax (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net losses | $(21,225) | $(2,014) | | Tax effect | $5,308 | $503 | | Net of tax | $(15,917) | $(1,511) | Accumulated Other Comprehensive Income (Loss) Balances, Net of Tax | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total unrealized gain (loss) | $(14,043) | $1,874 | 15. REVENUE FROM CONTRACTS WITH CUSTOMERS Total net revenue for Q1 2022 was $93.6 million, a decrease from $96.8 million in Q1 2021; Core Banking contributed 54% of net revenue, while Republic Processing Group (RPG) contributed 46%, with key revenue streams including service charges on deposit accounts, net refund transfer fees, interchange fee income, and a significant contract termination fee in Q1 2022 Total Net Revenue and Concentration (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total net revenue | $93,613 | $96,817 | | Net-revenue concentration (Core Banking) | 54 % | 65 % | | Net-revenue concentration (RPG) | 46 % | 35 % | Key Noninterest Income Streams (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Service charges on deposit accounts | $3,226 | $2,873 | | Net refund transfer fees | $12,051 | $12,721 | | Interchange fee income | $3,070 | $3,027 | | Contract termination fee | $5,000 | $0 | 16. SEGMENT INFORMATION The company operates through five reportable segments: Traditional Banking, Warehouse Lending, Mortgage Banking (Core Banking), Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS) (Republic Processing Group - RPG); segment performance is evaluated using operating income, with Core Banking contributing 54% and RPG 46% of net revenue in Q1 2022 - The company's reportable segments are Traditional Banking, Warehouse Lending, Mortgage Banking (collectively Core Banking), and Tax Refund Solutions (TRS), Republic Credit Solutions (RCS) (collectively Republic Processing Group - RPG)[201][202] Net Income by Segment (Q1 2022) | Segment | Net Income (in thousands) | | :----------------------------- | :------------------------ | | Traditional Banking | $4,371 | | Warehouse Lending | $3,073 | | Mortgage Banking | $160 | | Tax Refund Solutions | $15,377 | | Republic Credit Solutions | $4,945 | | Total Company | $27,926 | Net-Revenue Concentration by Segment (Q1 2022) | Segment | Net-Revenue Concentration | | :----------------------------- | :------------------------ | | Traditional Banking | 46 % | | Warehouse Lending | 5 % | | Mortgage Banking | 3 % | | Tax Refund Solutions | 36 % | | Republic Credit Solutions | 10 % | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on the company's financial performance and condition for the quarter ended March 31, 2022, compared to the prior year, detailing the drivers behind changes in net income, net interest income, provision for credit losses, noninterest income and expense, and key balance sheet items, including loans, deposits, and capital, while also discussing market risks and the LIBOR transition OVERVIEW Net income for Q1 2022 increased by 7% to $27.9 million, with diluted EPS rising to $1.40, primarily due to a $5.0 million contract termination fee and a positive reduction in Provision for Credit Losses, partially offset by decreased net interest income and Mortgage Banking income; the report highlights forward-looking statements and critical accounting policies, particularly the Allowance for Credit Losses on Loans (ACLL) - Total Company net income for Q1 2022 was $27.9 million, a 7% increase from Q1 2021, with diluted EPS increasing to $1.40 from $1.25[251] - The increase in net income primarily reflected a $5.0 million pre-tax contract termination fee and a positive reduction in Provision for Credit Losses, partially offset by a decrease in net interest income and Mortgage Banking income[251] - Management's evaluation of the Allowance for Credit Losses on Loans (ACLL) and Provision is a critical accounting estimate, requiring significant reliance on historical loss rates, economic factors, and reasonable forecasts[216][217] - Forward-looking statements involve known and unknown risks, including the potential impact of the COVID pandemic, litigation, economic conditions, interest rate fluctuations, and regulatory changes[208][209][210][218] BUSINESS SEGMENT COMPOSITION The company's five reportable segments (Traditional Banking, Warehouse Lending, Mortgage Banking, Tax Refund Solutions, and Republic Credit Solutions) are detailed, outlining their primary operations and revenue drivers; key developments include the cancellation of the TRS sale to Green Dot, leading to a $5.0 million termination fee, and the continued expansion of RCS consumer credit products - Traditional Banking provides traditional banking products through 42 full-service banking centers and digital channels, with principal lending activities including Retail Mortgage, Commercial, Construction and Land Development, Consumer, and Aircraft Lending[223][224][225][226][229][230] - Warehouse Lending offers short-term, revolving credit facilities to mortgage bankers across the U.S., primarily secured by single-family, first-lien residential real estate loans[235] - Mortgage Banking activities primarily involve originating and selling 15-, 20-, and 30-year fixed-term residential real estate loans into the secondary market, typically retaining servicing rights for loans within its footprint[237] - Tax Refund Solutions (TRS) facilitates federal and state tax refund products (Refund Transfers - RTs) and offers Easy Advance (EA) credit products; the May 2021 Purchase Agreement for the sale of TRS assets to Green Dot was terminated, resulting in a $5.0 million contract termination fee[238][239][244] - Republic Credit Solutions (RCS) offers unsecured, small-dollar consumer credit products, including LOC I, LOC II, installment loans, and healthcare receivables, primarily to subprime or near-prime borrowers, often selling participation interests[246][247][248][253] RESULTS OF OPERATIONS (Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021) The company's Q1 2022 results showed a decrease in total net interest income and net interest margin, primarily due to lower PPP fees and reduced Warehouse Lending activity; however, the Provision for Credit Losses decreased significantly, driven by TRS, while noninterest income increased due to a contract termination fee, and noninterest expense saw a slight increase, mainly in Traditional Banking Net Interest Income Total Company net interest income decreased by 8% to $62.6 million in Q1 2022, with net interest margin falling to 4.30% from 4.66%; this decline was primarily driven by a significant decrease in PPP fees and interest in Traditional Banking and reduced average outstanding balances and margin compression in Warehouse Lending, while RCS and TRS saw increases in net interest income Total Company Net Interest Income and Margin (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Interest Income | $62,612 | $67,780 | | Net Interest Margin | 4.30 % | 4.66 % | - Traditional Banking's net interest income decreased by $5.0 million (12%) to $36.1 million, primarily due to a $5.7 million (86%) decrease in PPP fees and interest[275][277] - Warehouse Lending's net interest income decreased by $2.3 million (33%) to $4.5 million, driven by lower average outstanding balances ($585 million vs $790 million) and margin compression (3.09% vs 3.43%)[281] - Tax Refund Solutions (TRS) net interest income increased by $728 thousand (5%) to $15.4 million, primarily from a $61 million increase in Easy Advance (EA) originations[284] - Republic Credit Solutions (RCS) net interest income increased by $1.5 million (32%) to $6.3 million, mainly due to higher loan fees on LOC products[285] - Management anticipates that additional increases in short-term interest rates will generally be favorable to Traditional Banking and Warehouse net interest income in the near term, though potential offsets exist from deposit cost increases or reduced demand[278][283] Provision Total Company Provision for expected credit loss expense decreased to a net charge of $9.2 million in Q1 2022 from $15.3 million in Q1 2021; this was largely due to a significant reduction in the TRS Provision, partially offset by an increase in the RCS Provision driven by higher net charge-offs Total Company Provision for Expected Credit Loss Expense (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total Provision | $9,226 | $15,262 | - Traditional Banking Provision was a net charge of $320 thousand in Q1 2022, compared to a net credit of $5 thousand in Q1 2021, reflecting formula reserves tied to general loan growth[295] - Warehouse recorded a net credit to the Provision of $401 thousand in Q1 2022, consistent with changes in outstanding balances[297] - Tax Refund Solutions (TRS) recorded a net charge to the Provision of $7.9 million in Q1 2022, down from $15.9 million in Q1 2021, primarily due to a contractual guaranty limiting Easy Advance (EA) losses and more normal tax season timing[299][301] - Republic Credit Solutions (RCS) recorded a net charge to the Provision of $1.4 million in Q1 2022, compared to a net credit of $375 thousand in Q1 2021, driven by a $1.7 million increase in net charge-offs on LOC products[304] - Net loan charge-offs to average total Company loans increased to 0.20% in Q1 2022 from 0.09% in Q1 2021, primarily due to a $1.4 million increase in net charge-offs within RPG operations[312] Noninterest Income Total Company noninterest income increased by $2.0 million in Q1 2022, primarily due to a $5.0 million contract termination fee from Green Dot; this was partially offset by a significant decrease in Mortgage Banking income due to rising interest rates and a slight decrease in net refund transfer fees, while RCS noninterest income saw a substantial increase from higher sales volume Total Company Noninterest Income (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total noninterest income | $31,001 | $29,037 | - Noninterest income for Q1 2022 included a $5.0 million contract termination fee from Green Dot[319] - Mortgage Banking income decreased by $4.5 million (63%) to $2.7 million, driven by a significant slowdown in originations and sales due to rising long-term interest rates[317] - Net Refund Transfer (RT) revenue decreased by 5% to $12.1 million, impacted by the departure of a Tax Provider[320] - Republic Credit Solutions (RCS) noninterest income (program fees) increased by $1.8 million (135%) to $3.1 million, reflecting higher sales volume for LOC and installment loan products[322][323] Noninterest Expense Total Company noninterest expense increased by $762 thousand, or 2%, in Q1 2022; Traditional Banking saw an increase driven by higher fraud losses, while Mortgage Banking experienced a decrease due to reduced mortgage commissions Total Company Noninterest Expense (Q1) | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total noninterest expense | $48,573 | $47,811 | - Traditional Banking noninterest expense increased by $891 thousand, primarily due to a $726 thousand increase in other expenses, including $250 thousand in fraud losses[324][325] - Mortgage Banking noninterest expense decreased by $431 thousand (14%), mainly due to a reduction in mortgage commissions consistent with lower origination volume[325] Comparison of Financial Condition As of March 31, 2022 and December 31, 2021 The company's financial condition as of March 31, 2022, showed an increase in cash and cash equivalents and total deposits, primarily driven by RPG; gross loans decreased due to Warehouse and PPP, while CRE loans grew, asset quality improved with decreases in classified and nonperforming loans, and capital ratios remained strong, and the company is actively managing interest rate risk and transitioning from LIBOR Cash and Cash Equivalents Cash and cash equivalents increased significantly by $320 million to $1.1 billion as of March 31, 2022, driven by continued deposit growth, including seasonal tax refund deposits; management began deploying excess cash into longer-term investment securities Cash and Cash Equivalents | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents | $1,077,158 | $756,971 | - The growth in cash balances was driven by continued deposit growth, including $100 million of short-term tax refund deposits at TRS[326] - Management began deploying excess cash through the purchase of longer-term investment securities during Q4 2021 and Q1 2022, targeting a maturity of approximately two years due to attractive risk-based returns and a steepening yield curve[328][329] Investment Securities The Bank purchased $116 million in investment debt securities during Q1 2022, including U.S. Treasuries, MBS, and U.S. government agency securities, with an expected weighted-average yield of approximately 1.51% and a weighted average life of 2.5 years for Treasuries - During Q1 2022, the Bank purchased $116 million in investment debt securities, comprising $86 million in U.S. Treasuries, a $20 million MBS, and a $10 million U.S. government agency security[328] - The U.S. Treasuries had an expected weighted-average yield of approximately 1.51% and a weighted average life at purchase of 2.5 years[328] Loans Gross loans decreased by $106 million, or 2%, to $4.39 billion as of March 31, 2022; this was primarily due to a $160 million decrease in Warehouse lines of credit and a $38 million reduction in PPP loans, partially offset by a $101 million increase in Commercial Real Estate (CRE) loans Gross Loans | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change ($) | Change (%) | | :----------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total loans | $4,390,243 | $4,496,562 | $(106,319) | (2)% | - Commercial Real Estate (CRE) loans grew $101 million (7%) during Q1 2022[333] - The Core Bank's PPP portfolio decreased $38 million (67%) during Q1 2022[333] - Outstanding Warehouse period-end balances decreased $160 million (19%) during Q1 2022[331][336] - Outstanding TRS loans decreased $9 million, reflecting a $25 million reduction in other TRS loans (commercial loans to Tax Providers) partially offset by $16 million of Easy Advances[338] - Outstanding RCS loans decreased $5 million, primarily due to decreases in LOC I product and hospital receivables[339] Allowance for Credit Losses The total Allowance for Credit Losses (ACL) increased by $7 million to $72 million as of March 31, 2022; the ACLL to total loans ratio increased to 1.63% from 1.44%, and this increase was mainly driven by estimated losses on the seasonal Easy Advance (EA) product within TRS, while Warehouse ACLL remained stable Total Allowance for Credit Losses (ACL) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total ACL | $71,656 | $64,577 | | ACLL to total loans | 1.63 % | 1.44 % | - Traditional Banking ACLL increased approximately $209 thousand to $50 million, driven primarily by formula reserves tied to loan growth[341] - Warehouse ACLL decreased to approximately $1.7 million, and the ACLL to total Warehouse loans remained at 0.25%[342] - Tax Refund Solutions (TRS) ACLL increased to $8 million from $96 thousand, driven primarily by estimated losses on its Easy Advance (EA) product[343] - Republic Credit Solutions (RCS) ACLL decreased $1 million to $12 million, driven by a decrease in RCS loan balances; the ACLL for RCS products ranged from 0.25% for healthcare receivables to 49% for line-of-credit products[344][345] Asset Quality The company's asset quality improved, with Classified and Special Mention loans decreasing by $10.4 million (8%) to $128.3 million; nonperforming loans decreased by $3.6 million (17%) to $16.97 million, and the ACLL to nonperforming loans ratio improved to 423%, while delinquent loans increased overall due to RPG, but Core Bank delinquencies decreased - Only $148 thousand (less than 1%) of the Traditional Bank portfolio remained under a COVID hardship accommodation as of March 31, 2022[347] Classified and Special Mention Loans | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change ($) | Change (%) | | :----------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total Classified Loans | $20,325 | $23,406 | $(3,081) | (13)% | | Total Special Mention Loans | $107,962 | $115,291 | $(7,329) | (6)% | | Total Classified and Special Mention Loans | $128,287 | $138,697 | $(10,410) | (8)% | Nonperforming Loans and Ratios | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total nonperforming loans | $16,966 | $20,552 | | Nonperforming loans to total loans | 0.39 % | 0.46 % | | ACLL to nonperforming loans | 423 % | 315 % | - Total delinquent loans increased to 0.37% of total loans as of March 31, 2022, from 0.30% at December 31, 2021; Core Bank delinquent loans decreased to 0.14% from 0.17%[362][364] Troubled Debt Restructurings (TDRs) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total TDRs | $15,187 | $15,386 | Deposits Total deposits increased by $247 million (5%) to $5.09 billion as of March 31, 2022; this growth was primarily driven by a $185 million (44%) increase in Republic Processing Group (RPG) deposits, specifically from seasonal tax refund deposits and prepaid card balances, while Core Bank deposits saw minimal growth Total Deposits | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change ($) | Change (%) | | :----------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total deposits | $5,087,106 | $4,840,418 | $246,688 | 5% | - Republic Processing Group (RPG) deposits increased $185 million (44%), driven by $92.3 million in seasonal short-term tax refund deposits and $91.8 million in brokered prepaid card deposits[372][374] - Core Bank deposits increased minimally by $61 million (1%)[373] Federal Home Loan Bank Advances FHLB advances decreased to $20 million as of March 31, 2022, from $25 million at December 31, 2021; the Bank extended the term on $20 million of advances to fixed-rate, long-term advances in anticipation of rising interest rates FHLB Advances | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total FHLB advances | $20,000 | $25,000 | - The Bank extended $20 million of FHLB advances to fixed-rate, long-term advances (5-year maturity, 1.89% weighted average cost) and repaid the remaining $5 million, anticipating increasing long-term interest rates[373] Interest Rate Swaps The Bank uses non-hedge interest rate swaps to facilitate client transactions, maintaining offsetting positions to minimize its own interest rate risk; changes in fair value are reported in current year earnings - The Bank enters into non-hedge interest rate swaps to facilitate client transactions and minimize its own interest rate risk through offsetting positions[375] - Changes in the fair value of these swaps are reported in current year earnings[375] Liquidity The company maintains strong liquidity, with total liquid assets increasing to $1.36 billion as of March 31, 2022, from $977 million at December 31, 2021; total borrowing capacity remained over $1 billion, and the loan to deposit ratio (excluding brokered deposits) improved to 94% from 99% Liquid Assets and Borrowing Capacity | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total liquid assets | $1,358,679 | $976,746 | | Total borrowing capacity | $1,012,520 | $1,025,424 | | Total liquid assets and borrowing capacity | $2,371,199 | $2,002,170 | - The Bank's loan to deposit ratio (excluding brokered deposits) improved to 94% as of March 31, 2022, from 99% as of December 31, 2021[378] - Pledged investment securities to secure public deposits, repurchase agreements, and FHLB borrowings had a fair value of $331 million as of March 31, 2022[380] Capital Total stockholders' equity increased to $840 million as of March 31, 2022; the company and its bank subsidiary continue to exceed "well-capitalized" regulatory requirements, with strong capital ratios across all categories, even after deferring the impact of CECL Total Stockholders' Equity | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total stockholders' equity | $840,329 | $834,232 | - The Parent Company's principal source of funds for dividend payments are dividends received from RB&T, which could declare approximately $123 million without prior approval as of April 1, 2022[384] Republic Bancorp, Inc. Capital Ratios (March 31, 2022) | Ratio | Amount (in thousands) | Ratio | | :----------------------------- | :-------------------- | :---- | | Total capital to risk-weighted assets | $906,036 | 18.13% | | Common equity tier 1 capital to risk-weighted assets | $843,538 | 16.88% | | Tier 1 (core) capital to risk-weighted assets | $843,538 | 16.88% | | Tier 1 leverage capital to average assets | $843,538 | 13.15% | - Republic and the Bank continue to exceed all "well-capitalized" regulatory requirements, including the 2.5% Capital Conservation Buffer[386][387] - The company and the Bank elected to defer the impact of CECL on regulatory capital, which would otherwise be approximately 15 basis points lower[388] Asset/Liability Management and Market Risk The Bank actively manages interest rate and liquidity risk using earnings simulation models; as of March 31, 2022, simulations indicated a positive impact on net intere