REPUBLIC BANCORP INC /KY/ (RBCAA) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

​

The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic 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 in Louisville, Kentucky. The Bank is a Kentucky-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 the U.S. The Captive is a Nevada-based, wholly owned insurance subsidiary of the Company. The Captive provides property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives for which insurance may not be available or economically feasible.

​

In 2005, Republic Bancorp Capital Trust, an unconsolidated trust subsidiary of Republic, was formed and issued $40 million in TPS. On September 30, 2021, as permitted under the terms of RBCT’s governing documents, Republic redeemed these securities at the par amount of approximately $40 million, without penalty. Although the TPS were treated as part of Republic’s Tier I Capital while outstanding, Republic’s capital ratios remained well above “well capitalized” levels following this redemption.

​

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part II Item 8 “Financial Statements and Supplementary Data.”

​

Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements, except as required by applicable law.

​

Broadly speaking, forward-looking statements include:

​

​

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:

​

41

Table of Contents

​

On October 26, 2022, Republic, the Bank and CBank entered into the CBank Agreement. Upon completion of the transaction, CBank will be merged with and into RB&T, with RB&T as the survivor of the merger. CBank is headquartered in Cincinnati, Ohio. This document contains statements regarding the proposed acquisition transaction that are not statements of historical fact and are considered forward-looking statements within the criteria described above. These statements are likewise subject to various risks and uncertainties that may cause actual results and outcomes of the proposed transaction to differ, possibly materially, from the anticipated results or outcomes expressed or implied in these forward-looking statements. In addition to factors disclosed in reports filed by Republic with the SEC, risks and uncertainties for Republic, CBank and the combined company include, but are not limited to: for the parties to receive all regulatory approvals as provided for in the CBank Agreement, the ability to grow CBank loan and deposit balances post-acquisition, unanticipated post-acquisition loan losses for Republic on CBank-originated loans, the ability of Republic to integrate acquired operations including obtaining synergies, integration objectives and anticipated timelines, the ability of Republic to integrate, manage and keep secure our information systems, and other risks and uncertainties reported from time to time in the Company’s filings with the SEC, including Part 1 Item 1A “Risk Factors.”

​

Accounting Standards Updates

​

For disclosure regarding the impact to the Company’s financial statements of ASUs, see Footnote 1 “Summary of Significant Accounting Policies” of Part II Item 8 “Financial Statements and Supplementary Data.”

​

42

Table of Contents

Critical Accounting Estimates

​

Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods.

​

Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.

​

Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective, and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.

​

Republic believes its critical accounting policies and estimates relate to the following:

​

ACLL and Provision — As of December 31, 2022, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.

​

The Company’s CECL method is a “static-pool” method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable, supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use the U.S. national unemployment rate as its primary forecasting tool. For its CRE loan pool, the Company initially employed a one-year forecast of CRE vacancy rates through March 31, 2021 but discontinued use of this forecast during the second quarter of 2021 in favor of a one-year forecast of general CRE values. This change in forecast method had no material impact on the Company’s ACLL.

​

Management’s evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast.

​

Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix or term, delinquency level, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on the U.S. national unemployment rate and CRE values. Subsequent to the one-year forecasts, loss rates are assumed to immediately revert back to long-term historical averages.

​

The impact of utilizing the CECL approach to calculate the ACLL is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company’s reported earnings.

​

See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 4 “Loans and Allowance for Credit Losses” of Part II Item 8 “Financial Statements and Supplementary Data.”

​

43

Table of Contents

Management’s Evaluation of the ACLL

​

Management evaluates the ACLL for its Core Banking operations separately from its non-traditional RPG operations. Core Banking operations consist of the Company’s Traditional Banking, Warehouse, and Mortgage Banking segments. RPG operations consist of the Company’s TRS and RCS segments.

​

Management evaluated the reasonableness of its Core Bank ACLL as of December 31, 2022 and 2021 by evaluating absorption and exhaustion rates that account for CECL life-of-loan considerations and the economic hardship and uncertainty brought about by the COVID-19 pandemic. The absorption rate considered total Core Bank net loan losses from 2008 to 2013 as a percent of the end-of-year Core Bank ACLL. The exhaustion rate considered how many years of gross Core Bank loan charge-offs the end-of-year Core Bank ACLL could withstand based on average annual net Core Bank loan losses from 2008 to 2013. The years 2008 to 2013 represent a six-year period during which the U.S. unemployment rate rose above 8% and the Core Bank incurred a historically high period of loan losses relative to an average year of loan losses for the Core Bank. Management believes Core Bank losses from 2008 to 2013 are more representative of current economic conditions than more recent years just prior to the onset of the COVID-19 pandemic.

​

As of December 31, 2022, the weighted average term of the Core Bank loan portfolio was approximately six years. The Core Bank’s absorption rate was 85% and its exhaustion rate was approximately 6.0 years as of December 31, 2022. Management considers these rates reasonable under current economic conditions. The table below reflects the Core Bank’s exhaustion and absorption rates for each of the last three years:

​

​

Based on management’s evaluation, a Core Bank ACLL of $52 million, or 1.21% of total Core Bank loans, was an adequate estimate of expected losses within the loan portfolio as of December 31, 2022 and resulted in Core Banking Provision for its loans of a net charge of $312,000 during 2022. This compares to an ACLL of $52 million and $50 million as of December 31, 2021 and December 31, 2020 with Provisions of a net credit of $319,000 for 2021 and net charge of $16.9 million for 2020.

​

If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, an adjustment to the Core Bank ACLL and the resulting effect on the income statement could be material.

​

The RPG ACLL as of December 31, 2022 primarily related to loans originated and held for investment through the RCS segment. RCS generally originates small-dollar, consumer credit products. In some instances, the Bank originates these products, sells 90% or 95% of the balances within three business days of loan origination, and retains a 5% or 10% interest. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through Core Banking operations, with a significant portion of RCS clients considered subprime or near-prime borrowers.

​

As of December 31, 2022, management evaluated the ACLL only on its active RCS products that had incurred meaningful losses since their inception, which were its line-of-credit products. Due to the general short-term nature of these products, management utilized its traditional absorption and exhaustion calculations using 2022 net charge-offs with the beginning-of-the-year ACLL. The absorption and exhaustion rates were 69% and 0.88 years, respectively, both of which were considered reasonable.

​

RPG maintained an ACLL for all the loan products held at amortized cost and offered through its RCS segment as of December 31, 2022, including its line-of-credit products and its healthcare-receivables products. As of December 31, 2022, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables portfolios to as high as 54.85% for its line-of-credit portfolios. A lower reserve percentage was provided for RCS’s healthcare receivables as of December 31, 2022, as such receivables have recourse back to the Company’s third-party service providers in the transactions. Based on management’s

44

Table of Contents

calculation, an ACLL of $18.7 million, or 7.3 %, of total RPG loans was an adequate estimate of expected losses within the RPG portfolio as of December 31, 2022.

​

RPG’s TRS segment offered its RA credit product during the first two months of 2022, 2021, and 2020, and its ERA credit product during December 2022 related to the first quarter 2023 tax season. An ACLL for losses on RAs and ERAs is estimated during the limited, short-term period the product is offered. RAs originated during the first two months of 2022, were repaid, on average, within 32 days of origination. Provisions for RA and ERA losses are estimated when advances are made and adjusted to actual net charge-offs as of June 30th of each year. The ACLL for ERAs as of December 31, 2022 was $3.8 million for $98 million of ERAs originated during December 2022. There were no ERAs originated during 2021, and as a result there was no ACLL as of December 31, 2021 for ERAs. There was no ACLL as of December 31, 2022 or December 31, 2021 for RAs originated during the first two months of 2022 or 2021, as all RAs originated during the first two months of those years had either been repaid or charged-off by June 30th of each year.

​

Related to the overall credit losses on RAs and ERAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s RA and ERA approval model is based primarily on the prior-year’s tax refund funding patterns. Because much of the loan volume occurs each year before that year’s tax refund funding patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund funding patterns change materially between years.

​

In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the RA and ERA product parameters. Further changes in RA and ERA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the RA an ERA and therefore on the Company’s financial condition and results of operations.

​

See additional discussion regarding the RA product under the sections titled:

​

​

RPG recorded a net charge of $22.0 million, $15.1 million, and $14.4 million to the Provision during 2022, 2021, and 2020, with the Provision for each year primarily due to net losses on RAs and growth in short-term, consumer loans originated through the RCS segment. If the number of future charge-offs on RAs and RCS loans differ significantly from assumptions used by management in making its determination, an adjustment to the RPG ACLL and the resulting effect on the income statement could be material.

​

Cancelled TRS Sale Transaction

​

On June 3, 2022, the Bank and Green Dot entered into the Settlement Agreement to fully resolve the Lawsuit that the Bank filed against Green Dot in the Delaware Court of Chancery on October 5, 2021.

​

As previously disclosed in the Company’s prior SEC filings, the Lawsuit arose from Green Dot’s inability to consummate the Sale

Transaction contemplated in the TRS Purchase Agreement through which Green Dot would purchase all of the assets and operations of the Bank’s Tax Refund Solutions business.

​

In accordance with the Settlement Agreement, on June 6, 2022, Green Dot paid $13 million to the Bank, which was in addition to a $5 million termination fee that Green Dot paid to the Bank during the first quarter of 2022 under the terms of the TRS Purchase Agreement. On June 6, 2022, the Bank and Green Dot filed a stipulation of dismissal of the Lawsuit with the Delaware Court of Chancery, which was effective to dismiss the Lawsuit when filed.

​

See Footnote 1 “Summary of Significant Accounting Policies” of Part II Item 8 “Financial Statements and Supplementary Data” for discussion regarding the cancelled sale of the TRS business and associated litigation.

​

45

Table of Contents

RECENT DEVELOPMENTS

​

Correction of Prior Period Error

​

As disclosed in Note 27, “Correction of Prior Period Error,” to our consolidated financial statements, the Company identified a prior period accounting error substantially in the form of an immaterial understatement of revenue, solely related to one RCS line of credit product. The financial reporting periods affected by this error include the Company’s previously reported audited consolidated financial statements for the fiscal year ended December 31, 2021, and the Company’s previously reported interim unaudited consolidated financial statements for each of the quarterly and fiscal year-to-date periods ended June 30, 2021; September 30, 2021; March 31, 2022; June 30, 2022; and September 30, 2022; and the unaudited consolidated quarterly financial data for the quarter ending December 31, 2021 (collectively the “previously reported financial statements”). The three month period ended December 31, 2021 and year ended December 31, 2021 also reflected certain immaterial revisions to reclassify certain gains and losses on the sale of the same RCS line of credit product.  These reclassifications impact noninterest income, noninterest expense and interest income with no impact to net income.

​

The Company concluded this error was not material, on an individual or aggregate basis, to the Company’s previously reported financial statements and correction of the error would not be material to the current year financial statements, including any interim periods. However, the Company corrected this error as a voluntary immaterial revision to the accompanying consolidated financial statements of this Annual Report on Form 10-K, as of and for the fiscal years ended December 31, 2022, and 2021, in the periods in which the error occurred. In addition, the Company expects to present the corrected interim 2022 amounts as a voluntary immaterial revision in its 2023 consolidated interim financial statements on a quarterly basis and a year-to-date basis upon the filing of its Quarterly Reports on Form 10-Q.

​

As a result, the financial results in the periods presented within the Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth below, have been revised to give effect to the correction of this error.

​

Bank Acquisition

On October 26, 2022, the Company, RB&T, and CBank entered into the CBank Agreement.  Upon completion of the transaction, CBank will be merged with and into RB&T, with RB&T as the survivor of the merger.  CBank is headquartered in Cincinnati, Ohio.

​

Under the terms of the CBank Agreement, the Company will acquire all of CBank’s outstanding common stock in an all-cash direct merger of CBank with RB&T, resulting in a total cash payment of approximately $51 million to CBank’s existing shareholders. Republic expects to fund the cash payment through existing resources on-hand at RB&T. The completion of the transaction is subject to customary closing conditions, including regulatory approval and approval by CBank’s shareholders. The CBank Agreement also contains reciprocal termination provisions in the event the transaction does not receive the required regulatory approvals within six months of the effective date of the CBank Agreement or if certain minimum capital levels are not maintained by CBank as of the closing date.

​

The CBank Agreement was unanimously approved by the Republic, RB&T and CBank boards of directors on October 25, 2022.  In connection with entering into the CBank Agreement, Republic entered into customary support agreements with the members of CBank’s board of directors and other shareholders in their capacities as shareholders of CBank (the “CBank Support Agreements”). Subject to the terms and conditions, and non-termination, of the CBank Support Agreements, each such shareholder agreed, among other things, to vote his or her respective shares of CBank Common Stock in favor of the approval of the CBank Agreement and the transaction contemplated thereby, and against alternative acquisition proposals.  The CBank Support Agreements do not prevent the shareholders, in their capacity as directors, from exercising their fiduciary obligations in connection with alternative acquisition proposals. The CBank Agreement provides certain termination rights for both Republic and CBank and further provides that a termination fee of $2,040,000 will be payable by CBank to Republic upon termination of the CBank Agreement under certain circumstances, including CBank’s termination of the CBank Agreement to accept a Superior Proposal (as defined in the CBank Agreement).  The CBank Agreement was approved by its shareholders on December 13, 2022.

​

As of January 31, 2023, CBank had approximately $257 million in assets, consisting of approximately $221 million in gross loans, no other real estate owned, approximately $16 million of marketable securities, approximately $14 million in cash and cash equivalents and approximately $6 million in other assets. Also as of January 31, 2023, CBank had approximately $228 million of liabilities, including approximately $209 million in customer deposits and $13 million in Federal Home Loan Bank advances.

46

Table of Contents

OVERVIEW

​

Total Company net income was $91.1 million and Diluted EPS was $4.59 for 2022, compared to net income of $87.6 million and Diluted EPS of $4.28 for 2021. Table 1 below presents Republic’s financial performance for the years ended December 31, 2022, 2021, and 2020:

​

Table 1 — Summary

​

​

The increase in net income for the Total Company primarily reflected the following:

​

​

​

​

​

​

Additional discussion follows in this section of the filing under “Results of Operations.”

​

​

General highlights by reportable segment for the year ended December 31, 2022 consisted of the following:

​

Traditional Banking segment

​

​

​

​

​

​

​

​

47

Table of Contents

Warehouse Lending segment

​

​

​

​

​

​

Mortgage Banking segment

​

​

​

Tax Refund Solutions segment

​

​

​

​

​

​

​

​

​

​

​

48

Table of Contents

TRS had multiple factors during 2021 and 2022 that impacted its 2022 performance and the comparability of that performance to the same periods in 2021. By year, these factors discussed below include, but may not be limited to, the following:

​

2021 Calendar Year

​

​

​

2022 Calendar Year

​

​

​

​

​

​

As it relates to factors impacting 2021, the processing season with the IRS started approximately two weeks later than normal. As a result, RT funding volume and loan repayments from the IRS lagged normal funding patterns in non-COVID-impacted years and effectively pushed RT revenue and loan recovery activity later into the 2021 calendar year. In addition, management believes government stimulus programs during 2021 negatively impacted demand for TRS RA and RT products.

​

In addition to the more normal timing of the tax season in 2022 as compared to 2021, the fiscal year 2022 tax season, in totality, was favorably impacted by a contractual amendment with one of the Company’s large Tax Providers. As a result of the amended contract, TRS shares certain revenues with this provider, while this provider absorbs certain overhead costs of the program and furnishes to TRS a loan loss guaranty ceiling as a percentage of RAs originated by this provider. Through this provider, TRS originated $172 million of RAs during the first quarter of 2022 as compared to $135 million originated during the first quarter of 2021. The net cost of the revenue share to the provider from TRS was approximately $266,000 for the $172 million of RA volume, while the benefit to TRS of the overhead costs eliminated as a result of the new contract was approximately $543,000 and the net benefit to TRS of the loan loss guaranty ceiling for 2022 was approximately $516,000.

​

Negatively impacting 2022 as compared to 2021 was a loss of RT volume by RB&T to Green Dot from certain third-party Tax Providers following the execution of the TRS Purchase Agreement. While TRS was able to partially offset this lost volume through higher volume from other existing relationships, the lost volume to Green Dot from this one provider had a negative impact to the overall results of TRS for 2022 and may continue to have a negative impact to the overall results of TRS beyond 2022, if TRS is unable to win this business back through its normal solicitation process.

​

As a net result of all the factors in the preceding paragraphs as well as the positive impact to non-interest income of the Green Dot settlement, TRS experienced a net positive improvement to its 2022 operating results as compared to 2021.

​

​

49

Table of Contents

Republic Credit Solutions segment

​

​

​

​

​

​

​

​

RESULTS OF OPERATIONS

​

This section provides a comparative discussion of Republic’s Results of Operations for the two-year period ended December 31, 2022, unless otherwise specified. Refer to Results of Operations on pages 53-63 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) for a discussion of the 2021 versus 2020 results.

​

Net Interest Income

​

Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.

​

See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.

​

A large amount of the Company’s financial instruments tracks closely with, or are primarily indexed to, either the FFTR, Prime, or LIBOR. These rates trended lower beginning in the first quarter of 2020 with the onset of the COVID pandemic, as the FOMC reduced the FFTR to approximately 25 basis points. During 2022 inflation rose to levels not seen in approximately 40 years. In response, the FOMC began executing a quantitative tightening program by reducing its balance sheet, selling certain types of bonds in the market, and repeatedly increasing the FFTR. The FOMC’s increases to the FFTR during 2022 included the following:

​

​

50

Table of Contents

Table 2 — Increases to the Federal Funds Target Rate during 2022

​

​

The FOMC’s actions and signals continued to place upward pressure on short-term market interest rates for bonds and loans throughout the second half of 2022. While long-term interest rates initially rose in tandem with the increases to the FFTR during the middle part of 2022, they began to decline during the second half of 2022 as the market generally began to anticipate a recession to take place in 2023. As a result of the increase in short-term interest rates and the moderation of long-term interest rates, the yield curve became inverted during 2022 with some short-term rates higher than some long-term rates on the yield curve. Further monetary tightening by the FOMC in the future will likely cause short-term interest rates to continue to increase. At this time, the future of long-term market interest rates remains uncertain. Increases in short-term market interest rates are expected to impact the various business segments of the Company differently and will be discussed in further detail in the sections below.

​

Total Company net interest income was $236.7 million during 2022 and represented an increase of $14.0 million over 2021. Total Company net interest margin expanded to 4.12% during 2022 compared to 3.79% for 2021.

​

The following were the most significant components affecting the Company’s net interest income by reportable segment:

​

Traditional Banking segment

​

The Traditional Banking’s net interest income increased $14.3 million, or 9%, over 2021. Traditional Banking’s net interest margin was 3.38% for 2022, an increase of 20 basis points from 2021.

​

The increase in the Traditional Bank’s net interest income during 2022 was primarily attributable to the following factors:

​

​

​

​

​

​

​

​

51

Table of Contents

Table 3 — Traditional Bank Net Interest Income and Net Interest Margin Excluding PPP (Non-GAAP)

​

The Company earns fees and a coupon interest rate of 1.0% on its PPP portfolio. Due to the short-term nature of the PPP, management believes Traditional Bank net interest income excluding PPP fees and coupon interest is a more appropriate measure to analyze the performance of the Traditional Bank’s net interest income and net interest margin. The following table reconciles Traditional Bank net interest income and net interest margin to Traditional Bank net interest income and net interest margin excluding PPP fees and interest, a non-GAAP measure.

​

​

As previously disclosed, short-term interest rates driven by the FOMC are expected to continue to increase into 2023 as a result of expected monetary tightening by the FOMC. Additional increases in short-term interest rates are generally believed by management to be favorable to the Traditional Bank’s net interest income and net interest margin in the near term. While many factors will determine the Traditional Bank’s net interest income and net interest margin in 2023 and beyond, the Bank’s ability to maintain its deposit balances near their current, relatively-low pricing levels is a significant assumption driving Management’s current belief that rising short-term rates will be beneficial to the Traditional Bank’s net interest income and net interest margin in the future. In addition, a continued or increased inversion of the yield curve could negatively impact the Traditional Bank’s net interest income and net interest margin in the future as many of the Bank’s loan products are priced relative to the long end of the yield curve while many of its deposit products are priced relative to the short-end of the yield curve. Additional variables which may also impact the Traditional 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 the Traditional Bank’s financial products, and the Traditional Bank’s overall future liquidity needs.

​

Warehouse Lending segment

​

Net interest income within the Warehouse segment decreased $11.5 million, or 46%, from 2021, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $748 million during the 2021 to $510 million for 2022, driven largely by the sharp rise in long-term interest rates during 2022, which depressed mortgage-refinancing demand and resulted in a significant drop in Warehouse line usage.

​

In addition, the Warehouse net interest margin decreased 68 basis points from 3.37% during 2021 to 2.69% during 2022. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company’s internal FTP methodology, generally rose in tandem with the increase in short-term interest rates during the year, while its yield increases were delayed until the adjustable rates on its clients’ lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited Warehouse’s net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during 2022. Committed Warehouse lines-of-credit decreased from $1.4 billion as of December 31, 2021 to $1.1 billion as of December 31, 2022, while average usage rates for Warehouse lines were 44% and 53%, respectively, during 2022 and 2021.

​

Additional increases in short-term interest rates are generally believed by management to be favorable to Warehouse’s net interest income and net interest margin in the near term, however, the benefit of an increase in rates could be partially or entirely offset by a reduction in average outstanding balances driven by a decline in demand from Warehouse clients, as higher long-term interest rates generally drive lower demand for Warehouse borrowings. In addition, a lower demand for Warehouse borrowings could cause additional competitive pricing pressures for the industry, driving down the yield Warehouse earns on its lines of credit.

52

Table of Contents

Tax Refund Solutions segment

​

TRS’s net interest income increased $5.9 million over 2021, driven by an increase in RA fees, which are recorded as interest income on loans; an increase in outstanding commercial loan balances; and an increase in interest income on TRS’s prepaid card balances as a function of the Company’s internal FTP methodology and a rise in interest rates. TRS’s RA product, including ERAs originated during December 2022, earned $14.5 million in fees during 2022, a $1.3 million increase from 2021, resulting primarily from a $159 million increase in RA originations from year to year.

​

Republic Credit Solutions segment

​

RCS’s net interest income increased $5.8 million, or 25%, from 2021. The increase was driven primarily by an increase in fee income from RCS’s LOC products.

​

RCS’s LOC loan fees, which are recorded as interest income on loans, increased to $27.3 million during 2022 compared to $19.3 million during 2021. Interest income on RCS’s LOC I product increased $2.5 million during 2022, driven by a $3.4 million increase in average outstanding balances for this product from 2021 to 2022.

​

Interest income on RCS’s LOC II product increased $5.4 million, as the Company first piloted this product during early 2021 with limited originations during the pilot phase.

​

Interest income from RCS’s hospital receivables decreased $381,000 from 2021 resulting from a $21 million decrease in average receivables from period to period.

​

Overall product demand for the RCS segment is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact demand for its various consumer loan products. A rising interest rate environment, however, likely will impact the Company’s internal FTP cost allocated to this segment. As a result, the impact of rising interest rates to RCS during 2023 will likely be negative to the segment’s financial results, although the exact amount of the negative impact will depend on the internal FTP cost assigned, as well as the overall volume and mix of loans it generates.

53

Table of Contents

Table 4 — Total Company Average Balance Sheets and Interest Rates

​

​

​

54

Table of Contents

Table 5 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

​

Table 5 — Total Company Volume/Rate Variance Analysis

​

55

Table of Contents

Provision

​

Total Company Provision was a net charge of $22.3 million for 2022 compared to a net charge of $14.8 million for 2021.

​

The following were the most significant components comprising the Company’s Provision by reportable segment:

​

Traditional Banking segment

​

The Traditional Banking Provision during 2022 was a net charge of $1.4 million compared to a net credit of $38,000 for 2021. An analysis of the Provision for 2022 compared 2021 follows:

​

​

​

​

​

As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.32% as of December 31, 2022 compared to 1.41% as of December 31, 2021. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of December 31, 2022.

​

Table 6 — Traditional Bank ACLL to Non-PPP Traditional Bank Loans (Non-GAAP)

​

​

See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Financial Condition” for additional discussion regarding the Provision and the Bank’s delinquent, nonperforming, impaired, and TDR loans.

​

Warehouse Lending segment

​

Warehouse recorded a net credit of $1.1 million for 2022 compared to a net credit of $281,000 for 2021. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $447 million during 2022 compared to a decrease of $112 million during 2021.

​

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of December 31, 2022, and December 31, 2021. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of December 31, 2022.

​

56

Table of Contents

Tax Refund Solutions segment

​

TRS recorded a net charge to the Provision of $10.0 million during 2022 compared to a net charge of $6.7 million for in 2021. Substantially all TRS Provision in both periods was related to its RA product, including the ERA product.

​

TRS recorded a charge to the Provision for RA loans of $10.5 million, or 2.56 % of its $409 million in total RAs and ERAs originated during 2022 compared to a charge to the Provision of $6.7 million, or 2.69% of its $250 million of RAs originated during 2021. The decrease in Provision as a percentage of originations for 2022 was primarily due to a contractual loss guaranty that TRS received from one of its large Tax Providers during 2022 that set a percentage ceiling on losses for RAs originated through this provider. Through this provider, TRS originated $172 million of RAs during 2022. The net benefit to the TRS Provision for this loan loss guaranty arrangement during 2022 was approximately $516,000.

​

See additional detail regarding the RA and ERA products under Footnote 4 “Loans and Allowance for Credit Losses” of Part II Item 8 “Financial Statements and Supplemental Data.”

​

Republic Credit Solutions segment

​

RCS recorded a net charge to the Provision of $12.1 million during 2022 compared to a net charge to the Provision of $8.4 million for 2021. The increase in the Provision was driven primarily by a $5.9 million increase in net charge-offs on RCS’s line-of-credit products.

​

Net charge-offs for RCS’s LOC I product increased to $7.0 million for 2022 from $3.5 million during 2021, with government stimulus programs generally driving down usage of this product during 2021.

​

Net charge-offs for RCS’s LOC II product were $3.2 million for 2022 compared to $840,000 of net charge-offs during 2021. The lower level of charge-offs for the LOC II product during 2021 were attributable to the relatively low level of originations during the year, as the product was launched during 2021 and remained in a pilot phase for much of the year.

​

While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 13.73% as of December 31, 2022 and 13.91% as of December 31, 2021. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of December 31, 2022.

​

The following table presents RCS Provision by product:

​

Table 7 — RCS Provision by Product

​

​

57

Table of Contents

Noninterest Income

​

Table 8 — Analysis of Noninterest Income

​

NM - Not meaningful

​

Total Company noninterest income increased $3.2 million over 2021.

​

The following were the most significant components comprising the total Company’s noninterest income by reportable segment:

​

Traditional Banking segment

​

Traditional Banking’s noninterest income increased $156,000, or less than 1%, over 2021, driven primarily by a $882,000 increase in Service Charges on Deposit Accounts offset by a $399,000 nonrecurring gain on sale of a former banking center recorded during 2021.

​

The Bank earns a substantial majority of its fee income related to its overdraft service. The total per item fees, net of refunds, included in service charges on deposits for 2022 and 2021 were $6.8 million and $5.6 million. The total daily overdraft charges, net of refunds, included in interest income for 2022 and 2021 were $1.3 million and $1.1 million. The year-over-year growth in these overdraft related fees were generally due to a full year of more normal economic activity during 2022 as opposed to 2021, which had less activity due to some continuing COVID restrictions.

​

Mortgage Banking segment

​

A significant rise in long-term interest rates during 2022 led to a significant slowdown in the origination and subsequent sale of mortgage loans into the secondary market. As a result, Mortgage Banking income decreased from $20.0 million during 2021 to $6.2 million for 2022. For 2022, the Bank recorded proceeds of $238 million for its loans sold into the secondary market and achieved an average cash-gain-as-a-percent-of-loans-sold during the year of 3.01%. During 2021, however, long-term interest rates were closer to historical lows, driving secondary market loan sales higher with overall proceeds from sale of $718 million and comparable cash-gain-as-a-percent-of-loans-sold of 3.22%.

​

With the FOMC potentially moving forward with its quantitative tightening program during 2023, management believes it is likely that the Core Bank’s mortgage origination volume will continue to be negatively impacted by higher interest rates combined with a potential economic slow-down within the US economy.

​

​

58

Table of Contents

Tax Refund Solutions segment

​

TRS’s noninterest income increased $14.7 million, or 62%, over 2021. Green Dot paid RB&T a total of $18 million in nonrecurring payments during 2022 related to the now-cancelled TRS Purchase Agreement. These nonrecurring payments included the following:

​

​

​

Regarding TRS’s RT product, net RT revenue decreased 16% from $20.2 million during 2021 to $17.1 million during 2022. The decrease was primarily driven by an 3% overall decrease in RT volume from the 2021 to the 2022 tax season, with a substantial portion of that decrease driven by the loss of one of TRS’s tax providers following the announcement of the now-cancelled May 2021 Asset Purchase Agreement.

​

For factors affecting the comparison of the TRS results of operations for 2022 and 2021, see section titled “OVERVIEW - Tax Refund Solutions.”

​

Republic Credit Solutions segment

​

RCS’s noninterest income increased $2.2 million, or 20%, with program fees representing the entirety of RCS’s noninterest income. The increase in RCS program fees primarily reflected higher sales volume from RCS’s line of credit and installment loan products as sales volume was negatively impacted during 2021 by federal government stimulus programs implemented to combat the economic impact of the COVID pandemic. RPG program fees resulting from the sale of RCS loan products totaled $13.3 million during 2022, a 20% increase over 2021.

​

The following table presents RCS program fees by product:

​

Table 9 — RCS Program Fees by Product

*The Company has elected the fair value option for this product, with mark-to-market adjustments recorded as a component of program fees.

​

59

Table of Contents

Noninterest Expense

​

Table 10 — Analysis of Noninterest Expense

​

​

Total Company noninterest expense increased $4.2 million, or 2%, over 2021.

​

The following were the most significant components comprising the increase in noninterest expense by reportable segment:

​

Traditional Banking segment

​

Traditional Banking noninterest expense increased $4.3 million over 2021. The following primarily drove the change in noninterest expense:

​

​

​

​

​

​

​

​

Mortgage Banking segment

​

Noninterest expense at the Mortgage Banking segment decreased $2.4 million, or 20%, from 2021, primarily due to a $3.3 million reduction in mortgage commissions partially offset by a $2.2 million reduction in credits to deferred salary expense. The decrease in mortgage commissions was directly attributable to the previously discussed significant decline in secondary market loan volume from 2021 to 2022.

​

60

Table of Contents

The Company records a credit offset to salary expense for each loan it originates and recognizes the cost of that credit as an adjustment to the loan’s yield over its estimated life. The amount of credit benefit to salary expense during a given year is determined by the overall loan origination volume during that year. With the dramatic decrease in mortgage origination volume during 2022, the overall credit benefit recognized by the Mortgage Banking segment during 2022 decreased substantially as compared to 2021 when mortgage origination volume was much higher.

​

In addition to the change in salary expenses noted in the previous paragraph, the Mortgage Banking segment also experienced a year-to-year decrease of $350,000 in marketing expenses as the rapid rise in interest rates made the fixed-rate secondary market product a less attractive alternative for clients seeking mortgage loans. The remaining decline in noninterest expense was related to a reduction in general overhead expenses allocated to the business segment as a result of the decrease in new loan origination volume.

​

Republic Credit Solutions segment

​

Noninterest expense at the RCS segment increased $3.6 million, or 76%, over 2021, primarily due to increased marketing of RCS’s LOC II product. The LOC II product was first piloted during the first quarter of 2021.

​

FINANCIAL CONDITION

​

Cash and Cash Equivalents

​

Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. For cash held at the FRB, the Bank earns a yield on amounts exceeding required reserves. This cash earned a weighted-average yield of 1.54% during 2022 with a spot balance yield of 4.40% on December 31, 2022. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.

​

Republic had $314 million in cash and cash equivalents as of December 31, 2022 compared to $757 million as of December 31, 2021. Period-end cash balances did decrease from December 31, 2021 to December 31, 2022 due in part to cash utilized to fund $98 million of ERAs originated during December of 2022 and also due to a $301 million decline in customer deposit balances during the year.

​

While the Company deployed a portion of its excess cash into the purchase of long-term investment securities during the fourth quarter of 2021 and periodically throughout 2022, it maintained a general strategy of keeping a large amount of interest earning cash on balance sheet for interest rate risk protection. As a result, Republic’s average interest-earning cash and cash equivalent balances were $738 million during 2022 compared to $807 million for 2021. This strategy significantly benefitted the Traditional Bank’s net interest income during the year as the FOMC began raising the FFTR during 2022.

​

The Company’s Captive maintains cash reserves to cover insurable claims. Captive cash reserves totaled approximately $4 million as of December 31, 2022 and 2021.

61

Table of Contents

Investment Securities

​

Table 11 — Investment Securities Portfolio

​

​

AFS debt securities primarily consists of U.S. Treasury securities and U.S. Government agency obligations, including agency MBS and agency CMOs. The agency MBSs primarily consist of hybrid mortgage investment securities, as well as other adjustable rate mortgage investment securities, underwritten and guaranteed by the GNMA, the FHLMC and the FNMA. Agency CMOs held in the investment portfolio are substantially all floating rate securities that adjust monthly. The Bank uses a portion of the investment securities portfolio as collateral to Bank clients for SSUARs. The remaining eligible securities that are not pledged to secure client SSUARs may be pledged to the FHLB as collateral for the Bank’s borrowing line.

​

During 2022, the Bank purchased $330 million in investment debt securities, allocated among $30 million in MBSs, $160 million in U.S. Treasuries, and $140 million in U.S. government agencies. Of the U.S. Treasuries that were purchased during the year, $75 million of these securities were designated as HTM at their time of purchase. The mortgage-backed securities that were purchased had an expected weighted-average yield of approximately 1.30% and a weighted-average maturity at purchase of 9.0 years. The U.S. Treasuries had an expected weighted-average yield of approximately 2.03% and a weighted-average life at purchase of 1.6 years. The U.S. Government agencies purchased had an expected weighted-average yield of approximately 4.70% and a weighted-average life of 2.0 years.

​

Strategies for the investment securities portfolio are influenced by economic and market conditions, loan demand, deposit mix, and liquidity needs. Since early 2020, the Bank has utilized a general investing strategy of purchasing securities with shorter-term durations or maintaining a large amount cash at the Federal Reserve. The Bank utilized this general strategy due to liquidity reasons and as an interest rate risk management tool, as management did not believe that extending the duration of a significant amount of the Company’s cash into longer investment terms was worth the interest rate risk given the historically low level of long-term interest rates at that time. This strategy could change in 2023 depending upon several factors including, but not limited to, the Company’s overall current and projected liquidity positions, its customers’ demand for its loans and deposit products, the Company’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.

​

During 2019, one of the Company’s floating rate corporate bonds with a current carrying amount of $10 million was downgraded to BBB+ (S&P/Fitch), driving a significant decrease in the bond’s market value at that time. As of December 31, 2022, this bond had recovered its lost value and reflected an unrealized gain of $1,000.

​

62

Table of Contents

Table 12 — Available-for-Sale Debt Securities

​

​

Table 13 — Held-to-Maturity Debt Securities

​

​

See Footnote 2 “Investment Securities” of Part II Item 8 “Financial Statements and Supplementary Data” for further information regarding the Bank’s investment securities.

​

63

Table of Contents

Loan Portfolio

​

Table 14 — Loan Portfolio Composition

​

*     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 $19 million during 2022 to $4.5 billion as of December 31, 2022. The most significant components comprising the change in loans by reportable segment follow:

​

Traditional Banking segment

​

Period-end balances for Traditional Banking loans increased $353 million, or 10%, from December 31, 2021 to December 31, 2022. The following primarily drove the change in loan balances during 2022:

​

​

64

Table of Contents

​

​

Warehouse Lending segment

​

Outstanding Warehouse period-end balances decreased $447 million from December 31, 2021 to December 31, 2022. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted-average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the fourth quarter of 2013 to a high of 71% during the fourth quarter of 2019. On an annual basis, weighted average usage rates on the Bank’s Warehouse lines have ranged from a low of 39% during 2022 to a high of 66% during 2020.

​

As previously discussed, additional increases overall market rates are generally believed by management to be unfavorable to Warehouse’s client demand, likely leading to a reduction in average outstanding balances as higher long-term interest rates generally drive lower demand for Warehouse borrowings.

​

Tax Refund Solutions segment

​

Outstanding TRS loans increased $99 million from December 31, 2021 to December 31, 2022 primarily reflecting the impact of $98 million of ERAs originated during the fourth quarter of 2022 through a new third party Tax Provider contract. Conversely, no ERAs were originated during the fourth quarter of 2021. In addition, other TRS loans increased $1 million from December 31, 2021 to December 31, 2022. Other TRS loans primarily represent commercial-related loans to Tax Providers. These loans are typically made in the fourth quarter of each year and fully repaid by June 30th of the following year.

​

Republic Credit Solutions segment

​

Outstanding RCS loans increased $15 million during 2022 reflecting a $12 million increase in hospital receivables and a $3 million increase in outstanding balances for RCS’s line-of-credit products. The increase in balances for RCS’s line-of-credit product was the direct result of additional marketing of the products during 2022.

​

65

Table of Contents

The table below illustrates the Bank’s fixed and variable rate loan maturities:

​

Table 15 — Selected Loan Distribution

​

​

Allowance for Credit Losses

​

As of December 31, 2022, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.

​

The Company’s ACLL increased $5.8 million from $64.6 million as of December 31, 2021 to $70.4 million as of December 31, 2022. As a percent of total loans, the total Company’s ACLL increased to 1.56% as of December 31, 2022 compared to 1.44% as of December 31, 2021. An analysis of the ACL by reportable segment follows:

66

Table of Contents

Traditional Banking segment

​

The Traditional Banking ACLL increased approximately $1.3 million to $50.7 million as of December 31, 2022 driven primarily by formula reserves tied to loan growth during 2022, partially offset by reserves released following the payoff or upgrade of loans graded Substandard or Special Mention.

​

Warehouse Lending segment

​

The Warehouse ACLL decreased to approximately $1.0 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing December 31, 2022 to December 31, 2021. As of December 31, 2022, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for 2021.

​

Tax Refund Solutions segment

​

The TRS ACLL increased to approximately $3.9 million as of December 31, 2022 compared to $944,000 as of December 31, 2021. The increased ACLL was primarily driven by estimated loss reserves for $98 million of ERAs outstanding as of December 31, 2022. These ERAs were originated during the fourth quarter of 2022 through a new third party Tax Provider contract and are expected to be repaid from tax refunds generated by tax returns filed during the first quarter 2023 filing season. In contrast there were no ERAs outstanding as of December 31, 2021

​

Republic Credit Solutions segment

​

The RCS ACLL increased $1.9 million from $12.9 million as of December 31, 2021 to $14.8 million as of December 31, 2022.

​

RCS maintained an ACLL for two distinct credit products offered as of December 31, 2022, including its line-of-credit products and its healthcare-receivables products. As of December 31, 2022, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 48.91% for its LOC I product and 54.85% for its LOC II product. The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.

​

For additional discussion regarding Republic’s methodology for determining the adequacy of the ACLL, see the section titled “Critical Accounting Policies and Estimates” in this section of the filing.

​

See additional detail regarding Republic Credit Solution’s loan products under Item 1 “Business.”

​

67

Table of Contents

Table 16 — Summary of Loan and Lease Loss Experience