Republic Bancorp Inc: Form 10-Q for the period ended Sep 30, 2023

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 May 2023, the Company’s Board of Directors voted to dissolve the Captive. The dissolution of the Captive is expected to occur during the fourth quarter of 2023.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Republic should be read in conjunction with Part I Item 1 “Financial Statements.”

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

Broadly speaking, forward-looking statements include:

• the potential impact of inflation on Company operations;
• projections of revenue, income, expenses, losses, earnings per share, capital expenditures, dividends, capital structure, loan volume, loan growth, deposit growth, or other financial items;
• descriptions of plans or objectives for future operations, products, or services;
• descriptions and projections related to management strategies for loans, deposits, investments, and borrowings;
• forecasts of future economic performance; and
• descriptions of assumptions underlying or relating to any of the foregoing.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to the following:

• the impact of inflation on the Company’s operations and credit losses;
• litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future;
• natural disasters impacting the Company’s operations;
• changes in political and economic conditions;
• the impact of bank failures and potential bank failures to the industry, the Bank’s deposit base and the FDIC’s deposit insurance fund;
• the discontinuation of LIBOR;
• the magnitude and frequency of changes to the FFTR implemented by the FOMC of the FRB;
• long-term and short-term interest rate fluctuations and the overall shape and steepness of the U.S. Treasury yield curve, as well as their impact on the Company’s net interest income and Mortgage Banking operations;
• competitive product and pricing pressures in each of the Company’s five reportable segments;
• equity and fixed income market fluctuations;
• client bankruptcies and loan defaults;
• recession;
• future acquisitions;
• integrations of acquired businesses;
• changes in technology;
• changes in applicable laws and regulations or the interpretation and enforcement thereof;
• changes in fiscal, monetary, regulatory, and tax policies;
• changes in accounting standards;
• monetary fluctuations;
• changes to the Company’s overall internal control environment;
• the ability of the Company to remediate its material weaknesses in its internal control over financial reporting;
• the Company’s ability to qualify for future R&D federal tax credits;
• the ability for Tax Providers to successfully market and realize the expected RA and RT volume anticipated by TRS;
• information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party service providers; and
• other risks and uncertainties reported from time to time in the Company’s filings with the SEC, including Part 1 Item 1A “Risk Factors.” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and Part II Item 1A “Risk Factors” of the current filing.

Accounting Standards Update

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

A summary of the Company's significant accounting policies is set forth in Part II “Item 8. Financial Statements and Supplementary Data” of its Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

Republic believes its critical accounting policies and estimates relate to its ACLL and Provision.

ACLL and Provision — As of September 30, 2023, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.

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

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

BUSINESS SEGMENT COMPOSITION

As of September 30, 2023, the Company was divided into five reportable segments: Traditional Banking, Warehouse, Mortgage Banking, TRS, and RCS. Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute RPG operations.

(I) Traditional Banking segment

The Traditional Banking segment provides traditional banking products primarily to customers in the Company’s market footprint. As of September 30, 2023, Republic had 46 banking centers with locations as follows:

• Kentucky — 29
• Metropolitan Louisville — 18
• Central Kentucky — 7
• Georgetown — 1
• Lexington — 5
• Shelbyville — 1
• Northern Kentucky — 4
• Bellevue— 1
• Covington — 1
• Crestview Hills — 1
• Florence — 1
• Indiana — 3
• Southern Indiana — 3
• Floyds Knobs — 1
• Jeffersonville — 1
• New Albany — 1
• Florida — 7
• Metropolitan Tampa — 7
• Ohio — 4
• Metropolitan Cincinnati — 4
• Tennessee — 3
• Metropolitan Nashville — 3

Republic’s headquarters are in Louisville, which is the largest city in Kentucky based on population.

The Bank’s principal lending activities consist of the following:

Retail Mortgage Lending — Through its retail banking centers and its online Consumer Direct channel, the Bank originates single-family, residential real estate loans and HELOCs. In addition, the Bank originates HEALs through its retail banking centers. Such loans are generally collateralized by owner-occupied, residential real estate properties. For those loans originated through the Bank’s retail banking centers, the collateral is predominately located in the Bank’s market footprint, while loans originated through its Consumer Direct channel are generally secured by owner-occupied collateral located outside of the Bank’s market footprint.

Commercial Lending — The Bank conducts commercial lending and commercial leasing activities primarily through Corporate Banking, Commercial Banking, Business Banking, Republic Bank Finance, and Retail Banking channels.

In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’s Commercial Credit Administration Department. Clients are generally located within the Bank’s market footprint or in areas nearby the market footprint.

Construction and Land Development Lending — The Bank originates business loans for the construction of both single-family, residential properties and commercial properties (apartment complexes, shopping centers, office buildings). While not a focus for the Bank, the Bank may originate loans for the acquisition and development of residential or commercial land into buildable lots.

Consumer Lending — Traditional Banking consumer loans made by the Bank include home improvement and home equity loans, other secured and unsecured personal loans, and credit cards. Except for home equity loans, which are actively marketed in conjunction with single family, first lien residential real estate loans, other Traditional Banking consumer loan products (not including products offered through RPG), while available, are not and have not been actively promoted in the Bank’s markets.

Aircraft Lending — Aircraft loans are typically made to purchase or refinance personal aircrafts, along with engine overhauls and avionic upgrades. Loans range between $200,000 and $4,000,000 in size and have terms up to 20 years. The aircraft loan program is open to all fifty states. The credit characteristics of an aircraft borrower are higher than a typical consumer in that they must demonstrate and indicate a higher degree of credit worthiness for approval.

The Bank’s other Traditional Banking activities generally consist of the following:

Private Banking — The Bank provides financial products and services to high-net-worth individuals through its Private Banking department. The Bank’s Private Banking officers have extensive banking experience and are trained to meet the unique financial needs of this clientele.

Treasury Management Services — The Bank provides various deposit products designed for commercial business clients located throughout its market footprint. Lockbox processing, remote deposit capture, business on-line banking, account reconciliation, and ACH processing are additional services offered to commercial businesses through the Bank’s Treasury Management department. Treasury Management officers work closely with commercial and retail officers to support the cash management needs of Bank clients.

Correspondent Lending — The Bank began acquiring single family, first lien mortgage loans for investment through its Correspondent Lending channel during the first quarter of 2023. Correspondent Lending generally involves the Bank acquiring, primarily from its Warehouse clients, closed loans that meet the Bank’s specifications. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium. Premiums on loans held for investment acquired through the Correspondent Lending channel will be amortized into interest income on the level-yield method over the expected life of the loan. Loans acquired through the Correspondent Lending channel are generally made to borrowers outside of the Bank’s historical market footprint.

Internet Banking — The Bank expands its market penetration and service delivery of its RB&T brand by offering clients Internet Banking services and products through its website, www.republicbank.com (http://www.republicbank.com).

Mobile Banking — The Bank allows clients to easily and securely access and manage their accounts through its mobile banking application.

Other Banking Services — The Bank also provides title insurance and other financial institution related products and services.

Bank Acquisitions — The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies.

See additional detail regarding the Traditional Banking segment under Footnote 17 “Segment Information” of Part I Item 1 “Financial Statements.”

(II) Warehouse

The Core Bank provides short-term, revolving credit facilities to mortgage bankers across the United States through mortgage warehouse lines of credit. These credit facilities are primarily secured by single-family, first-lien residential real estate loans. The credit facility enables the mortgage banking clients to close single-family, first-lien residential real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Bank. Individual loans are expected to remain on the warehouse line for an average of 15 to 30 days. Advances for Reverse mortgage loans and construction loans typically remain on the line longer than conventional mortgage loans. Interest income and loan fees are accrued for each individual advance during the time the advance remains on the warehouse line and collected when the loan is sold. The Core Bank receives the sale proceeds of each loan directly from the investor and applies the funds to pay off the warehouse advance and related accrued interest and fees. The remaining proceeds are credited to the mortgage-banking client.

See additional detail regarding the Warehouse under Footnote 17 “Segment Information” of Part I Item 1 “Financial Statements.”

(III) Mortgage Banking segment

Mortgage Banking activities primarily include 15-, 20- and 30-year fixed-term, single-family, first-lien residential real estate loans that are originated and sold into the secondary market, primarily to the FHLMC and the FNMA. The Bank typically retains servicing on loans sold into the secondary market. Administration of loans with servicing retained by the Bank includes collecting principal and interest payments, escrowing funds for property taxes and property insurance, and remitting payments to secondary market investors. The Bank receives fees for performing these standard servicing functions.

As part of the sale of loans with servicing retained, the Bank records MSRs. MSRs represent an estimate of the present value of future cash servicing income, net of estimated costs, which the Bank expects to receive on loans sold with servicing retained by the Bank. MSRs are capitalized as separate assets. This transaction is posted to net gain on sale of loans, a component of “Mortgage Banking income” in the income statement. Management considers all relevant factors, in addition to pricing considerations from other servicers, to estimate the fair value of the MSRs to be recorded when the loans are initially sold with servicing retained by the Bank. The carrying value of MSRs is initially amortized in proportion to and over the estimated period of net servicing income and subsequently adjusted quarterly based on the weighted average remaining life of the underlying loans. The MSR amortization is recorded as a reduction to net servicing income, a component of Mortgage Banking income.

With the assistance of an independent third-party, the MSRs asset is reviewed at least quarterly for impairment based on the fair value of the MSRs using groupings of the underlying loans based on predominant risk characteristics. Any impairment of a grouping is reported as a valuation allowance. A primary factor influencing the fair value is the estimated life of the underlying loans serviced. The estimated life of the loans serviced is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs is expected to decline due to increased anticipated prepayment speeds within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs would be expected to increase as prepayment speeds on the underlying loans would be expected to decline.

See additional detail regarding the Mortgage Banking segment under Footnote 12 “Mortgage Banking Activities” and Footnote 17 “Segment Information” of Part I Item 1 “Financial Statements.”

(IV) Tax Refund Solutions segment

Through the TRS segment, the Bank is one of a limited number of financial institutions that facilitates the receipt and payment of federal and state tax refund products and offers a credit product through third-party tax preparers located throughout the U.S., as well as tax-preparation software providers (collectively, the “Tax Providers”). The majority of all the business generated by the TRS business occurs during the first half of each year. During the second half of each year, TRS generates limited revenue and incurs costs preparing for the next year’s tax season. TRS also originated $98 million of ERAs during December 2022 related to tax returns that were anticipated to be filed during the first quarter 2023 tax filing season.

RTs are fee-based products whereby a tax refund is issued to the taxpayer after the Bank has received the refund from the federal or state government. There is no credit risk or borrowing cost associated with these products because they are only delivered to the taxpayer upon receipt of the tax refund directly from the governmental paying authority. Fees earned by the Company on RTs, net of revenue share, are reported as noninterest income under the line item “Net refund transfer fees.”

The RA credit product is a loan made in conjunction with the filing of a taxpayer’s federal tax return, which allows the taxpayer to borrow funds as an advance of a portion of their tax refund. The RA product had the following features during the first quarters of 2023 and 2022:

• Offered only during the first two months of each year;
• The taxpayer was given the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $6,250;
• No requirement that the taxpayer pays for another bank product, such as an RT;
• Multiple disbursement methods were available with most Tax Providers, including direct deposit, prepaid card, or check, based on the taxpayer-customer’s election;
• Repayment of the RA to the Bank is deducted from the taxpayer’s tax refund proceeds; and
• If an insufficient refund to repay the RA occurs:
• there is no recourse to the taxpayer,
• no negative credit reporting on the taxpayer, and
• no collection efforts against the taxpayer.

The ERA credit product is also a loan that allows a taxpayer to borrow funds as an advance of a portion of their tax refund. Unlike the RA product described immediately above, however, which is originated in conjunction with the filing of the taxpayer’s federal tax return, an ERA is originated prior to the filing of the taxpayer’s federal tax return and prior to the taxpayer receiving their year-end taxable income documentation, e.g., W-2. As such, the Company generally uses paystub information to estimate the tax refund and underwrite the ERA. The repayment of the ERA is incumbent upon the taxpayer client returning to the Bank’s Tax Provider for the filing of their federal tax return in order for the tax refund to potentially be received by the Bank from the federal government to pay off the advance. The ERA product related to the first quarter 2023 tax filing season had the following features:

• Offered only during December 2022 and January 2023;
• The taxpayer had the option to choose from multiple loan-amount tiers, subject to underwriting, up to a maximum advance amount of $1,000;
• No requirement that the taxpayer pays for another bank product, such as an RT;
• Multiple disbursement methods were available with most Tax Providers, including direct deposit or prepaid card, based on the taxpayer-customer’s election;
• Repayment of the ERA to the Bank is deducted from the taxpayer’s tax refund proceeds; and
• If an insufficient refund to repay the ERA occurs, including the failure to file a federal tax return through a Republic Tax Provider:
• there is no recourse to the taxpayer,
• no negative credit reporting on the taxpayer, and
• no collection efforts against the taxpayer.

The Company reports fees paid for the RAs, including ERAs, as interest income on loans. RAs that were originated related to the first quarter 2022 tax season were repaid, on average, within 32 days after the taxpayer’s tax return was submitted to the applicable taxing authority. RAs do not have a contractual due date but the Company considered a RA, related to the first quarter 2022 tax season, delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. In 2023, the Company also considered a RA, related to the first quarter 2023 tax season, delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. For the ERA product originated in December of 2022 and January 2023, the Company considered it delinquent if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority. The number of days for delinquency eligibility is based on management’s annual analysis of tax return processing times. Provisions on RAs and ERAs are estimated when advances are made. Unpaid RAs, including ERAs, related to the first quarter tax season of a given year are charged-off by June 30th of that year, with RAs collected during the second half of that year recorded as recoveries of previously charged-off loans, unless they were covered under a loss guaranty arrangement. Any RAs subject to a loss guaranty arrangement that are recovered during the second half of the year are distributed to the guarantor.

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

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

See additional detail regarding the RA product under Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Cancelled Sale Transaction - As previously disclosed, Green Dot Corporation paid RB&T a contract termination fee of $5.0 million during the first quarter of 2022 and a legal settlement of $13.0 million during the second quarter of 2022 related to the cancelled Sale Transaction.

Republic Payment Solutions division

RPS is currently managed and operated within the TRS segment. The RPS division offers general-purpose reloadable prepaid cards, payroll debit cards, and limited-purpose demand deposit accounts with linked debit cards as an issuing bank through third-party service providers. Until the operating results of the RPS division are material to the Company’s overall results of operations, they will be reported as part of the TRS segment. The Company does not expect to report the RPS division as a separate reportable segment until such time, if any, that it meets quantitative reporting thresholds.

The Company reports fees related to RPS programs under Program fees. Additionally, the Company’s portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “Interchange fee income.”

(V) Republic Credit Solutions segment

Republic Credit Solutions segment — Through the RCS segment, the Bank offers consumer credit products. In general, the credit products are unsecured, small dollar consumer loans that are dependent on various factors. RCS loans typically earn a higher yield but also have higher credit risk compared to loans originated through the Traditional Banking segment, with a significant portion of RCS clients considered subprime or near-prime borrowers. The Bank uses third-party service providers for certain services such as marketing and loan servicing of RCS loans. Additional information regarding consumer loan products offered through RCS follows:

• RCS line-of-credit products – Using separate third-party service providers, the Bank originates two line-of-credit products to generally subprime borrowers in multiple states.
• RCS’s LOC I represented the substantial majority of RCS activity during 2022 and 2023. Elastic Marketing, LLC and Elevate Decision Sciences, LLC, are third-party service providers for the product and are subject to the Bank’s oversight and supervision. Together, these companies provide the Bank with certain marketing, servicing, technology, and support services, while a separate third-party provides customer support, servicing, and other services on the Bank’s behalf. The Bank is the lender for this product and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of the product.

The Bank sells participation interests in this product. These participations sold represent a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.

• One of RCS’s existing third-party service providers, subject to the Bank’s oversight and supervision, provides the Bank with marketing services and loan servicing for the LOC II product. The Bank is the lender for this product and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this product.

The Bank sells participation interests in this product. These participations sold represent a 95% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 5% participation interest in each advance, it maintains 100% ownership of the underlying LOC II account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.

• RCS installment loan product – Through RCS, the Bank offers installment loans with terms ranging from 12 to 60 months to borrowers in multiple states. The same third-party service provider for RCS’s LOC II is the third-party provider for the installment loans. This third-party provider is subject to the Bank’s oversight and supervision and provides the Bank with marketing services and loan servicing for these RCS installment loans. The Bank is the lender for these RCS installment loans and is marketed as such. Furthermore, the Bank controls the loan terms and underwriting guidelines, and the Bank exercises consumer compliance oversight of this RCS installment loan product. Currently, all loan balances originated under

this RCS installment loan program are carried as “held for sale” on the Bank’s balance sheet, with the intention to sell these loans to a third-party, who is an affiliate of the Bank’s third-party service provider, generally within sixteen days following the Bank’s origination of the loans. Loans originated under this RCS installment loan program are carried at fair value under a fair-value option, with the portfolio marked to market monthly.

• RCS healthcare receivables products – The Bank originates healthcare-receivables products across the U.S. through three different third-party service providers.
• For two of the programs, the Bank retains 100% of the receivables, with recourse in the event of default.
• For the remaining program, in some instances the Bank retains 100% of the receivables originated, with recourse in the event of default, and in other instances, the Bank sells 100% of the receivables generally within one month of origination. Loan balances held for sale through this program are carried at the lower of cost or fair value.

The Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “Program fees.”

OVERVIEW (Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022)

Total Company net income for the third quarter of 2023 was $21.6 million, an increase of $1.7 million over the same period in 2022. Diluted EPS also increased to $1.10 for the third quarter of 2023 compared to $1.01 for the same period in 2022. The increase in net income primarily reflected the following by reportable segment:

Traditional Banking segment

• Net income decreased $1.2 million, 9%, for the third quarter of 2023 compared to the same period in 2022.
• Net interest income increased $847,000, or 2%, for the third quarter of 2023 compared to the same period in 2022.
• Provision was a net charge of $1.6 million for the third quarter of 2023 compared to a net credit of $753,000 for the same period in 2022.
• Noninterest income increased $427,000, or 5%, for the third quarter of 2023 compared to the same period in 2022.
• Noninterest expense increased $1.5 million, or 4%, for the third quarter of 2023 compared to the same period in 2022.

Warehouse

• Net income decreased $402,000 or 20%, for the third quarter of 2023 compared to the same period in 2022.
• Net interest income decreased $544,000, or 18%, for the third quarter of 2023 compared to the same period in 2022.
• The Warehouse Provision was a net credit of $203,000 for the third quarter of 2023 compared to a net credit of $386,000 for the same period in 2022.
• Average committed Warehouse lines decreased to $1.0 billion in the third quarter of 2023 compared to $1.3 billion in the third quarter of 2022.
• Average line usage was 42% during the third quarter of 2023 compared to 38% during the same period in 2022.

Mortgage Banking segment

• Within the Mortgage Banking segment, mortgage banking income decreased $302,000, or 26%, during the third quarter of 2023 compared to the same period in 2022.
• Overall, Republic’s proceeds from the sale of secondary market loans totaled $26 million during the third quarter of 2023 compared to $39 million during the same period in 2022, with the Company’s cash-gain-as-a-percent-of-loans-sold increased to 2.33% for the third quarter of 2023 from 2.23% for the third quarter of 2022.

Tax Refund Solutions segment

• Net income increased $2.6 million, or 276%, for the third quarter of 2023 compared to the same period in 2022.
• Net interest income increased $2.8 million for the third quarter of 2023 compared to the same period in 2022.
• Overall, TRS recorded a net credit to the Provision of $2.0 million during the third quarter of 2023 compared to a net credit to the Provision of $1.3 million for the same period in 2022.
• Noninterest income decreased $350,000, or 25%, for the third quarter of 2023 compared to the same period in 2022.
• Within noninterest income, net RT revenue decreased $351,000, or 59%, for the third quarter of 2023 compared to the same period in 2022.
• Noninterest expense was $3.1 million for the third quarter of 2023 compared to $3.2 million for the same period in 2022.

Republic Credit Solutions segment

• Net income increased $841,000, or 21%, for the third quarter of 2023 compared to the same period in 2022.
• Net interest income increased $3.1 million, or 44%, for the third quarter of 2023 compared to the same period in 2022.
• Overall, RCS recorded a net charge to the Provision of $4.3 million during the third quarter of 2023 compared to a net charge of $4.0 million for the same period in 2022.
• Noninterest income decreased $844,000, or 20%, from the third quarter of 2022 to the third quarter of 2023.
• Noninterest expense was $3.1 million for the third quarter of 2023 and $2.2 million for the same period in 2022.

RESULTS OF OPERATIONS (Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022)

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 is primarily indexed to, either the FFTR or Prime. 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 and the first nine months of 2023 included the following:

Table 1 — Increases to the Federal Funds Target Rate from January 1, 2022 through September 30, 2023

The FOMC’s actions and signals continued to place upward pressure on short-term market interest rates throughout the second half of 2022 and the first nine months of 2023. While long-term interest rates initially rose in tandem with the increases to the FFTR through the middle part of 2022, they generally moved lower than short-term rates during the second half of 2022 and maintained a relative lower level into 2023 as the market generally began to anticipate a recession to take place in 2023. As a result of the increase in short-term interest rates and the moderation of long-term interest rates, the yield curve has been inverted for several months, with short-term rates generally higher than long-term rates on the yield curve.

During the third quarter of 2023, long-term rates began to increase meaningfully with short-term rates remaining relatively stable by comparison. As a result, the inversion of the yield curve became less extreme during the third quarter of 2023 as the yields on longer-term interest rates approached the yields on shorter-term interest rates. While the inversion did become less extreme during the quarter, the yield curve remained inverted as of September 30, 2023. Because banks generally price customer deposits based on the shorter-end of the yield curve and price many loans based on the longer-end of the yield curve, an inverted yield curve is generally negative for banks’ net interest income while a steep yield curve, in which long-term rates exceed short-term rates, is generally favorable for banks.

At this time, the near-term shape of the yield curve is uncertain. The Federal Reserve continues to signal its willingness to implement appropriate monetary policy to reduce inflation. Any further monetary tightening by the FOMC in the future will likely cause short-term interest rates to increase. The impact additional short-term rate increases by the FOMC could have on long-term market interest rates is unknown.

Total Company net interest income was $64.8 million during the third quarter of 2023 and represented an increase of $6.2 million, or 11%, from the third quarter of 2022. The Total Company net interest margin increased to 4.35% during the third quarter of 2023 compared to 4.09% for the same period in 2022.

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

Traditional Banking segment

Net interest income within the Traditional Bank was slightly higher from the third quarter of 2022 to the third quarter of 2023 with a slight decrease in NIM over the same periods. Overall, the Traditional Bank’s net interest income increased $847,000, or 2%, while its NIM declined 13 basis points from the third quarter of 2022 to 3.50% for the third quarter of 2023.

The small increase in net interest income at the Traditional Bank from the third quarter of 2022 to the third quarter of 2023 is a continuing change in trend from early 2023, when the Traditional Bank’s net interest income was much higher on a period-over-same-period-last-year basis. The on-going drivers of this change in trend, which began to emerge late in the first quarter of 2023, were a reduction in average interest-earning cash balances compared to the same period in the prior year combined with an on-going shift in funding mix away from noninterest-bearing deposit balances into higher-costing, interest-bearing deposits and Federal Home Loan Bank advances. As a result of these factors, the Traditional Bank’s yield on its interest earning assets increased 120 basis points from the third quarter of 2022 to the third quarter of 2023, while the cost of its interest-bearing liabilities increased 203 basis points over the same periods.

Further detailing this change in net interest income and NIM between the third quarter of 2022 and the third quarter of 2023 were the following:

• Traditional Bank average loans grew from $3.7 billion with a weighted-average yield of 4.23% during the third quarter of 2022 to $4.4 billion with a weighted average yield of 5.23% during the third quarter of 2023. As previously noted, loan growth remained particularly strong within the Core Bank during the first nine months of 2023, with the acquisition of CBank adding approximately $217 million to the Core Bank’s average loans during the third quarter of 2023.
• Average investments were $772 million with a weighted-average yield of 2.75% during the third quarter of 2023 compared to $695 million with a weighted-average yield of 1.88% for the third quarter of 2022. As part of its overall interest rate risk management strategy, the Traditional Bank generally maintains an investment portfolio with a shorter overall duration as compared to its peers. This strategy is generally favorable to net interest income in a rising interest rate environment.
• The Traditional Bank’s average noninterest-bearing deposits decreased from $1.6 billion during the third quarter of 2022 to $1.4 billion for the third quarter of 2023. This decrease in average noninterest-bearing deposits was primarily funded through a decrease in interest-earning cash balances and an increase in FHLB borrowings.
• The Traditional Bank’s weighted-average cost of interest-bearing liabilities increased from 0.02% during the third quarter of 2022 to 2.05% for the third quarter of 2023. Further segmenting the Traditional Bank’s interest-bearing liabilities:
• The weighted-average cost of total interest-bearing deposits increased from 0.26% during the third quarter of 2022 to 2.08% for the third quarter of 2023. In addition, average interest-bearing deposits grew $199 million from the third quarter of 2022 to the third quarter of 2023.
• The average balance of FHLB borrowings increased from $20 million for the third quarter of 2022 to $442 million for the third quarter of 2023. In addition, the weighted-average cost of these borrowings increased from 1.91% to 4.85% for the same time periods. As noted above, this increase in the average balance of borrowings was generally driven by a period-to-period decline in average deposit balances.
• Average interest-earning cash was $173 million with a weighted-average yield of 5.53% during the third quarter of 2023 compared to $724 million with a weighted-average yield of 2.31% for the third quarter of 2022. The decline in average cash balances was driven generally by a decrease in average deposit balances in combination with n an increase in average loans for the same periods.

As previously disclosed, short-term interest rates have risen dramatically since March of 2022 as a result of FOMC monetary actions. From March 2022 through December 2022, increases in short-term interest rates were generally favorable to the Traditional Bank’s net interest income and net interest margin primarily as a result of the substantial amount of immediately-repricing, interest-earning cash it maintained on its balance sheet and its ability to sustain a low cost of deposits in relation to the rising FFTR. During the third quarter of 2022, however, the Traditional Bank began to use its excess cash to fund a decline in deposit balances. This trend of declining interest-earning cash to fund decreasing deposit balances continued into the second quarter of 2023. In addition, during the first quarter of 2023, the cost of the Traditional Bank’s interest-bearing deposits began to increase more significantly during the latter part of the quarter due to customer pricing pressures. This trend of increasing deposit costs continued into the third quarter of 2023.

As a result of the declining cash balances, the increasing cost of deposits and the increasing balances of higher costing FHLB advances, the Bank began to experience a diminishing benefit to its net interest income and net interest margin with additional increases in the FFTR during the first quarter of 2023. This trend continued during the third quarter of 2023, as the increase in Traditional Bank interest income only slightly exceeded the increase in Traditional Bank interest expense.

Management believes the Traditional Bank will continue to experience net interest margin compression during the fourth quarter of 2023 as a result of the negative impact of 1) lower interest-earning cash and low-cost deposit balances; 2) larger, higher-costing average balances of FHLB borrowings; and 3) a continuing rise in the cost of interest-bearing deposits in order to maintain client balances. 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.

For additional discussion of the factors impacting interest-earning cash and deposit balances as well as deposit betas, see sections titled “Cash and Cash Equivalents” and “Deposits” in the “COMPARISON OF FINANCIAL CONDITION” of this document.

Warehouse

Net interest income within Warehouse decreased $544,000, or 18%, from the third quarter of 2022 to the third quarter of 2023, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $474 million during the third quarter of 2022 to $423 million for the third quarter of 2023, as home-mortgage refinancing dipped from a significantly higher volume in early 2022. Driving this decrease in average outstanding balances was a decline in committed lines-of-credit to $1.0 billion as September 30, 2023 from $1.2 billion as of September 30, 2022. Concurrent with the decline in committed lines of credit, the average usage rates for Warehouse lines increased to 42% during the third quarter of 2023 from 38% for the first quarter of 2022.

The Warehouse net interest margin compressed 21 basis points from 2.54% during the third quarter of 2022 to 2.33% during the third quarter of 2023. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company’s internal FTP methodology, generally rose in tandem with the increase in short-term interest rates since rates began rising in March 2022, while its yield increases were delayed until the adjustable rates on its clients’ lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited the Warehouse’s net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during the first quarter of 2022.

Additional increases in long-term market interest rates will likely lead to a continued 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, because the yields on Warehouse lines of credit are generally tied to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, driving down the yield Warehouse earns on its lines of credits.

Tax Refund Solutions segment

TRS’s net interest income increased $2.8 million for the third quarter of 2023 compared to the same period in 2022, driven primarily by an increase interest income on TRS’s prepaid card balances as a function of the Company’s FTP methodology and a rise in interest rates.

The prepaid card product component of TRS drove a $3 million increase to net interest income for the segment. This increase was generally driven by a higher crediting rate applied through the Company’s internal FTP. The prepaid card FTP credit yield was 5.00% for average prepaid card-related balances of $343 million during the third quarter of 2023 compared to 1.70% for average prepaid card-related balances of $338 million during the third quarter of 2022.

Republic Credit Solutions segment

RCS’s net interest income increased $3.1 million, or 44%, from the third quarter of 2022 to the third quarter of 2023. The increase was driven primarily by an increase in fee income from RCS’s LOC II product.

RCS’s LOC II loan fees, which are recorded as interest income on loans, increased to $9.8 million during the third quarter of 2023 compared to $6.6 million during the same period in 2022. The Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase. It began to ramp up origination volume for the product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year revenue.

Overall customer demand for the RCS segment’s products is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact origination volume 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 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.

The following table presents the average balance sheets for the three-month periods ended September 30, 2023 and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

Table 2 — Total Company Average Balance Sheets and Interest Rates

(dollars in thousands)

(1) For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets.

(2) Interest income for Refund Advances and RCS line-of-credit products is composed entirely of loan fees.

(3) Interest income includes loan fees of $0 and $0 for the three months ended September 30, 2023 and 2022.

(4) Interest income includes loan fees of $254,000 and $402,000 for the three months ended September 30, 2023 and 2022.

(5) Interest income includes loan fees of $1.7 million and $911,000 for the three months ended September 30, 2023 and 2022.

(6) Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all loan premiums, discounts, fees and costs.

Table 3 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

Table 3 — Total Company Volume/Rate Variance Analysis

(in thousands)

Provision

Total Company Provision was a net charge of $3.7 million for the third quarter of 2023 compared to a net charge of $1.6 million for the same period in 2022.

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

Traditional Banking segment

The Traditional Banking Provision during the third quarter of 2023 was a net charge of $1.6 million compared to a net credit of $753,000 for the third quarter of 2022.

The net charge during the third quarter of 2023 was primarily driven by the following:

• The Traditional Bank recorded a net charge to the Provision of $1.6 million for general formula reserves applied to $101 million of Traditional Bank loan growth for the quarter.

The net credit during the third quarter of 2022 was primarily driven by the following:

• The Traditional Bank recorded a net credit to the Provision of $1.7 million during the quarter substantially all of which was related to the favorable payoff of one large, classified loan.
• Offsetting the above, the Traditional Bank recorded a net charge to the Provision of $974,000 resulting primarily from general formula reserves applied to $81 million of growth for the quarter in non-PPP Traditional Bank loans.

As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.27% as of September 30, 2023 compared to 1.32% as of December 31, 2022 and 1.31% as of September 30, 2022. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of September 30, 2023.

See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.

Warehouse

Warehouse recorded a net credit to the Provision of $203,000 for the third quarter of 2023 compared to a net credit of $386,000 for the same period in 2022. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $81 million during the third quarter of 2023 compared to a decrease of $93 million during the third quarter of 2022.

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of September 30, 2023, December 31, 2022, and September 30, 2022. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of September 30, 2023.

Tax Refund Solutions segment

TRS recorded a net credit to the Provision of $2.0 million during the third quarter of 2023 compared to a net credit of $1.3 million for the same period in 2022. Substantially all TRS Provision in both periods was related to its RA product.

RAs related to the first quarter 2023 tax filing season were only originated during December of 2022 and the first two months of 2023. RAs related to the first quarter 2022 tax filing season were only originated during the first two months of 2022. As is the case each year as of March 31st, the Allowance related to RAs is an estimate with that estimate finalized during the second quarter when all uncollected RAs are ultimately charged off as of June 30th. RAs collected during the second half of a year are recorded as recoveries of previously charged-off loans unless they were covered under a loss guaranty arrangement. Any RAs subject to a loss guaranty arrangement that are recovered during the second half of the year are distributed to the guarantor.

As of September 30, 2023, TRS’s incurred loss rate related to RAs that were associated with the first quarter 2023 tax filing season was 3.79% of the $835 million of the total loans originated during December 2022 and the first two months of 2023. TRS’s incurred loss rate for RAs as of September 30, 2022 was 2.87% of total originations and it finished 2022 with a final RA loss rate of 2.20% of total RAs originated.

For factors affecting the comparison of the TRS results of operations for the third quarter of 2023 and the third quarter of 2022, see section titled “OVERVIEW (Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022) - Tax Refund Solutions.”

See additional detail regarding the RA product under Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Table 4 — Refund Advance Performance

(dollars in thousands)

(1) The Company originated $98 million of ERAs in December of 2022 related to the 2023 Tax Season. ERAs were not offered in December of 2021 related to the 2022 Tax Season.

See additional detail regarding the RA product under Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Republic Credit Solutions segment

As illustrated in Table 5 below, RCS recorded a net charge to the Provision of $4.3 million during the third quarter of 2023 compared to a net charge to the Provision of $4.0 million for the same period in 2022. The increase in the Provision was driven primarily by a $965,000 increase in net charge-offs for RCS’s LOC II product, which resulted in a higher reserve percentage being applied to the outstanding balances. Partially offsetting the increase in Provision related to the RCS LOC II product, net charge-offs for RCS’s LOC I product decreased $500,000 for the third quarter of 2023 compared to third quarter of 2022.

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 13.00% as of September 30, 2023, 12.88% as of June 30, 2023, 13.73% as of December 31, 2022, and 14.73% as of September 30, 2022. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of September 30, 2023.

The following table presents net charges to the RCS Provision by product:

Table 5 — RCS Provision by Product

(dollars in thousands)

Table 6 — Summary of Loan and Lease Loss Experience

(dollars in thousands)

Table 7 — Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category

* All loss rates above are based on net charge-offs as a function of average outstanding portfolio balances. Refund Advances are originated during the first two months of each year, with all RAs charged-off by June 30th of each year. Due to their relatively short life, RA net charge-offs are typically analyzed by the Company as a percentage of total RA originations, not as a percentage of average outstanding balances.

The Company’s net charge-offs to total average loans remained at 0.11% from the third quarter of 2022 to the third quarter of 2023.

From the third quarter of 2022 to the third quarter of 2023, TRS experienced a $643,000 increase in net RA recoveries due to the $523 million increase in year-over-year tax-season origination volume.

From the third quarter of 2022 to the third quarter of 2023, RCS experienced a $465,000 increase in net charge-offs primarily driven by an increase in net charge-offs within RCS’s LOC II product. Net charge-offs within this product increased $965,000 from the third quarter of 2022 to the third quarter of 2023. This product was first piloted during the first quarter of 2021. RCS began to ramp up origination volume for the RCS LOC II product during early 2022 and has steadily increased its volume since then, leading to a continuing increase in the period-over-previous-period net charge-offs for the product.

During the third quarters of 2023 and 2022, the Company’s Core Bank net charge-offs to average Core Bank loans remained near zero.

Noninterest Income

Total Company noninterest income decreased $1.1 million during the third quarter of 2023 compared to the same period in 2022.

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

Traditional Banking segment

Traditional Banking’s noninterest income increased $427,000, or 5%, for the third quarter of 2023 compared to the same period in 2022, with no material fluctuations to note.

The Traditional Bank earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the three months ended September 30, 2023 and 2022 were $1.9 million and $1.8 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended September 30, 2023 and 2022 were $327,000 and $337,000.

Mortgage Banking segment

A decrease in Mortgage banking income for the third quarter of 2023 was generally caused by substantially higher long-term market interest rates, which led to a significant slowdown in the origination of mortgage loans to be sold into the secondary market. For the third quarter of 2023, the 30-year mortgage rate was fluctuating within a range between 7.0% and 7.50% for most of the entire quarter. As a result, the Core Bank sold $26 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold of 2.33% during the third quarter of 2023 compared to sales of $39 million with comparable cash-gain-as-a-percent-of-loans-sold of 2.23% during the third quarter of 2022 when mortgage rates were notably lower.

With long term interest rates trending during the third quarter of 2023, management believes it is likely that the Core Bank’s mortgage origination volume will continue to be negatively impacted by higher interest rates causing additional declines in mortgage banking income during the fourth quarter of 2023.

Republic Credit Solutions segment

RCS’s noninterest income decreased $844,000, or 20%, during the third quarter of 2023 compared to the same period in 2022, with program fees representing the entirety of RCS’s noninterest income. The decrease in RCS program fees primarily reflected lower sales volume and corresponding gains from RCS’s installment loan product which were substantially offset by higher sales volume and gains from RCS’s LOC II product.

Proceeds from the sale of RCS’s installment loan products totaled $33 million during the third quarter of 2023, a 66% decrease from the same period in 2022. Proceeds from the sale of RCS's loan products totaled $290 million during the third quarter of 2023, a 21% decrease from the same period in 2022. Partially offsetting the decrease, RCS sold approximately $133 million of balances for the LOC II product during the third quarter of 2023, an increase of 109% over the third quarter of 2022. This increase in sales volume for the LOC II product contributed to a $702,000 increase in RCS program fee revenue, which partially offset the decline in revenue from the installment product. RCS began to ramp up origination volume for the LOC II product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year net program revenue.

The following table presents RCS program fees by product:

Table 8 — RCS Program Fees by Product

(dollars in thousands)

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

Noninterest Expense

Total Company noninterest expense increased $1.9 million, or 4%, during the third quarter of 2023 compared to the same period in 2022.

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

Traditional Banking segment

Traditional Banking noninterest expense increased $1.5 million, or 4%, for the third quarter of 2023 compared to the same period in 2022. The following primarily drove the change in noninterest expense:

• Noninterest expense associated with the former CBank operations acquired in March 2023 totaled $913,000 across all categories for the third quarter of 2023, with no such expenses for the third quarter of 2022.
• Legacy Salaries and Benefits expense increased $1.2 million, or 6%, to $23.6 million for the third quarter of 2023. The most notable changes within this category were as follows:
• Direct Legacy salaries increased a net $1.4 million, or 8%, due primarily to the additional cost of annual merit increases.
• Legacy Overhead salaries increased $244,000, as a greater portion of overhead salaries was allocated to the Traditional Banking segment than the Mortgage Banking segment during the third quarter of 2023 compared to the same period in 2022. Overhead salaries are allocated to the Traditional Banking and the Mortgage Banking segments each period based on each segment’s pro rata mortgage production, with Mortgage Banking production disproportionately and negatively impacted more during 2023 following a rise in interest rates.

Mortgage Banking segment

Noninterest expense at the Mortgage Banking segment decreased $212,000, or 27%, during the third quarter of 2023 compared to the same period in 2022, primarily due to a $128,000 reduction in overhead salaries allocated to the Mortgage Banking segment and a $65,000 decrease in other overhead shared costs, with both reductions resulting from the previously discussed slowdown in mortgage origination volume.

Republic Credit Solutions segment

Noninterest expense at the RCS segment increased $888,000, or 40%, during the third quarter of 2023 compared to the same period in 2022. Approximately $792,000 of this increase was concentrated within the LOC II product and was primarily a result of a year-over-year increase in marketing activity for the product.

OVERVIEW (Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022)

Total Company net income for the first nine months of 2023 was $70.7 million, a $1.9 million, or 3%, decrease from the same period in 2022. Diluted EPS decreased to $3.60 for the first nine months of 2023 compared to $3.65 for the same period in 2022. The decrease in net income primarily reflected the following:

Traditional Banking segment

• Net income increased $10.5 million, or 43%, for the first nine months of 2023 compared to the same period in 2022.
• Net interest income increased $24.3 million, or 20%, for the first nine months of 2023 compared to the same period in 2022.
• Provision was a net charge of $6.4 million for the first nine months of 2023 compared to a net credit of $287,000 for the same period in 2022.
• Noninterest income increased $3.5 million, or 15%, for the first nine months of 2023 compared to the same period in 2022.
• Noninterest expense increased $8.1 million, or 7%, for the first nine months of 2023 compared to the same period in 2022.
• Total Traditional Bank loans increased $642 million, or 17%, during the first nine months of 2023.
• Total nonperforming loans to total loans for the Traditional Banking segment was 0.40% as of September 30, 2023 compared to 0.40% as of December 31, 2022.
• Delinquent loans to total loans for the Traditional Banking segment was 0.15% as of September 30, 2023 compared to 0.16% as of December 31, 2022.
• Total Traditional Bank deposits increased $254 million from December 31, 2022 to $4.3 billion as of September 30, 2023.

Warehouse

• Net income decreased $4.0 million, or 53%, for the first nine months of 2023 compared to the same period in 2022.
• Net interest income decreased $4.2 million, or 37%, for the first nine months of 2023 compared to the same period in 2022.
• The Warehouse Provision was a net charge of $134,000 for the first nine months of 2023 compared to a net credit of $1.0 million for the same period in 2022.
• Average committed Warehouse lines declined to $1.0 billion for the first nine months of 2023 from $1.4 billion for first nine months of 2022.
• Average line usage was 41% during the first nine months of 2023 compared to 40% during the same period in 2022.

Mortgage Banking segment

• Within the Mortgage Banking segment, mortgage banking income decreased $3.0 million, or 54%, during the first nine months of 2023 compared to the same period in 2022.
• Overall, Republic’s proceeds from sale of secondary market loans totaled $54 million during the first nine months of 2023 compared to $226 million during the same period in 2022, with the Company’s cash-gain-as-a-percent-of-loans-sold increasing to 2.25% from 2.23% from period to period.

Tax Refund Solutions segment

• Net income decreased $7.5 million, or 26%, for the first nine months of 2023 compared to the same period in 2022.
• Net interest income increased $21.5 million, or 115%, for the first nine months of 2023 compared to the same period in 2022.
• Total RA originations were $737 million during the first nine months of 2023 compared to $311 million for the first nine months of 2022. Originations for both nine month periods all occurred during the first quarter of these periods.
• In addition to the originations for the first nine months of 2023 and 2022 noted in the preceding bullet, TRS originated $98 million of ERAs related to the first quarter 2023 tax season during December 2022. No ERAs were originated during December 2021 related to the first quarter 2022 tax season.
• Overall, TRS recorded a net charge to the Provision of $19.6 million during the first nine months of 2023 compared to a net charge to the Provision of $7.0 million for the same period in 2022.
• Noninterest income decreased $19.2 million for the first nine months of 2023 compared to the same period in 2022.
• Net RT revenue decreased $1.1 million for the first nine months of 2023 compared to the same period in 2022.
• Noninterest expense was $11.9 million for the first nine months of 2023 compared to $11.9 million for the same period in 2022.

Republic Credit Solutions segment

• Net income increased $1.0 million, or 8%, for the first nine months of 2023 compared to the same period in 2022.
• Net interest income increased $7.0 million, or 33%, for the first nine months of 2023 compared to the same period in 2022.
• Overall, RCS recorded a net charge to the Provision of $10.5 million during the first nine months of 2023 compared to a net charge of $8.8 million for the same period in 2022.
• Noninterest income decreased $1.5 million, or 14%, from the first nine months of 2022 to the first nine months of 2023.
• Noninterest expense was $8.4 million for the first nine months of 2023 and $5.7 million for the same period in 2022.
• Total nonperforming loans to total loans for the RCS segment was 0.82% as of September 30, 2023 compared to 0.70% as of December 31, 2022.
• Delinquent loans to total loans for the RCS segment was 9.71% as of September 30, 2023 compared to 8.53% as of December 31, 2022.

RESULTS OF OPERATIONS (Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022)

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 is primarily indexed to, either the FFTR or 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 and the first nine months of 2023 included the following:

Table 9 — Increases to the Federal Funds Target Rate since January 1, 2022

The FOMC’s actions and signals continued to place upward pressure on short-term market interest rates throughout the second half of 2022 and the first nine months of 2023. While long-term interest rates initially rose in tandem with the increases to the FFTR through the middle part of 2022, they generally moved lower than short-term rates during the second half of 2022 and maintained a relative lower level into 2023 as the market generally began to anticipate a recession to take place in 2023. As a result of the increase in short-term interest rates and the moderation of long-term interest rates, the yield curve has been inverted for several months, with short-term rates generally higher than long-term rates on the yield curve.

During the third quarter of 2023, long-term rates began to increase meaningfully with short-term rates remaining relatively stable by comparison. As a result, the inversion of the yield curve became less extreme during the third quarter of 2023 as the yields on longer-term interest rates approached the yields on shorter-term interest rates. While the inversion did become less extreme during the quarter, the yield curve remained inverted as of September 30, 2023. Because banks generally price customer deposits based on the shorter-end of the yield curve and price many loans based on the longer-end of the yield curve, an inverted yield curve is generally negative for banks’ net interest income while a steep yield curve, in which long-term rates exceed short-term rates, is generally favorable for banks.

At this time, the near-term shape of the yield curve is uncertain. The Federal Reserve continues to signal its willingness to implement appropriate monetary policy to reduce inflation. Any further monetary tightening by the FOMC in the future will likely cause short-term interest rates to increase. The impact additional short-term rate increases by the FOMC could have on long-term market interest rates is unknown.

Total Company net interest income was $222.0 million during the first nine months of 2023 and represented an increase of $48.4 million from the first nine months of 2022. Total Company net interest margin expanded to 5.09% during the first nine months of 2022 compared to 3.99% for the same period in 2022.

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

Traditional Banking segment

The Traditional Banking’s net interest income increased $24.3 million, or 20%, for the first nine months of 2023 compared to the same period in 2022. Traditional Banking’s net interest margin was 3.76% for the first nine months of 2023, an increase of 56 basis points from the same period in 2022.

The increase in the Traditional Bank’s net interest income during the first nine months of 2023 was primarily attributable to the following factors:

• Traditional Bank average loans grew from $3.6 billion with a weighted-average yield of 4.03% for the first nine months of 2022 to $4.2 billion with a weighted average yield of 4.91% for the first nine months of 2023. In addition, the acquisition of CBank added approximately $111 million to the Traditional Bank’s average loans during the first nine months of 2023. As discussed in the section titled “Loans” within this document, loan growth remained particularly strong within the Traditional Bank during the first nine months of 2023.
• Average investments grew to $773 million with a weighted-average yield of 2.70% during the first nine months of 2023 from $664 million with a weighted-average yield of 1.64% for the first nine months of 2022. As part of its overall interest rate risk management strategy, the Traditional Bank generally maintains an investment portfolio with a shorter overall duration as compared to its peers.
• The Traditional Bank’s average noninterest bearing deposits decreased from $1.6 billion during the first nine months of 2022 to $1.4 billion for the first nine months of 2023. This decrease in average noninterest-bearing deposits was funded through a decrease in interest-earning cash balances and an increase in FHLB borrowings.
• The Traditional Bank’s average cost of interest-bearing liabilities increased from 0.09% during the first nine months of 2022 to 1.28% for the first nine months of 2023. The following two bullets further segments this impact in the Traditional Bank’s cost of interest-bearing liabilities.
• The weighted-average cost of total interest-bearing deposits increased from 0.17% during the first nine months of 2022 to 1.49% for the first nine months of 2023. In addition, average interest-bearing deposits increased $33 million from the first nine months of 2022 to the first nine months of 2023.
• The average balance of FHLB borrowings increased from $21 million for the first nine months of 2022 to $315 million for the first nine months of 2023. In addition, the weighted-average cost of these borrowings increased from 1.43% to 4.69% for the same time periods. This increase in the average balance of borrowings was generally driven by the period-to-period decline in average deposit balances.
• Average interest-earning cash was $174 million with a weighted-average yield of 5.11% during the first nine months of 2023 compared to $797 million with a weighted-average yield of 1.04% for the first nine months of 2022. The decline in average cash balances was driven generally by a decline in average deposit balances for the same periods.

As previously disclosed, short-term interest rates have risen dramatically since March of 2022 as a result of FOMC monetary actions. From March 2022 through December 2022, increases in short-term interest rates were generally favorable to the Traditional Bank’s net interest income and net interest margin primarily as a result of the substantial amount of immediately-repricing, interest-earning cash it maintained on its balance sheet and its ability to sustain a low cost of deposits in relation to the rising FFTR. During the third quarter of 2022, however, the Traditional Bank began to use its excess cash to fund a decline in deposit balances. This trend of declining interest-earning cash to fund decreasing deposit balances continued into the second quarter of 2023. In addition, during the first quarter of 2023, the cost of the Traditional Bank’s interest-bearing deposits began to increase more significantly during the latter part of the quarter due to customer pricing pressures. This trend of increasing deposit costs continued into the third quarter of 2023.

As a result of the declining cash balances, the increasing cost of deposits and the increasing balances of higher costing FHLB advances, the Bank began to experience a diminishing benefit to its net interest income and net interest margin with additional increases in the FFTR during the first quarter of 2023. This trend continued during the third quarter of 2023, as the increase in Traditional Bank interest income only slightly exceeded the increase in Traditional Bank interest expense.

Management believes the Traditional Bank will continue to experience net interest margin compression during the fourth quarter of 2023 as a result of the negative impact of 1) lower interest-earning cash and low-cost deposit balances; 2) larger, higher-costing average balances of FHLB borrowings; and 3) a continuing rise in the cost of interest-bearing deposits in order to maintain client balances. 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

Net interest income within Warehouse decreased $4.2 million, or 37%, from the first nine months of 2022 to the first nine months of 2023, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $545 million during the first nine months of 2022 to $406 million for the first nine months of 2023, driven largely by the sharp rise in long-term interest rates during 2022, which depressed mortgage-refinancing demand and resulted in a sharp drop in Warehouse line usage.

In addition, the Warehouse net interest margin decreased 42 basis points from 2.79% during the first nine months of 2022 to 2.37% during the first nine months of 2023. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company’s internal FTP methodology, generally rose in tandem with the increase in short-term interest rates since rates began rising in March 2022, while its yield increases were delayed until the adjustable rates on its clients’ lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited the Warehouse net interest margin substantially during 2020 and 2021 when market rates declined to historical lows but have produced margin compression since the onset of the FFTR increases during the first quarter of 2022.

Committed Warehouse lines-of-credit decreased from $1.2 billion as September 30, 2022 to $1.0 billion as of September 30, 2023, while average usage rates for Warehouse lines were 41% and 40%, respectively, during the first nine months of 2023 and 2022.

Additional increases in long-term market interest rates will likely lead to a continued 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, because the yield on Warehouse lines of credit are generally tied to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, driving down the yield Warehouse earns on its lines of credits.

Tax Refund Solutions segment

Net interest income within the TRS segment was up $21.5 million from the first nine months of 2022 to the first nine months of 2023. Net interest income at TRS includes income from its prepaid card products as well as the income associated with its tax-related credit products.

The prepaid card product component of TRS drove a $9.0 million increase to net interest income for the segment. This increase was generally driven by a higher crediting rate applied through the Company’s internal FTP. The prepaid card FTP credit yield was 3.26% for average prepaid card-related balances of $350 million during the first nine months of 2023 compared to 0.62% for average prepaid card-related balances of $359 million during the first nine months of 2022.

Related to the segment’s tax-related products, net interest income increased $21.5 million for the first nine months of 2023 compared to the first nine months of 2022. Loan-related interest and fees increased $17.0 million for the period and was driven primarily by a $426 million increase in RA origination volume, most of which resulted from a new contract with a large national tax preparation provider. This increase in loan revenue was partially offset by a $4.7 million increase to the segment’s net cost of funds as applied through its internal FTP.

See additional detail regarding the RA product under Footnote 5“Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Republic Credit Solutions segment

RCS’s net interest income increased $7.0 million, or 33%, from the first nine months of 2022 to the first nine months of 2023. The increase was driven primarily by an increase in fee income from RCS’s LOC II product.

RCS’s LOC II loan fees, which are recorded as interest income on loans, increased to $13.2 million during the first nine months of 2023 compared to $5.7 million during the same period in 2022. The Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase. It began to ramp up origination volume for the product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year revenue.

Overall customer demand for the RCS segment’s products is not assumed to be interest rate sensitive and therefore management does not believe a rising interest rate environment will impact origination volume 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 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.

The following table presents the average balance sheets for the nine-month periods ended September 30, 2023 and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

Table 11 — Total Company Average Balance Sheets and Interest Rates

(dollars in thousands)

(1) For the purpose of this calculation, the fair market value adjustment on debt securities is included as a component of other assets.

(2) Interest income for Refund Advances and RCS line-of-credit products is composed entirely of loan fees.

(3) Interest income includes loan fees of $957,000 and $663,000 for the nine months ended September 30, 2023 and 2022.

(4) Interest income includes loan fees of $796,000 and $1.5 million for the nine months ended September 30, 2023 and 2022.

(5) Interest income includes loan fees of $4.2 million and $5.1 million for the nine months ended September 30, 2023 and 2022.

(6) Average balances for loans include the principal balance of nonaccrual loans and loans held for sale, and are inclusive of all loan premiums, discounts, fees and costs.

Table 12 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 12 — Total Company Volume/Rate Variance Analysis

(in thousands)

* Since interest income for Refund Advances is composed entirely of loan fees and RAs are only offered during the first two months of each year, volume and rate measurements for this product are not a meaningful metric for the periods presented above.

Provision

Total Company Provision was a net charge of $36.6 million for the first nine months of 2023 compared to a net charge of $14.5 million for the same period in 2022.

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

Traditional Banking segment

The Traditional Banking Provision during the first nine months of 2023 was a net charge of $6.4 million compared to a net credit of $287,000 for the first nine months of 2022. An analysis of the Provision for the first nine months of 2023 compared to the same period in 2022 follows:

• For the first nine months of 2023, the Traditional Bank Provision primarily reflected the following:
• The Traditional Bank incurred a net charge of $2.7 million during the first quarter of 2023 for the Day-1 Provision associated with the acquired CBank non-PCD loans. A net credit of $1.4 million was recorded during the second quarter of 2023 to reflect a change in estimated fair value based upon further evaluation of PCD loans.
• The Traditional Bank recorded approximately $5.0 million in general formula reserves for $642 million of loan growth during the first nine months of 2023. Approximately $1.0 million of these general formula reserves was due to an increase in the Traditional Bank’s qualitative factor reserves generally related to uncertain market conditions brought about by high inflation, government actions to combat inflation, and elevated vacancy rates for commercial office space.
• Offsetting the above, the Traditional Bank recognized a $2.7 million credit to the Provision during the first nine months of 2023 driven primarily by the release of $1.5 million in COVID-related reserves. The release of these reserves coincided with the federal government’s declaration of the official end to the COVID pandemic in May of 2023.
• For the first nine months of 2022, the Traditional Bank Provision primarily reflected the following:
• Approximately $3.4 million of additional Provision driven by formula reserves tied to general loan growth. Non-PPP Traditional Bank loans grew $294 million from December 31, 2021 to September 30, 2022.
• Offsetting the above was the release of approximately $3.7 million of reserves following the payoff or upgrade of loans previously downgraded during the height of the pandemic.

As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.27% as of September 30, 2023 compared to 1.32% as of December 31, 2022 and 1.31% as of September 30, 2022. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of September 30, 2023.

See the sections titled “Allowance for Credit Losses” and “Asset Quality” in this section of the filing under “Comparison of Financial Condition” for additional discussion regarding the Provision and the Bank’s credit quality.

Warehouse

Warehouse recorded a net charge to the Provision of $134,000 for the first nine months of 2023 compared to a net credit of $1.0 million for the same period in 2022. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $53 million during the first nine months of 2023 compared to a decrease of $408 million during the first nine months of 2022.

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of September 30, 2023, December 31, 2022, and September 30, 2022. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of September 30, 2023.

Tax Refund Solutions segment

TRS recorded a net charge to the Provision of $19.6 million during the first nine months of 2023 compared to a net charge of $7.0 million for the same period in 2022. Substantially all TRS Provision in both periods was related to its RA product.

TRS recorded a charge to the Provision for RA loans of $21.6 million, or 2.92% of its $737 million in RAs originated during the first nine months of 2022 compared to a charge to the Provision of $7.6 million, or 2.44% of its $311 million of RAs originated during the first nine months of 2022. The increase in Provision for the first nine months of 2023 was primarily due to the increased volume from the previously mentioned new contract with a large national tax preparation provider, which generated approximately $462 million in new RA volume related to the first quarter 2023 tax filing season.

With all unpaid RAs charged off as of June 30, 2023, any payments received for unguaranteed RAs during the third and fourth quarter of 2023 will represent recovery credits directly to income.

See additional detail regarding the RA product under Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

Republic Credit Solutions segment

As illustrated in Table 13 below, RCS recorded a net charge to the Provision of $10.5 million during the first nine months of 2023 compared to a net charge to the Provision of $8.8 million for the same period in 2022. The increase in the Provision was driven primarily by a $2.1 million increase in net charge-offs, which resulted in a higher reserve percentage being applied to the outstanding balances, and a $401,000 Allowance build for RCS’s LOC II product. Net charge-offs for RCS’s LOC II product were $4.3 million for the first nine months of 2023 compared to $2.2 million of net charge-offs during the first nine months of 2022. As previously disclosed in the quarterly discussion, this product was first piloted during the first quarter of 2021. RCS began to ramp up origination volume for the RCS LOC II product during early 2022 and has steadily increased its volume since then leading to corresponding higher year-over-year net charge-offs in the product.

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 13.0% as of September 30, 2023, 12.88% as of June 30, 2023, 13.73% as of December 31, 2022, and 14.73% as of September 30, 2022. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of September 30, 2023.

The following table presents net charges to the RCS Provision by product:

Table 13 — RCS Provision by Product

(in thousands)

Table 14 — Summary of Loan and Lease Loss Experience

(dollars in thousands)

Table 15 — Annualized Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category

* All loss rates above are based on net charge-offs as a function of average outstanding portfolio balances. Refund Advances are originated during the first two months of each year, with all RAs charged-off by June 30th of each year. Due to their relatively short life, RA net charge-offs are typically analyzed by the Company as a percentage of total RA originations, not as a percentage of average outstanding balances.

The Company’s net charge-offs to average total Company loans increased from 0.44% during the first nine months of 2022 to 0.90% during the first nine months of 2023, with net charge-offs increasing $18.5 million and average total Company loans increasing $4.9 million, or 12%. As discussed in more detail above, the increase in net charge-offs was primarily driven by a $18.0 million increase in net charge-offs within the Company’s TRS and RCS operations.

During the first nine months of 2023 and 2022, the Company’s Core Bank net charge-offs to average Core Bank loans remained near zero.

Noninterest Income

Total Company noninterest income decreased $20.3 million during the first nine months of 2023 compared to the same period in 2022.

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

Traditional Banking segment

Traditional Banking’s noninterest income increased $3.4 million, or 15%, for the first nine months of 2023 compared to the same period in 2022, driven primarily by a $1.7 million death benefit payment received during the second quarter of 2023 in excess of the cash surrender value of a BOLI policy.

The Traditional Bank also earns a substantial majority of its fee income related to its overdraft service program from the per item fee it assesses its customers for each insufficient-funds check or electronic debit presented for payment. The total per item fees, net of refunds, included in service charges on deposits for the nine months ended September 30, 2023 and 2022 were $5.3 million and $5.1 million. The total daily overdraft charges, net of refunds, included in interest income for the nine months ended September 30, 2023 and 2022 were $937,000 and $933,000.

Mortgage Banking segment

A decrease in Mortgage banking income for the first nine months of 2023 was generally caused by substantially higher market long-term interest rates, which led to a significant slowdown in the origination of mortgage loans to be sold into the secondary market. For the first nine months of 2023, the 30-year mortgage rate fluctuated in a range between 6.00% and 7.50% for most of the entire period. As a result, the Bank sold $53 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold of 2.25% during the first nine months of 2023. During the first two months of 2022, however, long-term interest rates were closer to historical lows, driving secondary market loan sales of $226 million with comparable cash-gain-as-a-percent-of-loans-sold of 2.23%. With the FOMC continuing its quantitative tightening program during the second half of 2023, management believes it is likely that the Core Bank’s mortgage origination volume will continue to be negatively impacted by higher interest rates causing additional declines in mortgage banking income throughout 2023.

Tax Refund Solutions segment

TRS’s noninterest income decreased $19.2 million, or 52%, during the first nine months of 2023 compared to the same period in 2022. Green Dot paid RB&T a total of $18 million in nonrecurring payments during the first nine months of 2022 related to the now-cancelled TRS Purchase Agreement. These nonrecurring payments included the following:

• A contract termination fee of $5.0 million in January 2022 after RB&T provided Green Dot a notice of termination of the May 2021 TRS Purchase Agreement for the sale of substantially all of RB&T’s TRS assets and operations to Green Dot.
• A legal settlement of $13.0 million in June 2022 regarding RB&T’s lawsuit against Green Dot.

Regarding the noninterest income from TRS’s RT product, net RT revenue decreased 6% from $16.6 million during the first nine months of 2022 to $15.5 million during the same period in 2023. RT revenue for 2023 was negatively impacted by a general decline in overall RT demand across the industry.

Republic Credit Solutions segment

RCS’s noninterest income decreased $1.5 million, or 14%, during the first nine months of 2023 compared to the same period in 2022, with program fees representing the substantial majority of RCS’s noninterest income. The decrease in RCS program fees primarily reflected lower sales volume and corresponding gains from RCS’s installment loan product which were substantially offset by higher sales volume and gains from RCS’s LOC II product.

Proceeds from the sale of RCS’s installment loan products totaled $86 million during the third quarter of 2023, a 71% decrease from the same period in 2022. Proceeds from the sale of RCS's loan products totaled $761 million during the first nine months of 2023, a 8% decrease from the same period in 2022. Partially offsetting the decrease, RCS sold approximately $363 million of balances for the LOC II product during the first nine months 2023, an increase of 137% over the first nine months of 2022. This increase in sales volume for the LOC II product contributed to a $1.8 million increase in RCS program fee revenue, which partially offset the decline in revenue from the installment product. RCS began to ramp up origination volume for the LOC II product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year net program revenue.

The following table presents RCS program fees by product:

Table 16 — RCS Program Fees by Product

(dollars in thousands)

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

Noninterest Expense

Total Company noninterest expense increased $9.7 million, or 7%, during the first nine months of 2023 compared to the same period in 2022.

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

Traditional Banking segment

Traditional Banking noninterest expense increased $8.1 million for the first nine months of 2023 compared to the same period in 2022. The following primarily drove the change in noninterest expense:

• Noninterest expenses associated with the acquired CBank operations were $5.4 million across all categories for the first nine months of 2023, with no such expenses for the first nine months of 2022. The figure for the first nine months of 2023 includes $2.2 million in merger related expenses that are not expected to recur in the future.
• Legacy Salaries and Benefits expense increased a net $2.5 million, or 3.69%, to $70.9 million for the first nine months of 2022. The most notable changes within this category were as follows:
• Direct legacy salaries increased a net $697,000, or 1%, due primarily to the cost of annual merit increases.
• Legacy Overhead salaries increased $2.1 million, as a greater portion of overhead salaries was allocated to the Traditional Banking segment than the Mortgage Banking segment during the first nine months 2023 compared to the same period in 2022. Overhead salaries are allocated to the Traditional Banking and the Mortgage Banking segments each period based on each segment’s pro rata mortgage production, with Mortgage Banking production disproportionately and negatively impacted during 2022 following a rise in interest rates.
• Legacy technology expenses declined $887,000 as the Traditional Bank continued to combine technology platforms as part of a Company-wide efficiency initiative.
• Interchange related expenses increased $709,000 due to higher debit card and credit card purchasing activity.
• FDIC Insurance expense increased $443,000 due to higher premiums charged by the FDIC in 2023.

Mortgage Banking segment

Noninterest expense at the Mortgage Banking segment decreased $858,000, or 11%, during the first nine months of 2023 compared to the same period in 2022, primarily due to a $383,000 reduction in overhead salaries allocated to the Mortgage Banking segment and a $369,000 decrease in other shared overhead costs.

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 period is determined by the overall loan origination volume during that period.

Republic Credit Solutions segment

Noninterest expense at the RCS segment increased $2.7 million, or 47%, during the first nine months of 2023 compared to the same period in 2022. Approximately $2.0 of this increase was concentrated within the LOC II product and was a result of a year-over-year increase in marketing activity for the product. Approximately $538,000 of the increase was within Salaries and Benefits and was primarily the result of annual merit increases and an increase in headcount.

COMPARISON OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

Cash and Cash Equivalents

Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Republic had $220 million in cash and cash equivalents as of September 30, 2023 compared to $314 million as of December 31, 2022. Comparing average balances for the third quarters of 2023 and 2022, the Company had average interest-earning cash and cash equivalent balances of $177 million for the third quarter of 2023 compared to $801 million for the third quarter of 2022. The decline in average interest-earning cash balances from period to period was driven generally by a decrease in average deposits and an increase in average loan balances.

For cash held at the FRB, the Bank earns a yield on amounts more than required reserves. This cash earned a weighted-average yield of 5.00% during the first nine months of 2023 with a spot balance yield of approximately 5.40% on September 30, 2023. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.

Investment Securities

Table 17 — Purchases of Investment Securities

(in thousands)

Republic’s investment portfolio increased $17 million from December 31, 2022 to September 30, 2023, driven by $55 million in portfolio purchases, $16 million of investments acquired as part of the CBank merger, and a $22 million increase in FHLB stock. These increases were offset by portfolio declines of $50 million from calls and maturities of debt securities, $28 million in paydowns on mortgage-backed securities, and a $2 million increase in the portfolio market value.

Table 18 — Loan Portfolio Composition

(dollars in thousands)

*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 $565 million, or 13%, during the first nine months of 2022 to $5.1 billion as of September 30, 2023. The most significant components comprising the change in loans by reportable segment follow:

Traditional Banking segment

Period-end balances for Traditional Banking loans increased $642 million, or 17%, from December 31, 2022 to September 30, 2023. The following primarily drove the change in loan balances during the first nine months of 2023:

• The Traditional Bank acquired loans and leases with a fair value of $216 million in connection with the CBank acquisition as of September 30, 2023, CBank related loan balances were approximately $211 million.
• The Traditional Bank’s legacy CRE portfolio, which excludes the CRE loans acquired from CBank, grew $143 million, or 9%, during the first nine months of 2023, as the Traditional Bank experienced strong loan demand within its Corporate Lending, Private Banking and Commercial Real Estate divisions in its Louisville market.
• With mortgage refinance volume at all-time record levels during 2020 and 2021, balances of 1-4 family loans, including HELOCs, generally declined as the vast majority of the volume of refinancings was sold into the secondary market. This trend began to change in mid to late 2022, however, as a significant rise in long-term, fixed-rate mortgages caused portfolio level ARM loans to become generally more attractive than secondary market loans. As a result, the Traditional Bank’s

legacy residential real estate portfolio, which excludes the residential real estate loans acquired from CBank, increased $227 million during the first nine months of 2023.

• After a multi-year pause in operations, the Traditional Bank’s Corresponding Lending Division began purchasing loans again during the first quarter of 2023. The loans purchased are all 1-4 Family, first-lien mortgages with fixed rate terms of generally five or seven years. Through September 30, 2023, this division had acquired approximately $111 million of loans with an expected average yield of approximately 5.94%.

Warehouse

Outstanding Warehouse period-end balances increased $53 million from December 31, 2022 to September 30, 2023. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse 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 first quarter of 2023 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 40% during 2013 to a high of 66% during 2020.

As previously discussed, additional increases in long-term market interest rates will likely lead to a continued 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, because the yield on Warehouse lines of credit are generally tied to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, driving down the yield Warehouse earns on its lines of credits.

Tax Refund Solutions segment

Outstanding TRS loans decreased $149 million from December 31, 2022 to September 30, 2023 primarily reflecting the substantial paydown of RAs originated during the 2023 tax season. In addition, TRS also received substantial paydowns of commercial loans made during the fourth quarter of 2022 to third-party tax-related businesses for their cash flow needs for the first quarter tax season. RAs, including ERAs, are only made during the December of the previous year and the first two months of each year, with all unpaid RAs charged off by June 30th of each year.

Allowance for Credit Losses

As of September 30, 2023, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.

The Company’s ACLL increased from $70 million as of December 31, 2022 to $75 million as of September 30, 2023. As a percent of total loans, the total Company’s ACLL decreased to 1.47% as of September 30, 2023 compared to 1.56% as of December 31, 2022. An analysis of the ACL by reportable segment follows:

Traditional Banking segment

The Traditional Banking ACLL increased approximately $6 million to $57 million as of September 30, 2023, generally driven primarily by formula reserves tied to loan growth during the first nine months of 2023 partially offset by the $1.5 million release of COVID-related reserves. The release of these reserves coincided with the federal government’s declaration of the official end to the COVID pandemic in May of 2023.

Warehouse

The Warehouse ACLL remained at approximately $1 million, and the Warehouse ACLL to total Warehouse loans remained at 0.25% when comparing September 30, 2023 to December 31, 2022. As of September 30, 2023, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first nine months of 2023.

Tax Refund Solutions

The TRS ACLL decreased $4 million from December 31, 2022 to $1,000 as of September 30, 2023, with this decrease driven by the June 30, 2023 charge-off of all unpaid RAs originated during December 2022.

Republic Credit Solutions segment

The RCS ACLL increased $2 million to $17 million as of September 30, 2023, with this increase driven by an increase in the RCS LOC II spot balance and a change in the RCS loan mix as the outstanding healthcare receivables spot balance increased and the RCS LOC I spot balance decreased.

RCS maintained an ACLL for two distinct credit products offered as of September 30, 2023, including its line-of-credit products and its healthcare-receivables products. As of September 30, 2023, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 48.96% for its line-of-credit products. The lower reserve percentage of 0.25% was provided for RCS’s healthcare receivables, as such receivables have recourse back to the third-party providers.

Table 19 — Management’s Allocation of the Allowance for Credit Losses on Loans

(in thousands)

* Values of less than 50 basis points are rounded down to zero.

Asset Quality

Classified and Special Mention Loans

The Bank applies credit quality indicators, or ratings, to individual loans based on internal Bank policies. Such internal policies are informed by regulatory standards. Loans rated “Loss,” “Doubtful,” “Substandard,” and PCD-Substandard are considered “Classified.” Loans rated “Special Mention” or PCD-Special Mention are considered Special Mention. The Bank’s Classified and Special Mention loans decreased approximately $6 million during the first nine months of 2023, driven primarily by commercial-purpose loans repaid or upgraded to a Pass rating during the first nine months of 2022.

See Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding Classified and Special Mention loans.

Table 20 — Classified and Special Mention Loans

(dollars in thousands)

Nonperforming Loans

Nonperforming loans include loans on nonaccrual status and loans past due 90-days-or-more and still accruing. The nonperforming loan category includes TDRs totaling approximately $0 million and $2 million as of September 30, 2023 and December 31, 2022.

Nonperforming loans to total loans increased to 0.38% at September 30, 2023 from 0.36% at December 31, 2022, as the total balance of nonperforming loans increased by $3 million, or 17%, while total loans increased $561 million, or 13%, during the first nine months of 2023.

The ACLL to total nonaccrual loans decreased to 412% as of September 30, 2023 from 452% as of December 31, 2022, as the total ACLL increased $4 million and the balance of nonaccrual loans increased by $3 million, or 16%. The driver of the increase in ACLL was primarily formula reserves applied to $565 million of loan growth from December 31, 2022 to September 30, 2023.

Table 21 — Nonperforming Loans and Nonperforming Assets Summary

(dollars in thousands)

* Loans on nonaccrual status include collateral-dependent loans. See Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans.

** Loans past due 90-days-or-more and still accruing consist of smaller balance consumer loans.

Table 22 — Nonperforming Loan Composition

(dollars in thousands)

Table 23 — Stratification of Nonperforming Loans

(dollars in thousands)

(dollars in thousands)

Table 24 — Roll-forward of Nonperforming Loans

(in thousands)

* Includes relatively small consumer portfolios, e.g., RCS loans.

Table 25 — Detail of Loans Removed from Nonperforming Status

(in thousands)

Based on the Bank’s review as of September 30, 2023, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.

Delinquent Loans

Total Company delinquent loans to total loans increased to 0.38% as of September 30, 2023 from 0.34% as of December 31, 2022. Core Bank delinquent loans to total Core Bank loans remained unchanged at 0.14% as of September 30, 2023 from December 31, 2022. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of September 30, 2023 and December 31, 2022 were on nonaccrual status.

Table 26 — Delinquent Loan Composition*

(dollars in thousands)

* Represents total loans 30-days-or-more past due. Delinquent status may be determined by either the number of days past due or number of payments past due.

Table 27 — Roll-forward of Delinquent Loans

(in thousands)

* Includes relatively small consumer portfolios, e.g., RCS loans.

Table 28 — Detail of Loans Removed from Delinquent Status

(in thousands)

Collateral-Dependent Loans and Loan Modifications

When management determines that a loan is collateral dependent and foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs, if appropriate. The Bank’s policy is to charge-off all or that portion of its recorded investment in collateral-dependent loans upon a determination that it expects the full amount of contractual principal and interest will not be collected.

A loan modification (formerly a TDR prior to the adoption of ASU 2022-02) is a situation where, due to a borrower’s financial difficulties, the Bank grants a concession to the borrower that the Bank would not otherwise have considered. The majority of the Bank’s loan modifications involve a restructuring of loan terms such as a temporary reduction in the payment amount to require only interest and escrow (if required), reducing the loan’s interest rate, and/or extending the maturity date of the debt. Nonaccrual loans modified as loan modifications remain on nonaccrual status and continue to be reported as nonperforming loans. Accruing loans modified as loan modifications are evaluated for nonaccrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt. With the adoption of ASU 2022-02 in 2023, all loan modifications will now be recognized as collateral-dependent. As of September 30, 2023 there were $1.9 million collateral-dependent loan modifications.

Table 29 — Collateral-Dependent Loans and Troubled Debt Restructurings

(dollars in thousands)

See Footnote 5 “Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements” for additional discussion regarding collateral-dependent loans and TDRs.

Deposits

Table 30 — Deposit Composition

(in thousands)

(1) Includes time deposits

Total deposits increased $256 million from December 31, 2022 to $4.8 billion as of September 30, 2023. Total Core Bank deposits increased by $250 million with the March 2023 CBank acquisition resulting in $182 million of this growth. Core Bank legacy deposits, which excludes the deposits assumed from the CBank acquisition, increased $68 million, or 2%, from December 31, 2022. Within the Core Bank’s legacy deposits, interest-bearing deposits increased $302 million and noninterest-bearing deposits decreased $234 million.

As it relates to the decrease of $234 million in Core Bank legacy noninterest-bearing deposits, Management believes two factors generally drove, and continue to drive, this overall decline. The first is a general decline in liquidity among both businesses and consumers as the excess liquidity created during the COVID pandemic continued to wane. Second, Management believes that the substantial increase in market interest rates over the past year has caused the difference between what a client can earn for an interest-bearing deposit versus the client’s lack of a financial return for a noninterest-bearing deposit to become large enough to cause some clients to pursue other opportunities for their cash both inside and outside the Bank.

Related to the $302 million increase in Core Bank legacy interest-bearing deposits, much of this increase occurred during the second and third quarters of 2023 as Core Bank legacy interest-bearing deposits were down $61 million for the first quarter of 2023. The majority of this increase was in the Bank’s CDARs and ICS product types.

CDARs accounts represent reciprocal, term certificate-of-deposit accounts and ICS accounts represent liquid money market accounts in which:

1) The Bank receives large client deposits above the FDIC insurance limit of $250,000;

2) The Bank places these large deposits into like term CDs or money market accounts in a nationwide network of banks in amounts under the FDIC insurance threshold of $250,000 in order to receive full FDIC insurance on the total deposit amount; and

3) The Bank receives an equivalent amount of deposits back from the network of banks from numerous clients of theirs, under the $250,000 FDIC insurance limit for each of those clients.

These balances grew $228 million for the first nine months of the year with $167 million of this growth occurring during the second and third quarters when the Bank offered significantly higher rates on these products in order to combat deposit run-off. In addition to the higher offering rates available through these two products, CDARs and ICS accounts are also attractive to clients because they offer clients the ability to receive full FDIC insurance for their deposit balances up to $50 million per client.

Management believes the higher offering rates it is paying for its interest-bearing deposits as of September 30, 2023 will continue to raise the Traditional Bank's overall cost of funds into the second half of 2023 and cause further contraction to its net interest margin on a linked-quarter basis. This strategy is subject to change depending upon several factors including, but not limited to, the Bank’s current and projected overall liquidity positions, its clients’ demand for its loans and deposit products, the Bank’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.

Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings

SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank’s control.

SSUARs decreased $136 million, or 63%, during the first nine months of 2023 to $81 million as of September 30, 2023. SSUARs generally represent large customer relationships deposited into the Bank that require security collateral above the $250,000 FDIC insurance limit of the Bank. Due to the size of the underlying relationships, large fluctuations in the underlying account balances from period to period are common.

While the Bank has changed its pricing strategy with deposits in order to retain and attract funds, it has not generally changed its pricing strategy with SSUARs. As a result, its SSUAR balances have continued to decline during the first nine months of 2023. At this time, management is not contemplating a change in its pricing strategy for SSUARs, and as a result, a further decline in outstanding balances is possible. The Bank’s SSUAR pricing strategy, however, is subject to change depending upon several factors including, but not limited to, the Bank’s current and projected overall liquidity positions, its clients’ demand for its loans and deposit products, the Bank’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.

Federal Home Loan Bank Advances

The Bank’s total FHLB advances were $465 million as of September 30, 2023 compared to $95 million as of December 31, 2022. During the third quarter of 2023, the Bank extended the term of an additional $200 million in overnight borrowings into longer-term, fixed rate advances with a weighted average term of 4.33 years and a weighted average cost of 4.61%. With overnight borrowings costing approximately 5.40% during the quarter, the Bank extended these borrowings to mitigate the risk of rising interest rates to its balance sheet, while also taking advantage of the inverted yield curve by lowering its total borrowings costs. As of September 30, 2023, approximately $270 million of the Bank’s FHLB advances were fixed terms with a weighted average maturity of 4.5 years and a weighted-average cost of 4.33%. In addition, the Bank had remaining $195 million of overnight borrowings with a cost of 5.37% as of September 30, 2023.

Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.

Interest Rate Swaps

The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets, primarily in the form of cash, cash equivalents, and unencumbered investment securities. Funding and cash flows can also be realized through deposit product promotions, the sale of AFS debt securities, principal paydowns on loans and mortgage-backed securities, and proceeds realized from loans held for sale.

See Footnote 13 “Interest Rate Swaps” of Part I Item 1 “Financial Statements” for additional discussion regarding the Bank’s interest rate swaps.

Liquidity

The Bank maintains sufficient liquidity to fund routine loan demand and routine deposit withdrawal activity. Liquidity is managed by maintaining sufficient liquid assets, primarily in the form of cash, cash equivalents, and unencumbered investment securities. Funding and cash flows can also be realized through deposit product promotions, the sale of AFS debt securities, principal paydowns on loans and mortgage-backed securities, and proceeds realized from loans held for sale.

Table 31 — Liquid Assets and Borrowing Capacity

The Bank’s liquid assets and borrowing capacity included the following:

(in thousands)

The Company had a loan to deposit ratio (excluding wholesale brokered deposits) of 106% as of September 30, 2023 and 99% as of December 31, 2022. Republic’s banking centers and its website, www.republicbank.com (http://www.republicbank.com), provide access to retail deposit markets. These retail deposit products, if offered at attractive rates, have historically been a source of additional funding when needed. If the Bank were to lose a significant funding source, such as a few major depositors, or if any of its lines of credit were cancelled, or if the Bank cannot obtain brokered deposits, the Bank would be compelled to offer market leading deposit interest rates to meet its funding and liquidity needs.

As noted in the sections above titled “Deposits” and “Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings,” the Bank implemented a general strategy during 2022 and most of the first quarter of 2023 to maintain a low beta for its client-related interest-bearing liabilities as part of its overall strategy to increase its net interest margin and net interest income. As a result of this strategy, however, the Bank did experience a decline in both personal and business deposit balances and SSUAR balances as some clients moved their funds to more attractive offerings outside of the Bank. In response to this deposit outflow, during the third quarter of 2023 the Bank began marketing some deposit products, such as money market accounts and short-term certificates of deposit, with higher offering rates. This strategy appears to have generally reversed the outflow of deposits during late May and June of 2023. These higher offering rates also raised the Traditional Bank's overall cost of funds meaningfully during the third quarter of 2023 and caused contraction to its net interest margin on a linked-quarter basis. Management is unsure if these higher offering rates will continue to prevent future deposit outflows or if the Bank may be required to raise its offering rates more in order to prevent future deposit outflows. The Bank’s overall deposit and SSUAR pricing strategies are subject to change depending upon several factors including, but not limited to, the Bank’s current and projected overall liquidity positions, its clients’ demand for its loans and deposit products, the Bank’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.

As of September 30, 2023, the Bank had approximately $681 million in deposits from 133 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million. Total uninsured deposits for the Bank were $1.7 billion, or 36%, of total deposits as of September 30, 2023. The 20 largest non-sweep deposit relationships represented approximately $224 million, or 5%, of the Bank’s total deposit balances as of September 30, 2023. These accounts do not require collateral; therefore, cash from these accounts can generally be utilized to fund the loan portfolio. If any of these balances were moved from the Bank, the Bank would likely utilize overnight borrowing lines in the short-term to replace the balances. On a longer-term basis, the Bank would likely utilize wholesale-brokered deposits to replace withdrawn balances, or alternatively, higher-cost internet-sourced deposits. Based on past experience utilizing brokered deposits and internet-sourced deposits, the Bank believes it can quickly obtain these types of deposits if needed. The overall cost of gathering these types of deposits, however, could be substantially higher than the Traditional Bank deposits they replace, potentially decreasing the Bank’s earnings.

The Bank’s liquidity is impacted by its ability to sell certain investment securities, which is limited due to the level of investment securities that are needed to secure public deposits, securities sold under agreements to repurchase, FHLB borrowings, and for other purposes, as required by law. As of September 30, 2023 and December 31, 2022, these pledged investment securities had a fair value of $82 million and $218 million.

Capital

Total stockholders’ equity increased from $857 million as of December 31, 2022 to $893 million as of September 30, 2023. The increase in stockholders’ equity was primarily attributable to net income earned during 2023 reduced primarily by cash dividends declared.

Common Stock — The Class A Common shares are entitled to cash dividends equal to 110% of the cash dividend paid per share on Class B Common Stock. Class A Common shares have one vote per share and Class B Common shares have ten votes per share. Class B Common shares may be converted, at the option of the holder, to Class A Common shares on a share for share basis. The Class A Common shares are not convertible into any other class of Republic’s capital stock.

Dividend Restrictions — The Parent Company’s principal source of funds for dividend payments are dividends received from RB&T. Banking regulations limit the amount of dividends that may be paid to the Parent Company by the Bank without prior approval of the respective states’ banking regulators. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. As of October 1, 2023, RB&T could, without prior approval, declare dividends of approximately $126 million. Any payment of dividends in the future will depend, in large part, on the Company’s earnings, capital requirements, financial condition, and other factors considered relevant by the Company’s Board of Directors.

Regulatory Capital Requirements — The Company and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Republic’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings, and other factors.

Banking regulators have categorized the Bank as well capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 10.0% Total Risk-Based Capital ratio, a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, and a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, the Company and Bank must hold a capital conservation buffer of 2.5% composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements.

Republic continues to exceed the regulatory requirements for Total Risk-Based Capital, Common Equity Tier I Risk-Based Capital, Tier I Risk Based-Capital, and Tier I Leverage Capital. Republic and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the Capital Conservation Buffer. Republic’s average stockholders’ equity to average assets ratio was 14.29% as of September 30, 2023 and 13.82% as of December 31, 2022. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

Table 32 — Capital Ratios (1)

(dollars in thousands)

(1) The Company and the Bank elected in 2020 to defer the impact of CECL on regulatory capital. The deferral period is five years, with the total estimated CECL impact 100% deferred for the first two years, then phased in over the next three years. If not for this election, the Company’s regulatory capital ratios would have been approximately 6 basis points lower than those presented in the table above as of September 30, 2023 and approximately 10 basis points lower than those presented in the table above as of December 31, 2022.

Asset/Liability Management and Market Risk

Asset/liability management is designed to ensure safety and soundness, maintain liquidity, meet regulatory capital standards, and achieve acceptable net interest income based on the Bank’s risk tolerance. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. The Bank, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be a significant risk to the Bank’s overall earnings and balance sheet.

The interest sensitivity profile of the Bank at any point in time will be impacted by a number of factors. These factors include the mix of interest sensitive assets and liabilities, as well as their relative pricing schedules. It is also influenced by changes in market interest rates, deposit and loan balances, and other factors.

The Bank utilizes earnings simulation models as tools to measure interest rate sensitivity, including both a static and dynamic earnings simulation model. A static simulation model is based on current exposures and assumes a constant balance sheet. In contrast, a dynamic simulation model relies on detailed assumptions regarding changes in existing business lines, new business, and changes in management and customer behavior. While the Bank runs the static simulation model as one measure of interest rate risk, historically, the Bank has utilized its dynamic earnings simulation model as its primary interest rate risk tool to measure the potential changes in market interest rates and their subsequent effects on net interest income for a one-year time period. This dynamic model projects a “Base” case net interest income over the next 12 months and the effect on net interest income of instantaneous movements in interest rates between various basis point increments equally across all points on the yield curve. Many assumptions based on growth expectations and on the historical behavior of the Bank’s loans and deposits and their related balances in relation to changes in interest rates are incorporated into this dynamic model. These assumptions are inherently uncertain and, as a result, the dynamic model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to the actual timing, magnitude and frequency of interest rate changes, the actual timing and magnitude of changes in loan and deposit balances, as well as the actual changes in market conditions and the application and timing of various management strategies as compared to those projected in the various simulated models. Additionally, actual results could differ materially from the model if interest rates do not move equally across all points on the yield curve.

As of September 30, 2023, a dynamic simulation model was run for interest rate changes from “Down 200” basis points to “Up 300” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning October 1, 2023 and ending September 30, 2024 based on instantaneous movements in interest rates from Down 200 to Up 300 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees and excludes Traditional Bank loan fees.

Table 33 — Bank Interest Rate Sensitivity

Notable changes for the Bank’s interest rate sensitivity projections from December 31, 2022 to September 30, 2023 occurred in all the scenarios.

In general, the period-to-period declines in the up-rate scenarios were tied to the following three main factors.

• The Company’s average interest-earning cash balances further declined from December to September. As a result, the benefit the Company expects to receive from rising short-term interest rates, as a result of its immediately repricing interest-earning cash, decreased.
• The Company increased its assumed deposit betas from December to September in anticipation of a more competitive deposit gathering and retention environment. These higher deposit betas resulted in higher projected costs for the Company’s interest-bearing deposits in a rising rate environment.
• Lastly, net interest income is projected to decline in the up-rate scenarios due to the increased amount of immediately repricing overnight borrowings on the Company’s balance sheet as of September 30, 2023 as compared to December 31, 2022.

Conversely in the down rate scenarios, the Company’s interest rate risk position notably improved. This improvement was generally tied to the following four factors.

• The Company expects to achieve a notable increase above current levels for mortgage banking income as refinance activity is assumed to increase with a decline in interest rates.
• Net interest income is expected to improve due to the assumed benefit for interest rate floors related to loans, which are projected to take effect with a substantial drop in interest rates.
• Net interest income is projected to improve in the down rate scenarios due to the increased amount of immediately repricing overnight borrowings on the Company’s balance sheet as of September 30, 2023 as compared to December 31, 2022.
• Lastly, a significant portion of the Company’s interest-bearing deposits have repriced higher since December 31, 2022, bringing them more in-line with current market rates. As a result, the Company’s interest sensitivity model as of September 30, 2023 assumes the Company will reprice a significant amount of its deposits lower in the event of a decline in market interest rates. Conversely, as of December 31, 2022, a significant amount of the Company’s deposits was priced below then-current market rates, and as a result, the Company’s interest rate sensitivity model assumed the Company did not have the ability to reprice many of its deposits lower in the event of a decline in market rates.

For further discussion of interest-bearing deposit betas, see section titled “Deposits” in this Form 10-Q.

LIBOR Exposure

In July 2017, the Financial Conduct Authority (“FCA”), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, in November 2020, the FCA announced that many tenors of LIBOR would continue to be published through June 2023. In compliance with regulatory guidance, the Bank discontinued referencing LIBOR for new financial instruments during 2021 and chose SOFR to be its primary alternative reference rate for most transaction types upon the discontinuance or unavailability of LIBOR.

Regarding its legacy assets that reference LIBOR, the Bank has previously disclosed that the underlying contracts for these assets may not include adequate “fallback” language to use alternative indexes and margins when LIBOR ceased. However, on March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Law”). The LIBOR Law provides for a statutory transition to a replacement rate selected by the Board of Governors of the Federal Reserve System (the “FRS Board”) based on the SOFR for contracts referencing LIBOR that contain no or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute.

On December 16, 2022, under the LIBOR Law, the FRS Board issued final regulations (the “LIBOR Regulations”) that included the selection of an FRS Board-selected benchmark replacement rate based on SOFR and incorporated an applicable tenor spread adjustment (“Selected Benchmark Rate”). The Selected Benchmark Rate replaced LIBOR in certain financial contracts after September 30, 2023. Substantially all of the Company’s financial instruments transitioned to the Selected Benchmark as of July 1, 2023.

For additional discussion regarding the Bank’s net interest income, see the sections titled “Net Interest Income” in this section of the filing under “RESULTS OF OPERATIONS (Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022) and “RESULTS OF OPERATIONS (Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022.”