Republic Bancorp Inc: Form 10-Q for the period ended Sep 30, 2024

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 geographical market footprint where it has physical locations, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. During the last quarter of 2023, the Company dissolved its Captive, a Nevada-based, wholly owned insurance subsidiary of the Company. The Captive provided property and casualty insurance coverage to the Company and the Bank, as well as a group of third-party insurance captives.

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 results of operations;
• changes in political and economic conditions;
• 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 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 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 cybersecurity 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, 2023 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, 2023.

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, 2024, 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, 2024, the Company was divided into five reportable segments: Traditional Banking, Warehouse Lending, TRS, RPS, and RCS. Republic had previously reported mortgage banking as a separate reportable segment prior to the first quarter of 2024. Due to the quantitative and qualitative immateriality of this division, Management concluded its mortgage banking operations no longer constitutes a separate reportable segment for SEC reporting purposes and now includes these results in the Traditional Banking segment. In addition, all prior period mortgage banking results of operations have been reclassified into the Traditional Banking segment, as well.

Management considers the first two segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last three 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, 2024, Republic had 47 banking centers with locations as follows:

• Kentucky — 29
• Metropolitan Louisville — 19
• Central Kentucky — 6
• Georgetown — 1
• Lexington — 5
• Northern Kentucky (Metropolitan Cincinnati) — 4
• Bellevue— 1
• Covington — 1
• Crestview Hills — 1
• Florence — 1
• Indiana — 3
• Southern Indiana (Metropolitan Louisville) — 3
• Floyds Knobs — 1
• Jeffersonville — 1
• New Albany — 1
• Florida — 7
• Metropolitan Tampa — 7
• Ohio — 4
• Metropolitan Cincinnati — 4
• Tennessee — 4
• Metropolitan Nashville — 4

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.

Mortgage banking — 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.

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

In general, commercial lending credit approvals and processing are prepared and underwritten through the Bank’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 Lending clients, closed loans that meet the Bank’s specifications. Substantially all loans purchased through the Correspondent Lending channel are purchased at a premium. Premiums on loans held for investment acquired through the Correspondent Lending channel are 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 16 “Segment Information” of Part I Item 1 “Financial Statements.”

(II) Warehouse Lending segment

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 Lending segment under Footnote 16 “Segment Information” of Part I Item 1 “Financial Statements.”

(III) Tax Refund Solutions segment

Through the TRS segment, the Bank 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 that offer Republic Bank ERAs, RAs, and RTs (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. During December 2023, TRS originated $103 million of ERAs related to tax returns that were anticipated to be filed during the first quarter 2024 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 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 2024 and 2023:

• 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 $6,500;
• No requirement that the taxpayer pays for another bank product, such as an RT;
• Multiple disbursement methods were available through 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.

Since its introduction in December of 2022, the ERA loan product has been structured similarly to the RA with the primary differences being the timing of when the ERAs are originated and the documentation available to underwrite the ERAs. The ERA is originated prior to the taxpayer receiving their fiscal year taxable income documentation, e.g., W-2, and the filing of the taxpayer’s final federal tax return. As such, the Company generally uses paystub information to 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 final 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 had the following features during the 2023 and 2024 tax filing seasons:

• Only offered during December and the succeeding January in connection with the ensuing first quarter tax business for each period;
• The taxpayer had the option to choose from multiple loan 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 available through most Tax Providers, including direct deposit or prepaid card, based on the taxpayer-customer’s election;
• Repayment of the ERA to the Bank deducted from the taxpayer’s tax refund proceeds; and
• If an insufficient refund to repay the ERA, including the failure to file a final federal tax return through a Republic Tax Provider:
• 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. The number of days for delinquency eligibility is based on management’s annual analysis of tax return processing times. RAs, including ERAs that were originated related to the first quarter 2023 tax filing 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 as it did during 2023, the Company considered an RA delinquent during the first nine months of 2024 if it remained unpaid 35 days after the taxpayer’s tax return was submitted to the applicable taxing authority.

Provisions on RAs are estimated when advances are made. Unpaid RAs, including ERAs, related to the first quarter tax filing season of a given year are considered delinquent at June 30th of that year and charged-off. In addition, as of June 30, 2024, RAs that were subject to Tax Provider loan loss guarantees were charged off and immediately recorded as recoveries of previously charged-off loans with corresponding receivables recorded in other assets for the Tax Provider guarantees. Those corresponding receivables were settled during the third quarter of 2024. RAs collected during the second half of that year, not subject to loan loss guarantee arrangements, are recorded as recoveries of previously charged-off loans.

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

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

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

(IV) Republic Payment Solutions segment

Through the RPS segment, the Bank offers a range of payment-related products and services to consumers through third-party service providers. The Bank offers both issuing solutions and money movement capabilities.

Issuing Solutions:

The RPS segment offers prepaid and debit solutions primarily marketed to consumers through third-party marketer-servicers.

Prepaid solutions include the issuing of payroll and general purpose reloadable (“GPR”) cards. Characteristics of these cards include the following:

• Similar to a traditional debit card with features including traditional point of sale purchasing, ATM withdrawals and direct deposit;
• Funds associated with these products are typically held in pooled accounts at the Bank with the Bank maintaining records of individual balances within these pooled accounts; and
• Payroll cards facilitate the loading of an employer’s payroll onto a card via direct deposit with GPR cards generally distributed through retail locations and reloadable through participating retail load networks.

Debit solutions include the issuing of demand deposit accounts, savings accounts and/or debit cards. In addition to offering traditional point of sale purchasing, ATM withdrawals, and direct deposit options, these accounts may include overdraft protection.

Money Movement:

The Bank participates in traditional money movement solutions including ACH transactions, wire transfer, check processing, and the Mastercard Remote Payment and Presentment Service (“RPPS”). These capabilities are complementary to issuing within RPS, as well as, generally facilitating the movement of money for the TRS and RCS Divisions.

The Company reports its share of client-related charges and fees for RPS programs under RPS 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.

3) Elastic Marketing, LLC and Elevate Decision Sciences, LLC are third-party service providers for the LOC I 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 participation interests are a 90% interest in advances made to borrowers under the borrower’s line-of-credit account, and the participation interests are generally sold three business days following the Bank’s funding of the associated advances. Although the Bank retains a 10% participation interest in each advance, it maintains 100% ownership of the underlying LOC I account with each borrower. Loan balances held for sale through this program are carried at the lower of cost or fair value.

4) Similar to its LOC I product, the Bank provides oversight and supervision to a third party for its LOC II product. In return, this third party 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 95% participation interests in the LOC II product. These 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.

For the RCS line of credit and healthcare receivable products, the Company reports interest income and loan origination fees earned on RCS loans under “Loans, including fees,” while any net gains or losses on sale and mark-to-market adjustments of RCS loans are reported as noninterest income under “RCS Program fees.” The Company has elected fair value accounting for its RCS installment loan product that it sells after an initial holding period. As a result, interest income on loans, loan origination fees, net gains or losses on sale, and mark-to-market adjustments for the RCS installment product are reported as noninterest income under “RCS Program fees.”

OVERVIEW (Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023)

Total Company net income for the third quarter of 2024 was $26.5 million, an increase of $5.0 million over the same period in 2023. Diluted EPS also increased to $1.37 for the third quarter of 2024 compared to $1.10 for the same period in 2023. The increase in net income primarily reflected the following by reportable segment:

Traditional Banking segment

• Net income increased $3.5 million, 31%, from the third quarter of 2023 to the third quarter of 2024.
• Net interest income increased $3.5 million, or 7%, from the third quarter of 2023 to the third quarter of 2024.
• Provision was a net charge of $1.5 million for the third quarter of 2024 compared to a net charge of $1.6 million for the same period in 2023.
• Noninterest income increased $1.1 million, or 11%, from the third quarter of 2023 to the third quarter of 2024.
• Noninterest expense decreased $234,000, or 1%, from the third quarter of 2023 to the third quarter of 2024.

Warehouse

• Net income increased $422,000, or 27%, from the third quarter of 2023 to the third quarter of 2024.
• Net interest income increased $1.1 million, or 45%, from the third quarter of 2023 to the third quarter of 2024.
• The Warehouse Provision was a net charge of $116,000 for the third quarter of 2024 compared to a net credit of $203,000 for the same period in 2023.
• Average committed Warehouse lines declined to $940 million for the third quarter of 2024 from $1.0 billion for the third quarter of 2023.
• Average line usage was 56% during the third quarter of 2024 compared to 42% during the same period in 2023.

Tax Refund Solutions segment

• Net income increased $501,000 from the third quarter of 2023 to the third quarter of 2024.
• Net interest income increased $39,000 from the third quarter of 2023 to the third quarter of 2024.
• Overall, TRS recorded a net credit to the Provision of $2.3 million during the third quarter of 2024 compared to a net credit to the Provision of $2.0 million for the same period in 2023.
• Noninterest income increased $295,000 from the third quarter of 2023 to the third quarter of 2024.
• Within noninterest income, net RT revenue increased $340,000 from the third quarter of 2023 to the third quarter of 2024.
• Noninterest expense was $2.3 million for the third quarter of 2024 compared to $2.2 million for the same period in 2023.

Republic Payment Solutions segment

• Net income decreased $917,000 from the third quarter of 2023 to the third quarter of 2024.
• Net interest income decreased $1.3 million from the third quarter of 2023 to the third quarter of 2024.
• Noninterest income was $933,000 for the third quarter of 2024 compared to $715,000 for the third quarter of 2023.
• Noninterest expense was $947,000 for the third quarter of 2024 and compared to $874,000 for the third quarter of 2023.

Republic Credit Solutions segment

• Net income increased $1.4 million, or 29%, from the third quarter of 2023 to the third quarter of 2024.
• Net interest income increased $3.1 million, or 30%, from the third quarter of 2023 to the third quarter of 2024.
• Overall, RCS recorded a net charge to the Provision of $6.4 million during the third quarter of 2024 compared to a net charge of $4.3 million for the same period in 2023.
• Noninterest income increased $813,000, or 24%, from the third quarter of 2023 to the third quarter of 2024.
• Noninterest expense was $3.3 million for the third quarter of 2024 and $3.1 million for the same period in 2023.

RESULTS OF OPERATIONS (Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023)

Net Interest Income

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

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

A large amount of the Company’s financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or SOFR. These indices 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 beginning in March 2022 repeatedly increasing the FFTR until it reached its peak of 5.50% in July 2023.

While long-term interest rates initially rose in tandem with the increases to the FFTR through the middle part of 2022, they trended lower than short-term rates during the second half of 2022. Long-term rates generally maintained this lower level relative to short-term rates throughout 2023 and the first two quarters of 2024, which was generally negative for banks’ net interest income and net interest margins during that time period.

On September 19, 2024, the FOMC lowered the FFTR by 50 basis points bringing the FFTR to 5.00% as of September 30, 2024. The FOMC also issued commentary to lead many in the market to believe additional rate cuts in the near term are forthcoming. Management currently believes the 50-basis-point decrease to the FFTR in September 2024 will be beneficial to the Company’s net interest income and net interest margin in the near term. Management also believes that any future reductions to the FFTR will likely not benefit the Company’s net interest income and net interest margin. The amount of such impact to the Company’s net interest income and net interest margin resulting from the most recent change and any future changes to the FFTR will be dependent upon many factors including, but not limited to, the magnitude of the continuing shift from noninterest-bearing deposits into interest-bearing deposits, the actual steepness and shape of the yield curve, future demand for the Company’s financial products, the Company’s ability to lower its deposit costs in conjunction with, and in line with the magnitude to, the decreases to the FFTR, as well as the Company’s overall future liquidity needs.

Total Company net interest income was $71.3 million during the third quarter of 2024 compared to $64.8 million during the third quarter of 2023, representing a $6.5 million or 10% increase. The Total Company net interest margin increased 14 basis points to 4.49% during the third quarter of 2024 compared to 4.35% during the third quarter of 2023.

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

Traditional Banking segment

The Traditional Bank’s net interest income was $51.0 million for the third quarter of 2024, a $3.5 million, or 7%, increase from $47.5 million during the third quarter of 2023 and was driven generally by period-over-period growth in average interest-earning assets and a higher net interest margin. The increase in the Traditional Bank’s total dollars of net interest income represented the second consecutive quarter-over-same-quarter-last-year increase following two consecutive quarterly declines in net interest income for the fourth quarter of 2023 and the first quarter of 2024.

The Traditional Bank’s NIM increased from 3.52% during the third quarter of 2023 to 3.61% during the third quarter of 2024. This increase represented the first rise in the Traditional Bank’s quarter-over-same-quarter-last-year NIM since the second quarter of 2023. The increase in the Traditional Bank’s NIM occurred as the rise in its interest-earning asset yields outpaced the rise in its funding costs. While the Traditional Bank’s cost of interest bearing liabilities did demonstrate a notable increase of 40 basis points from the third quarter of 2023 to the third quarter of 2024, the pace of the increase on a linked-quarter basis began to slow meaningfully during the second quarter of 2024, growing 117 basis points from the first quarter of 2024 to the second quarter of 2024 and only 73 basis points from the second quarter of 2024 to the third quarter of 2024.

Additional items of note impacting the Traditional Bank’s change in net interest income and NIM between the third quarter of 2023 and the third quarter of 2024 were as follows:

• Traditional Bank average loans grew from $4.4 billion with a weighted-average yield of 5.23% during the third quarter of 2023 to $4.6 billion with a weighted average yield of 5.63% during the third quarter of 2024. In general, the growth in average loan balances was primarily attributable to loan growth achieved during the last three months of 2023, as the spot balances for Traditional Bank loans decreased $52 million, or 1%, from December 31, 2023 to September 30, 2024. For additional discussion of the stricter pricing strategy for new loan originations, see section titled “Loan Portfolio” in the “COMPARISON OF FINANCIAL CONDITION” of this document.
• Average interest-earning cash, which is managed as a separate but complementary component of the Traditional Bank’s overall investment portfolio, was $458 million with a weighted-average yield of 5.36% during the third quarter of 2024 compared to $178 million with a weighted-average yield of 5.38% for the third quarter of 2023.

The increase in average interest-earning cash was a strategic decision primarily resulting from the inverted yield curve as the yield for overnight cash remained a more appealing option throughout the first nine months of 2024 than longer-term investment alternatives. Additionally, management also chose to maintain supplemental on-balance sheet liquidity during the first nine months of the year, above required minimums, in response to the uncertainty of the economic environment.

• Average investments were $593 million with a weighted-average yield of 3.20% during the third quarter of 2024 compared to $771 million with a weighted-average yield of 2.75% for the third quarter of 2023. As noted above, the more attractive yield for cash generally led to a decrease in the Traditional Bank’s average investments throughout 2024. Overall, the Traditional Bank continued to maintain an investment portfolio with a short overall duration as part of its total balance sheet interest rate risk management strategy.
• Further segmenting the Traditional Bank’s increased cost of interest-bearing liabilities:
• The weighted-average cost of total interest-bearing deposits increased from 2.09% during the third quarter of 2023 to 2.77% for the third quarter of 2024, while average interest-bearing deposits grew $506 million over the same periods. Included within this $506 million of growth in interest-bearing deposits was a $145 million increase in the average balances for higher-costing, short-term brokered deposits and third-party listing service deposits, which the Traditional Bank utilized for excess liquidity purposes.
• The average balance of FHLB borrowings decreased from $442 million for the third quarter of 2023 to $388 million for the third quarter of 2024. In addition, the weighted-average cost of these borrowings decreased from 4.85% to 4.41% for the same time periods. The decrease in the average balance of borrowings was driven by the above noted growth in period-to-period average interest-bearing deposits, while the decrease in the overall weighted-average cost of FHLB borrowings resulted from term-extension strategies to take advantage of the inverted yield curve during the period.
• Average noninterest-bearing deposits decreased $178 million from the third quarter of 2023 to the third quarter of 2024. The decline in noninterest-bearing deposits continued a trend dating back to the fourth quarter of 2022, as the inverted yield curve and competition for deposits continued to make interest-bearing deposits a more attractive on-going alternative for consumer and business deposit accounts.

Management believes that any future reductions to the FFTR will likely not benefit the Traditional Bank’s net interest income and net interest margin. The amount of such impact to the Traditional Bank’s net interest income and net interest margin resulting from the most recent change and any future changes to the FFTR will be dependent upon many factors including, but not limited to, the magnitude of the continuing shift from noninterest-bearing deposits into interest-bearing deposits, the actual steepness and shape of the yield curve, future demand for the Company’s financial products, the Company’s ability to lower its deposit costs in conjunction with, and in line with the magnitude to, the decreases to the FFTR, as well as the Company’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 increased $1.1 million, or 45%, from the third quarter of 2023 to the third quarter of 2024. The rise in Warehouse net interest income was primarily driven by a 37-basis point increase in its net interest margin as its loan yields increased by 33 basis points from period-to-period, while its internally assigned net FTP funding costs decreased 8 basis points for the same period. The expansion in Warehouse loan yield over its cost of funds was generally driven by an improvement in pricing with some clients resulting from their annual line of credit renewals.

In addition to the improvement in net interest margin, Warehouse balances increased from $458 million during the third quarter of 2023 to $595 million for the third quarter of 2024. During these same periods, average committed Warehouse lines declined from $1.0 billion to $940 million from September 30, 2023 to September 30, 2024, while a decline in long-term interest rates during the quarter caused an up-tick in demand and average usage rates for Warehouse lines from 42% for the third quarter of 2023 to 56% for the third quarter of 2024.

Because consumer mortgage demand drives the usage of Warehouse lines of credit, overall line usage for the Warehouse segment has been sensitive, historically, to changes in interest rates on the long end of the yield curve. As a result, a decreasing interest rate environment for the long end of the yield curve could positively impact Warehouse demand if the long term interest rate declines are substantial. Alternatively, if interest rates only decline substantially on the short-end of the yield curve, Warehouse demand would not likely be materially impacted.

Republic Payment Solutions

Net interest income from the Company’s prepaid card division decreased $1.3 million from the third quarter of 2023 to the third quarter of 2024. During the quarter, RPS earned a slightly lower yield of 4.91% applied to the $351 million average of prepaid program balances for the third quarter of 2024 compared to a yield of 4.97% for the $343 million in average prepaid card balances for the third quarter of 2023. In addition, net interest income at RPS was also negatively impacted by a $1.3 million charge to interest expense for a revenue sharing arrangement that began in January 2024.

Overall customer demand for the RPS segment has historically not been interest rate sensitive and therefore management does not believe a changing interest rate environment would impact origination volume for its prepaid card products. A decreasing interest rate environment, however, would likely negatively impact the Company’s internal FTP credit more than it would impact the revenue share the Company pays for the product, decreasing the segment's net interest margin. The exact amount of impact for either scenario would depend on the final internal FTP credit assigned, as well as the overall volume of balances, as the revenue share payouts are also based on overall balances tiers.

Republic Credit Solutions segment

RCS’s net interest income increased $3.1 million, or 30%, from the third quarter of 2023 to the third quarter of 2024. The increase was driven primarily by an increase in fee income from RCS’s LOC II product as net interest income increased $2.4 million to $7.7 million from the third quarter of 2023 to the third quarter of 2024. The rise in net interest income for this LOC product was driven primarily by a period-to-period increase in average outstanding loan balances of approximately $8 million.

Overall customer demand for the RCS segment’s products has historically not been interest rate sensitive and therefore management does not believe a changing interest rate environment would materially impact origination volume for its various consumer loan products. A decreasing interest rate environment likely would positively impact the Company’s internal FTP cost allocated to this segment, which would increase the NIM for the segment. The exact amount of the impact would depend on the final internal FTP cost assigned, as well as the overall volume and mix of loans the segment generates.

The following table presents the average balance sheets for the three-month periods ended September 30, 2024 and 2023, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

Table 1 — Total Company Average Balance Sheets and Interest Rates

(dollars in thousands)

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

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

c) Interest income includes loan fees of $0 and $0 for the three months ended September 30, 2024 and 2023.

d) Interest income includes loan fees of $392,000 and $254,000 for the three months ended September 30, 2024 and 2023.

e) Interest income includes loan fees of $1.5 million and $1.7 million for the three months ended September 30, 2024 and 2023.

f) 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 2 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 2 — Total Company Volume/Rate Variance Analysis

(in thousands)

Provision

Total Company Provision was a net charge of $5.7 million for the third quarter of 2024 compared to a net charge of $3.7 million for the same period in 2023.

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 2024 was a net charge of $1.5 million compared to a net charge of $1.6 million for the third quarter of 2023.

The net charge of $1.5 million during the third quarter of 2024 was primarily driven by the following:

• The Traditional Bank recorded a net credit to the Provision of $315,000 during the third quarter of 2024 primarily related to a decline in Traditional Bank loan balances, which decreased by $22 million for the quarter.
• The Traditional Bank recorded a loan loss Provision of $1.9 million for the charge-off of three linked, broker-related marine loans. The Company discontinued originating broker-related marine loans during the third quarter of 2024. As of September 30, 2024, the Bank had $4.9 million of broker-related marine loans remaining in its loan portfolio.

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

As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.30% as of September 30, 2024 compared to 1.28% as of December 31, 2023 and 1.27% as of September 30, 2023. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of September 30, 2024.

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 $116,000 for the third quarter of 2024 compared to a net credit of $203,000 for the same period in 2023. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $46 million during the third quarter of 2024 compared to a decrease of $81 million during the third quarter of 2023.

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of September 30, 2024, December 31, 2023, and September 30, 2023. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of September 30, 2024.

Tax Refund Solutions segment

TRS recorded a net credit to the Provision of $2.3 million during the third quarter of 2024 compared to a net credit of $2.0 million for the same period in 2023. Substantially all TRS Provision in both periods was related to its RA product.

RAs related to the first quarter 2024 tax filing season were only originated during December of 2023 and the first two months of 2024, while RAs related to the first quarter 2023 tax filing season were only originated during December of 2022 and the first two months of 2023. 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 are 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.

TRS’s incurred loss rate for RAs as of September 30, 2023 was 3.09% of total originations and it finished 2023 with a final RA loss rate of 2.84% of total RAs originated. As of September 30, 2024, TRS’s incurred loss rate related to RAs that were associated with the first quarter 2024 tax filing season was 3.40% of the $874 million of the total loans originated during December 2023 and the first two months of 2024.

For factors affecting the comparison of the TRS results of operations for the third quarter of 2024 and the third quarter of 2023, see section titled “OVERVIEW (Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023) - 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.”

Republic Credit Solutions segment

As illustrated in Table 3 below, RCS recorded a net charge to the Provision of $6.4 million during the third quarter of 2024 compared to a net charge to the Provision of $4.3 million for the same period in 2023. The increase in the Provision was driven primarily by a $1.5 million increase in net charge-offs for RCS’s LOC II product. The 83% increase in net charge-offs within the LOC II product for the third quarter of 2024 was generally in-line with the 47% increase in average outstanding balances for the same periods.

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 15.70% as of September 30, 2024, 13.82% as of December 31, 2023, and 13.00% as of September 30, 2023. The segment continued to experience a change in loan mix, growing in categories with higher loan loss reserve requirements thus driving its higher ACLL for the quarter. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of September 30, 2024.

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

Table 3 — RCS Provision by Product

(dollars in thousands)

Table 4 — Summary of Loan and Lease Loss Experience

(dollars in thousands)

Table 5 — 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 0.11% during the third quarter of 2023 to 0.32% during the third quarter of 2024, with net charge-offs increasing $2.8 million, or 209%, and average total Company loans increasing $255 million, or 5%. The increase in net charge-offs was primarily driven by $1.9 million of charge-offs within the Traditional Bank’s broker-related marine product. The net charge-offs within broker-related marine portfolio were isolated to three linked loans. As previously noted, the Company discontinued the origination of this product during the third quarter of 2024 and had $4.9 million broker-related marine loans remaining in its loan portfolio as of September 30, 2024.

In addition to the increase in net charge-offs within the Traditional Bank, the Company also experienced a $1.5 million increase in net charge-offs within the LOC II product of the Company’s RCS operations. As previously noted, the net charge-offs within LOC II product was primarily driven by a similar increase in the average outstanding balances for the product. RCS’s line of credit products generally include significantly higher risk lending activities than the Company’s Core Banking operations.

Noninterest Income

Total Company noninterest income increased $2.5 million during the third quarter of 2024 compared to the same period in 2023.

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 $1.1 million, or 11%, from the third quarter of 2023 compared to the third quarter of 2024. The increase in noninterest income was primarily driven by a $1.2 million increase in mortgage banking income, which resulted from a reduction in long-term interest rates during the third quarter of 2024 leading to an up-tick in consumer loan demand for 15- and 30-year fixed rate mortgage loans. Altogether, the Core Bank experienced a $47.5 million, or 99%, increase in fixed-rate, secondary market loan rate-lock applications from the third quarter of 2023 to the third quarter of 2024.

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, 2024 and 2023 were $2.0 million and $1.9 million. The total daily overdraft charges, net of refunds, included in interest income for the three months ended September 30, 2024 and 2023 were $328,000 and $327,000.

Republic Credit Solutions segment

RCS’s noninterest income increased $813,000, or 24%, during the third quarter of 2024 compared to the same period in 2023, with program fees representing the entirety of RCS’s noninterest income. The increase in program fees at RCS primarily reflected higher sales volume from RCS’s LOC II and installment products. Proceeds from the sale of RCS’s LOC II product totaled $163 million for the third quarter of 2024, compared to $133 million for the third quarter of 2023. Proceeds from the sale of RCS’s installment product totaled $47 million for the third quarter of 2024, compared to $33 million for the third quarter of 2023.

The following table presents RCS program fees by product:

Table 6 — 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 $241,000 during the third quarter of 2024 compared to the same period in 2023.

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

Traditional Banking segment

Traditional Banking noninterest expense decreased $234,000, or 1%, for the third quarter of 2024 compared to the same period in 2023. Notable line-item variances within the noninterest expense category included:

• Salaries and benefits decreased $221,000 as a 40-count reduction in Traditional Bank FTEs from September 30, 2023 to September 30, 2024 was able to substantially offset the increase in salaries over the same periods resulting from annual merit increases.
• Technology expenses declined $358,000 from period-to-period, primarily the result of a $450,000 credit the Traditional Bank received during the third quarter of 2024 for a contract billing dispute with one of its technology providers.

Republic Credit Solutions segment

Noninterest expense at the RCS segment increased $144,000, or 5%, during the third quarter of 2024 compared to the same period in 2023. The most notable items driving this increase were in the LOC II product, including a $377,000 increase in third-party servicing costs for growth in the product and an $88,000 increase in marketing and development expenses related to the Company’s share of these expenses based on overall origination volume. Under the terms of the Company’s contract with its LOC II marketer-servicer, Republic reimburses the marketer-servicer a certain dollar amount for marketing costs based on each new line of credit originated during the period.

OVERVIEW (Nine months ended September 30, 2024 Compared to Nine months ended September 30, 2023)

Total Company net income for the first nine months of 2024 was $82.4 million, an $11.6 million, or 16%, increase from the same period in 2023. Diluted EPS increased to $4.24 for the first nine months of 2024 compared to $3.60 for the same period in 2023. The increase in net income primarily reflected the following:

Traditional Banking segment

• Net income increased $8.9 million, or 28%, for the first nine months of 2024 compared to the same period in 2023.
• Net interest income increased $2.8 million, or 2%, for the first nine months of 2024 compared to the same period in 2023.
• Provision was a net charge of $2.8 million for the first nine months of 2024 compared to a net charge of $6.4 million for the same period in 2023.
• Noninterest income decreased $255,000, or 1%, for the first nine months of 2024 compared to the same period in 2023.
• Noninterest expense decreased $5.0 million, or 4%, for the first nine months of 2024 compared to the same period in 2023.
• Total Traditional Bank loans decreased $52 million, or 1%, during the first nine months of 2024.
• Total nonperforming loans to total loans for the Traditional Banking segment was 0.42% as of September 30, 2024 compared to 0.41% as of December 31, 2023.
• Delinquent loans to total loans for the Traditional Banking segment was 0.22% as of September 30, 2024 compared to 0.18% as of December 31, 2023.
• Total Traditional Bank deposits increased $254 million from December 31, 2023 to $4.6 billion as of September 30, 2024.

Warehouse

• Net income increased $751,000, or 22%, for the first nine months of 2024 compared to the same period in 2023.
• Net interest income increased $1.6 million, or 22%, for the first nine months of 2024 compared to the same period in 2023.
• The Warehouse Provision was a net charge of $639,000 for the first nine months of 2024 compared to a net charge of $134,000 for the same period in 2023.
• Average committed Warehouse lines declined to $936 million for the first nine months of 2024 from $1.0 billion for first nine months of 2023.
• Average line usage was 47% during the first nine months of 2024 compared to 41% during the same period in 2023.

Tax Refund Solutions segment

• Net income increased $370,000, or 3%, for the first nine months of 2024 compared to the same period in 2023.
• Net interest income increased $3.4 million, or 12%, for the first nine months of 2024 compared to the same period in 2023.
• Total RA originations were $771 million during the first nine months of 2024 compared to $737 million for the first nine months of 2023. 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 2024 and 2023, TRS originated $103 million of ERAs during the fourth quarter of 2023 related to the anticipated filing of tax returns for the upcoming first quarter 2024 tax filing season compared to $98 million during the fourth quarter of 2022 related to the anticipated filing of tax returns for the first quarter of 2023.
• Overall, TRS recorded a net charge to the Provision of $22.3 million during the first nine months of 2024 compared to a net charge to the Provision of $19.6 million for the same period in 2023.
• Noninterest income decreased $464,000 for the first nine months of 2024 compared to the same period in 2023.
• Net RT revenue decreased $315,000 for the first nine months of 2024 compared to the same period in 2023.
• Noninterest expense was $8.8 million for the first nine months of 2024 compared to $9.2 million for the same period in 2023.

Republic Payment Solutions segment

• Net income decreased $1.7 million for the nine months of 2024 compared to the same period in 2023.
• Net interest income decreased $2.3 million for the nine months of 2024 compared to the same period in 2023.
• Noninterest income was $2.5 million for the first nine months of 2024 compared to $2.2 million for the first nine months of 2023.
• Noninterest expense was $2.9 million for the first nine months of 2024 compared to $2.7 million for the first nine months of 2023.

Republic Credit Solutions segment

• Net income increased $3.3 million, or 23%, for the first nine months of 2024 compared to the same period in 2023.
• Net interest income increased $9.3 million, or 33%, for the first nine months of 2024 compared to the same period in 2023.
• Overall, RCS recorded a net charge to the Provision of $15.7 million during the first nine months of 2024 compared to a net charge of $10.5 million for the same period in 2023.
• Noninterest income increased $2.2 million, or 25%, from the first nine months of 2023 to the first nine months of 2024.
• Noninterest expense was $10.4 million for the first nine months of 2024 and $8.4 million for the same period in 2023.
• Total nonperforming loans to total loans for the RCS segment was 0.12% as of September 30, 2024 compared to 1.11% as of December 31, 2023.
• Delinquent loans to total loans for the RCS segment was 8.10% as of September 30, 2024 compared to 10.51% as of December 31, 2023.

RESULTS OF OPERATIONS (Nine months ended September 30, 2024 Compared to Nine months ended September 30, 2023)

Net Interest Income

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

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

A large amount of the Company’s financial instruments track closely with, or are primarily indexed to, either the FFTR, Prime, or SOFR. These indices 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 beginning in March 2022 repeatedly increasing the FFTR until it reached its peak of 5.50% in July 2023.

While long-term interest rates initially rose in tandem with the increases to the FFTR through the middle part of 2022, they trended lower than short-term rates during the second half of 2022. Long-term rates generally maintained this lower level relative to short-term rates throughout 2023 and the first two quarters of 2024, which was generally negative for banks’ net interest income and net interest margins during that time period.

On September 19, 2024, the FOMC lowered the FFTR by 50 basis points bringing the FFTR to 5.00% as of September 30, 2024. The FOMC also issued commentary to lead many in the market to believe additional rate cuts in the near term are forthcoming. Management currently believes the 50-basis-point decrease to the FFTR in September 2024 will be beneficial to the Company’s net interest income and net interest margin in the near term. Management also believes that any future reductions to the FFTR will likely not benefit the Company’s net interest income and net interest margin. The amount of such impact to the Company’s net interest income and net interest margin resulting from the most recent change and any future changes to the FFTR will be dependent upon many factors including, but not limited to, the magnitude of the continuing shift from noninterest-bearing deposits into interest-bearing deposits, the actual steepness and shape of the yield curve, future demand for the Company’s financial products, the Company’s ability to lower its deposit costs in conjunction with, and in line with the magnitude to, the decreases to the FFTR, as well as the Company’s overall future liquidity needs.

Total Company net interest income was $236.8 million during the first nine months of 2024 and represented an increase of $14.8 million from the first nine months of 2023. Total Company net interest margin decreased to 4.92% during the first nine months of 2024 from 5.09% for the first nine months of 2023.

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

Traditional Banking segment

The Traditional Bank’s net interest income increased $2.8 million, or 2%, for the first nine months of 2024 compared to the same period in 2023. Traditional Banking’s net interest margin was 3.49% for the first nine months of 2024, a decrease of 29 basis points from the first nine months of 2023.

The increase in the Traditional Bank’s net interest income during the first nine months of 2024 was primarily attributable to the following factors:

• Traditional Bank average loans grew from $4.2 billion with a weighted-average yield of 4.95% during the first nine months of 2023 to $4.6 billion with a weighted average yield of 5.55% during the first nine months of 2024. In general, the growth in average loan balances was primarily attributable to loan growth achieved during the last three months of 2023, as the spot balances for Traditional Bank loans decreased $52 million, or 1%, from December 31, 2023 to September 30, 2024. For additional discussion of the stricter pricing strategy for new loan originations, see section titled “Loan Portfolio” in the “COMPARISON OF FINANCIAL CONDITION” of this document.
• Average interest-earning cash, which is managed as a separate but complementary component of the Company’s overall investment portfolio, was $435 million with a weighted-average yield of 5.46% during the first nine months of 2024 compared to $178 million with a weighted-average yield of 4.99% for the first nine months of 2023.

The increase in average interest-earning cash was a strategic decision primarily resulting from the inverted yield curve as the yield for overnight cash remained a more appealing option throughout the first nine months of 2024 than longer-term investment alternatives. Additionally, management also chose to maintain supplemental on-balance sheet liquidity during the first nine months of the year, above required minimums, in response to the uncertainty of the economic environment.

• Average investments decreased to $665 million with a weighted-average yield of 3.08% during the first nine months of 2024 from $773 million with a weighted-average yield of 2.70 % for the first nine months of 2023. As part of its overall interest rate risk management strategy, the Traditional Bank generally maintains an investment portfolio with a short overall duration. As noted above, the more attractive yield for cash generally led to a decrease in the Traditional Bank’s average investments throughout 2024. Overall, the Traditional Bank continued to maintain an investment portfolio with a short overall duration as part of its total balance sheet interest rate risk management strategy.
• The Traditional Bank’s average cost of interest-bearing liabilities increased from 1.32% during the first nine months of 2023 to 2.56% for the first nine months of 2024. 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 1.50% during the first nine months of 2023 to 2.75% for the first nine months of 2024. In addition, average interest-bearing deposits increased $638 million from the first nine months of 2023 to the first nine months of 2024. Included within growth in interest-bearing deposits was a $225 million increase in the average balances for higher-cost, short-term brokered deposits and third-party listing service deposits, which the Company utilized for excess liquidity purposes.
• The average balance of FHLB borrowings increased from $315 million for the first nine months of 2023 to $410 million for the first nine months of 2024. The weighted-average cost of these borrowings decreased from 4.69% to 4.61% for the same time periods.
• The Traditional Bank’s average noninterest-bearing deposits decreased from $1.4 billion during the first nine months of 2023 to $1.2 billion for the first nine months of 2024, as the inverted yield curve and competition for deposits continued to make interest-bearing deposits a more attractive on-going alternative for consumer and business deposit accounts.

Management believes the Traditional Bank could experience a benefit to its net interest income and net interest margin during the fourth quarter of 2024 resulting from the decrease to the FFTR The amount of this benefit, if any, will be dependent upon several factors including, but not limited to, the magnitude of the continuing shift from noninterest-bearing deposits into interest-bearing deposits, the actual steepness and shape of the yield curve, future demand for the Company’s financial products, the Company’s ability to lower its deposit costs in conjunction with, and in line with the magnitude to, the decreases to the FFTR, as well as the Company’s overall future liquidity needs.

Warehouse

Net interest income within Warehouse rose $1.6 million, or 22%, from the first nine months of 2023 to the first nine months of 2024, driven primarily by an increase in the Warehouse net interest margin, which increased 27 basis points from 2.37% during the first nine months of 2023 to 2.64% during the first nine months of 2024. The improvement in Warehouse net interest margin occurred as its loan yields increased by 64 basis points from period-to-period, while its internally assigned net FTP funding costs rose 81 basis points for the same period. The expansion in Warehouse loan yield over its cost of funds was generally driven by an improvement in pricing with some clients resulting from their annual line of credit renewals.

Overall average outstanding Warehouse balances also increased from $406 million during the first nine months of 2023 to $442 million for the first nine months of 2024. Average committed Warehouse lines-of-credit decreased from $1.0 billion as September 30, 2023 to $936 million as of September 30, 2024, while average usage rates for Warehouse lines were 47% and 41% during the first nine months of 2024 and 2023.

Because consumer mortgage demand drives the usage of Warehouse lines of credit, overall line usage for the Warehouse segment has historically been sensitive to changes in interest rates on the long end of the yield curve. As a result, a decreasing interest rate environment for the long end of the yield curve could positively impact Warehouse demand if the long term interest rate declines are substantial. Alternatively, if interest rates only decline substantially on the short-end of the yield curve, Warehouse demand would not likely be materially impacted.

Tax Refund Solutions segment

Net interest income within the TRS segment was up $3.4 million from the first nine months of 2023 to the first nine months of 2024. Loan-related interest and fees increased $4.2 million for the period and was generally driven by a 4.75% increase in tax season loan origination volume from period to period. In addition, loan fees included a $560,000 payment received during the second quarter of 2024 representing a Tax Provider yield enhancement for the RA program to help offset the Company’s higher funding costs. This yield enhancement was new for the 2024 tax season. The increase in loan interest and fees was partially offset by an $841,000 increase to the segment’s cost of funds net of its FTP credit for its deposit accounts.

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

Republic Payment Solutions

Net interest income from the Company’s prepaid card division decreased $2.3 million for the first nine months of 2024 compared to the same period in 2023. Overall, RPS earned a higher yield of 5.01% applied to the $362 million average of prepaid program balances for the first nine months of 2024 compared to a yield of 4.43% for the $361 million in average prepaid card balances for the first nine months of 2023. The increase in this higher yield, however, was substantially offset by a $3.1 million charge to interest expense for a new revenue sharing arrangement for the program which began in January 2024.

Overall customer demand for the RPS segment has historically not been interest rate sensitive and therefore management does not believe a changing interest rate environment would impact origination volume for its prepaid card products. A decreasing interest rate environment, however, would likely negatively impact the Company’s internal FTP credit more than it would impact the revenue share the Company pays for the product, decreasing the segment's net interest margin. The exact amount of impact for either scenario would depend on the final internal FTP credit assigned, as well as the overall volume of balances, as the revenue share payouts are also based on overall balances tiers.

Republic Credit Solutions segment

RCS’s net interest income increased $9.3 million, or 33%, from the first nine months of 2023 to the first nine months of 2024. 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 $9.0 million during the first nine months of 2024 to $22.1 million, an 68% increase compared to the $13.2 million recorded during the first nine months of 2023. As a result, average loan balances outstanding increased by $9.0 million or 64% from the first nine months of 2023 to the first nine months of 2024.

Overall customer demand for the RCS segment’s products has historically not been interest rate sensitive and therefore management does not believe a changing interest rate environment would materially impact origination volume for its various consumer loan products. A decreasing interest rate environment likely would positively impact the Company’s internal FTP cost allocated to this segment, which would increase the NIM for the segment. The exact amount of the impact would depend on the final internal FTP cost assigned, as well as the overall volume and mix of loans the segment generates.

The following table presents the average balance sheets for the nine-month periods ended September 30, 2024 and 2023, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

Table 7 — Total Company Average Balance Sheets and Interest Rates

(dollars in thousands)

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

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

c) Interest income includes loan fees of $1.2 million and $957,000 for the nine months ended September 30, 2024 and 2023.

d) Interest income includes loan fees of $977,000 and $796,000 for the nine months ended September 30, 2024 and 2023.

e) Interest income includes loan fees of $4.2 million and $4.2 million for the nine months ended September 30, 2024 and 2023.

f) 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 8 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 8 — 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 $41.4 million for the first nine months of 2024 compared to a net charge of $36.6 million for the same period in 2023.

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 2024 was a net charge of $2.8 million compared to a net charge of $6.4 million for the first nine months of 2023. An analysis of the Provision for the first nine months of 2024 compared to the same period in 2023 follows:

For the first nine months of 2024, the net charge of $2.8 million to the Provision for the Traditional Bank primarily reflected the following:

• The Traditional Bank recorded a net charge to the Provision of $545,000 during the first nine months of 2024 related to general formula reserves applied to Traditional Bank loans. While loan balances at the Traditional Bank decreased by $52 million during the first nine months of 2024, the segment continued to experience a change in loan mix, growing in categories with higher loan loss reserve requirements thus driving its higher Provision for the quarter.
• The Traditional Bank recorded a loan loss Provision of $1.9 million for the charge-off of three linked, broker-related marine loans. The Company discontinued originating broker-related marine loans during the third quarter of 2024. As of September 30, 2024, the Bank had $4.9 million of broker-related marine loans remaining in its loan portfolio.

For the first nine months of 2023, the net charge of $6.4 million to the Provision for the Traditional Bank 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.

As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.30% as of September 30, 2024 compared to 1.28% as of December 31, 2023 and 1.27% as of September 30, 2023. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of September 30, 2024.

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 $639,000 for the first nine months of 2024 compared to a net charge of $134,000 for the same period in 2023. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $255 million during the first nine months of 2024 compared to an increase of $53 million during the first nine months of 2023.

As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of September 30, 2024, December 31, 2023, and September 30, 2023. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of September 30, 2024.

Tax Refund Solutions segment

TRS recorded a net charge to the Provision of $22.3 million during the first nine months of 2024 compared to a net charge of $19.6 million for the same period in 2023. Substantially all TRS Provision in both periods was related to its RA product.

RAs related to the first quarter 2024 tax filing season were only originated during December of 2023 and the first two months of 2024, while RAs related to the first quarter 2023 tax filing season were only originated during December of 2022 and the first two months of 2023. 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 are 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.

TRS’s incurred loss rate for RAs as of September 30, 2023 was 2.95% of total originations and it finished 2023 with a final RA loss rate of 2.84% of total RAs originated. As of September 30, 2024, TRS’s incurred loss rate related to RAs that were associated with the first quarter 2024 tax filing season was 3.40% of the $874 million of the total loans originated during December 2023 and the first two months of 2024.

Net charge-offs and net Provision were significantly higher for TRS during the first nine months of 2024 compared to the first nine months of 2023 as payments on a year-to-date basis from the US Treasury to pay off RAs and ERAs continued to significantly lag payments received during the same time period in 2023. At this time, management believes the final payment performance for the 2024 Tax Season will remain significantly below the 2023 Tax Season. With all unpaid RAs charged off as of June 30, 2024, any payments received for unguaranteed RAs during the fourth quarter of 2024 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 9 below, RCS recorded a net charge to the Provision of $15.7 million during the first nine months of 2024 compared to a net charge to the Provision of $10.5 million for the same period in 2023. The increase in the Provision was driven primarily by a $4.1 million increase in net charge-offs within the LOC II product, which resulted in a higher reserve percentage being applied to the outstanding balances, and a $419,000 increase in formula reserves applied to the LOC II product. The increase in Provision within the LOC II product was generally in line with the 64% increase in average outstanding loan balances for the same periods.

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 15.70% as of September 30, 2024, 13.82% as of December 31, 2023, and 13.00% as of September 30, 2023. The segment continued to experience a change in loan mix, growing in categories with higher loan loss reserve requirements thus driving its higher ACLL for the quarter. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of September 30, 2024.

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

Table 9 — RCS Provision by Product

(dollars in thousands)

Table 10 — Summary of Loan and Lease Loss Experience

(dollars in thousands)

Table 11 — 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 0.90% during the first nine months of 2023 to 1.04% during the first nine months of 2024, with net charge-offs increasing $8.7 million, or 27%, and average total Company loans increasing $466 million, or 10% over the same periods. As discussed in more detail above, the increase in net charge-offs was primarily driven by a $2.8 million increase in period-over-period net charge-offs within the Company’s TRS operations, and a $4.1 million increase in period-over-period net charge-offs within the Company’s RCS operations.

The Company’s net charge-offs also included a $1.8 million increase in net charge-offs within the Traditional Bank. The increase in net charge-offs within the Traditional Bank was primarily driven by $1.9 million of charge-offs within the Traditional Bank’s broker-related marine product. The net charge-offs within marine lending were isolated to three linked loans. As previously noted, the Company discontinued the origination of this product during the third quarter of 2024 and had $4.9 million broker-related marine loans outstanding as of September 30, 2024.

Noninterest Income

Total Company noninterest income increased $1.9 million during the first nine months of 2024 compared to the same period in 2023.

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 decreased $255,000, or 1%, for the first nine months of 2024 compared to the same period in 2023, driven primarily by a $1.7 million payment received during the second quarter of 2023 related to a death benefit payment in excess of the cash surrender value for 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, 2024 and 2023 were $5.5 million and $5.3 million. The total daily overdraft charges, net of refunds, included in interest income for the nine months ended September 30, 2024 and 2023 were $928,000 and $937,000.

Tax Refund Solutions segment

TRS’s noninterest income decreased $464,000, or 3%, during the first nine months of 2024 compared to the same period in 2023, driven by a 2%, or $315,000, decrease net RT revenue. Net RT revenue for 2024 was negatively impacted by a year-to year decline in payment volume received from the US Treasury, as the number of RTs processed during the first nine months of 2024 declined approximately 3% from the nine months of 2023. In addition, net RT revenue was also negatively impacted comparing the first nine months of 2024 versus the first nine months of 2023 as the volume mix shifted toward Tax Providers with revenue sharing arrangements that were less favorable to Republic.

Republic Credit Solutions segment

RCS’s noninterest income increased $2.2 million, or 25%, during the first nine months of 2024 compared to the same period in 2023, with program fees representing the substantial majority of RCS’s noninterest income. The increase in program fees at RCS primarily reflected higher sales volume from RCS’s LOC II and installment products. Proceeds from the sale of RCS’s LOC II product totaled $449 million for the first nine months of 2024, compared to $363 million for the first nine months of 2023. Proceeds from the sale of RCS’s installment product totaled $126 million for the first nine months of 2024 compared to $86 million for the first nine months of 2023. The higher sales volume in both products was driven by an increase in marketing activity for the products.

The following table presents RCS program fees by product:

Table 12 — 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 decreased $3.1 million, or 2%, during the first nine months of 2024 compared to the same period in 2023.

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

Traditional Banking segment

Traditional Bank noninterest expense decreased $5.0 million for the first nine months of 2024 compared to the same period in 2023. The following primarily drove the change in noninterest expense:

• Noninterest expenses associated with the acquired CBank operations were $3.6 million across all categories for the first nine months of 2024 and $5.4 million for the first nine months of 2023. 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 decreased a net $2.0 million, or 3%, to $73.8 million for the first nine months of 2024. The most notable changes within this category were as follows:
• Direct legacy salaries increased a net $1.2 million, or 2%, due primarily to the cost of annual merit increases of approximately 4%, partially offset by a 40-count decrease in the number of FTEs from September 30, 2023 to September 30, 2024.
• Estimated Legacy incentive compensation accruals decreased $2 million due to above noted decrease in FTEs, with a notable number of these associates having annual bonus opportunities.
• Legacy Employee benefits declined $708,000, or 6%, due primarily to the above noted decrease in the number of FTEs and associated incentive compensation accruals.
• Legacy Marketing expenses declined $502,000 primarily due to a reduced focus on media related marketing during the first nine months of 2024.
• Legacy Technology expenses declined $350,000 from period-to-period, primarily the result of a $450,000 credit the Traditional Bank received during the third quarter of 2024 for a contract billing dispute with one of its technology providers.
• Within the other category, provision for off-balance sheet exposures declined by $430,000 due to an overall decrease in these unfunded commitments for the first nine months of 2024, while the first nine months of 2023 had an increase in these commitments.

Republic Credit Solutions segment

Noninterest expense at the RCS segment increased $2.0 million, or 24%, during the first nine months of 2024 compared to the same period in 2023. The most notable items driving this increase were in the LOC II product, including a $1.3 million increase in third-party servicing costs for growth in the product and a $1.2 million increase in marketing and development expenses related to the Company’s share of these expenses based on overall origination volume. Under the terms of the Company’s contract with its LOC II marketer-servicer, Republic reimburses the marketer-servicer a certain dollar amount for marketing costs based on each new line of credit originated during the period.

COMPARISON OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2024 AND DECEMBER 31, 2023

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 $531 million in cash and cash equivalents as of September 30, 2024 compared to $317 million as of December 31, 2023. Comparing average balances for the first nine months of 2024 and 2023, the Company had average interest-earning cash and cash equivalent balances of $458 million for the first nine months of 2024 compared to $177 million for the first nine months of 2023.

The increase in average interest-earning cash was a strategic decision primarily resulting from the inverted yield curve as the yield for overnight cash remained a more appealing option throughout the first nine months of 2024 than longer-term investment alternatives. Additionally, management also chose to maintain supplemental on-balance sheet liquidity during the first nine months of the year, above required minimums, in response to the uncertainty of the economic environment.

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 5.47% during the first nine months of 2024 with a spot balance yield of approximately 5.00% on September 30, 2024. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.

Investment Securities

Table 13 — Purchases of Investment Securities

(in thousands)

Republic’s investment portfolio decreased $192 million from December 31, 2023 to September 30, 2024. The decrease was driven by $276 million in calls and maturities of debt securities and $26 million in paydowns on mortgage-backed securities, which were partially offset by the purchase of $110 million in securities. The Company elected to generally maintain the excess cash it received from the decline in its investment portfolio in interest-earning cash due to its more attractive yield as compared to longer-term investment options.

Loan Portfolio

The composition of the loan portfolio follows:

Table 14 — 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.

(1) The approximate percentage of Nonowner-occupied CRE loans to total CRE loans was 64% and 63%, respectively, for September 30, 2024 and December 31, 2023. The approximate percentage of Owner-occupied CRE loans to total CRE loans was 36% and 37%, respectively, for September 30, 2024 and December 31, 2023.

Gross loans increased by $57 million, or 1%, during the first nine months of 2023 to $5.3 billion as of September 30, 2024. The most significant components comprising the change in loans by reportable segment follow:

Traditional Banking segment

Period-end balances for Traditional Banking loans decreased $52 million, or 1%, from December 31, 2023 to September 30, 2024. Primarily driving this change, during the last half of March 2024, Management made the decision to sell $69 million of correspondent loans that were previously classified as held for investment. The sale of these loans was completed during the third quarter of 2024 with the final dollar amount of loans sold being $67 million.

In addition to the loan sale, management has generally implemented a stricter pricing strategy across all loan types due to the inverted yield curve and elevated funding costs in the market. This stricter pricing strategy has led to a general slowdown in overall origination volume across most product types. Management believes it will maintain this stricter pricing strategy as long as the yield curve remains inverted and incremental funding costs remain elevated, most likely causing new loan production to remain well below 2023 levels for the remainder of 2024. It is also possible this stricter pricing policy could cause loan payoffs and paydowns to outpace new originations leading to a decline in the Traditional Bank’s loan balances for the fourth quarter of 2024 and potentially 2025 as well.

Warehouse

Outstanding Warehouse period-end balances increased $255 million from December 31, 2023 to September 30, 2024. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse Lending business greatly depends on the overall mortgage market and typically follows industry trends. Since its entrance into this business during 2011, the Bank has experienced volatility in the Warehouse portfolio consistent with overall demand for mortgage products. Weighted average quarterly usage rates on the Bank’s Warehouse lines have ranged from a low of 31% during the 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 39% during 2022 to a high of 66% during 2020.

Tax Refund Solutions segment

Outstanding TRS loans decreased $149 million from December 31, 2023 to September 30, 2024 primarily reflecting the substantial paydown and charge-offs of ERAs originated during December 2023. In addition, TRS also received substantial paydowns of commercial loans made during the fourth quarter of 2023 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, 2024, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.

The Company’s ACLL remained at $82 million from December 31, 2023 to September 30, 2024. As a percent of total loans, the total Company’s ACLL decreased to 1.55% as of September 30, 2024 compared to 1.57% as of December 31, 2023. An analysis of the ACL by reportable segment follows:

Traditional Banking segment

The Traditional Banking ACLL increased approximately $550,000 to $60 million as of September 30, 2024 driven primarily by general formula reserves applied to Traditional Bank loans. While loan balances at the Traditional Bank decreased in total during the first nine months of 2024, the segment experienced a change in loan mix growing in loan categories, such as construction and land development, with higher loan loss reserve requirements. Partially offsetting the change in loan mix, the Traditional Bank reclassed $69 million of correspondent mortgage loans from held for investment into held for sale.

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, 2024 to December 31, 2023. As of September 30, 2024, the Warehouse ACLL was entirely qualitative in nature with no adjustments to the qualitative reserve percentage required for the first nine months of 2024.

Tax Refund Solutions

The TRS ACLL decreased $4 million from December 31, 2023 to $1,000 as of September 30, 2024, with this decrease driven by the September 30, 2024 charge-off of all unpaid RAs originated during December 2023.

Republic Credit Solutions segment

The RCS ACLL increased $3 million to $21 million as of September 30, 2024, with this increase driven by an increase in the RCS LOC II spot loan balances and a change in the RCS loan mix as the outstanding RCS LOC I and healthcare receivables spot loan balances decreased.

RCS maintained an ACLL for two distinct credit products offered as of September 30, 2024, including its line-of-credit products and its healthcare-receivables products. As of September 30, 2024, 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 54.69% 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 15 — 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 increased approximately $669,000 during the first nine months of 2024, driven primarily by commercial-purpose loans repaid or upgraded to a Pass rating during the first nine months of 2023.

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

Table 16 — 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 loan modifications totaling approximately $152,000 and $2 million as of September 30, 2024 and December 31, 2023.

Nonperforming loans to total loans decreased to 0.37% as of September 30, 2024 from 0.39% as of December 31, 2023, as the total balance of nonperforming loans decreased by $1 million, or 5%, while total loans increased $57 million during the first nine months of 2024.

The ACLL to total nonaccrual loans decreased to 424% as of September 30, 2024 from 429% as of December 31, 2023, as the total ACLL increased $28,000 and the balance of nonaccrual loans increased by $231,000.

Table 17 — 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 18 — Nonperforming Loan Composition

(dollars in thousands)

Table 19 — Stratification of Nonperforming Loans

(dollars in thousands)

(dollars in thousands)

Table 20 — Roll-forward of Nonperforming Loans

(in thousands)

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

Table 21 — Detail of Loans Removed from Nonperforming Status

(in thousands)

Based on the Bank’s review as of September 30, 2024, management believes that its reserves are adequate to absorb expected losses on all nonperforming loans.

Delinquent Loans

Total Company delinquent loans to total loans decreased to 0.40% as of September 30, 2024 from 0.42% as of December 31, 2023. Core Bank delinquent loans to total Core Bank loans increased to 0.19% as of September 30, 2024 from 0.16% as of December 31, 2023. With the exception of small-dollar consumer loans, all Traditional Bank loans past due 90-days-or-more as of September 30, 2024 and December 31, 2023 were on nonaccrual status.

Table 22 — 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 23 — Roll-forward of Delinquent Loans

(in thousands)

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

Table 24 — Detail of Loans Removed from Delinquent Status

(in thousands)

Deposits

Table 25 — Deposit Composition

(in thousands)

(1) Includes time deposits

Total deposits increased $49 million from December 31, 2023 to $5.1 billion as of September 30, 2024. Total Core Bank deposits increased by $257 million, or 6%, from December 31, 2023. Within the Core Bank’s deposits, interest-bearing deposits increased $338 million and noninterest-bearing deposits decreased $81 million.

The increase in Core Bank interest-bearing deposits was driven by $225 million of growth in money market deposits and, a $76 million increase in reciprocal money market deposits, and a $16 million increase in time deposits. The growth in money market and reciprocal money market deposits was primarily in exception-priced accounts as well as those products marketed with standard higher offering rates. The growth in savings deposit balances was driven primarily by funds received from a third-party listing service.

During the first nine months of 2024, noninterest-bearing deposit balances continued their downward trend, while interest-bearing categories generally increased. This trend was generally the result of the attractive yields available on interest-bearing deposit accounts as compared to noninterest-bearing alternatives, which provide no yield to the depositor.

RPG Deposits

As previously noted in the Company’s 2023 Report on Form 10-K filed on March 14, 2024, RPS began sharing a significant portion of the interest revenue it earns on its prepaid card balances with its prepaid card marketer-servicers during the first quarter of 2024. This revenue share is being reported as interest expense on deposits. As a result, all prepaid card deposit balances subject to a revenue share arrangement will be reported as interest-bearing deposits on an on-going basis, as long as they remain subject to a revenue share arrangement. Conversely, for any periods reported prior to 2024, these deposits will remain noninterest-bearing as they were not subject to a revenue share arrangement during those periods.

As a result of all the factors noted above, Management believes the Company is more likely to experience slower overall growth and possibly, a continuing decline in its noninterest-bearing deposits over the foreseeable future.

Federal Home Loan Bank Advances

The Bank’s total FHLB advances were $370 million as of September 30, 2024 compared to $380 million as of December 31, 2023. There were no overnight borrowings as of September 30, 2024 compared to $110 million as of December 31, 2023. The Company has utilized FHLB advances over the past year to partially fund its noninterest-bearing deposit outflow and overall loan growth.

During the second quarter of 2024, the Bank elected to extend $100 million of FHLB borrowings during May and June through a third-party, fixed rate swap to take advantage of the inverted yield curve and lower its overall borrowing costs. As a result of this swap, the Bank was able to lock in an annualized cost of 4.42% for this $100 million over a five-year term.

As of September 30, 2024, the Company’s $370 million of FHLB advances had a weighted-average maturity of 2.53 years and a weighted-average cost of 4.52%, both including the impact of the related swaps. Overall use of FHLB advances during a given year is dependent upon many factors including asset growth, deposit growth, current earnings, and expectations of future interest rates, among others.

Interest Rate Swaps

The Bank enters into interest rate swaps to facilitate client transactions and meet their financing needs. Upon entering into these instruments, the Bank enters into offsetting positions in order to minimize the Bank’s interest rate risk. These swaps are derivatives, but are not designated as hedging instruments, and therefore changes in fair value are reported in current year earnings.

In addition, as noted in the section above, the Company entered into $100 million of notional amount balance sheet related interest rate swaps during the second quarter of 2024 in order to take advantage of the more attractive long-term pricing resulting from the inverted yield.

See Footnote 12 “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 26 — Liquid Assets and Borrowing Capacity

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

(in thousands)

The Company generally carried higher average interest-earning cash balances during the first nine months of 2024 as the result of a strategic decision to maintain additional on-balance sheet liquidity above required minimums in response to the uncertainty of the economic environment.

The Bank had a period-end loan-to-deposit ratio (excluding brokered deposits) of 106% as of September 30, 2024 and 106% as of December 31, 2023. 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 of September 30, 2024, the Bank had approximately $1.0 billion in deposits from 191 large non-sweep deposit relationships, including reciprocal deposits, where the individual relationship exceeded $2 million for a depositor’s taxpayer identification number. Total uninsured deposits for the Bank were $1.9 billion, or 37%, of total deposits as of September 30, 2024. The 20 largest non-sweep deposit relationships represented approximately $378 million, or 7%, of the Company’s total deposit balances as of as of September 30, 2024. 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, 2024 and December 31, 2023, these pledged investment securities had a fair value of $81 million and $100 million.

Capital

Total stockholders’ equity increased from $913 million as of December 31, 2023 to $980 million as of September 30, 2024. The increase in stockholders’ equity was primarily attributable to net income earned during the first nine months of 2024 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, 2024, RB&T could, without prior approval, declare dividends of approximately $120 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 13.87% as of September 30, 2024 and 14.21% as of December 31, 2023. Formal measurements of the capital ratios for Republic and the Bank are performed by the Company at each quarter end.

Table 27 — 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, 2024 and approximately 6 basis points lower than those presented in the table above as of December 31, 2023.

Asset/Liability Management and Market Risk

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

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

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

As of September 30, 2024, a dynamic simulation model was run for interest rate changes from “Down 400” basis points to “Up 400” basis points. The following table illustrates the Bank’s projected percent change from its Base net interest income over the period beginning October 1, 2024 and ending September 30, 2025 based on instantaneous movements in interest rates from Down 400 to Up 400 basis points equally across all points on the yield curve. The Bank’s dynamic earnings simulation model includes secondary market loan fees, which are a component of mortgage banking income within noninterest income and excludes Traditional Bank loan fees.

Table 28 — Bank Interest Rate Sensitivity

Notable changes for the Bank’s interest rate sensitivity projections from December 31, 2023 to September 30, 2024 occurred in all the scenarios. In general, the period-to-period improvements in the up-rate scenarios were generally tied to the Company’s average interest-earning cash balances, which increased from December 2023 to September 2024. As a result, the Bank’s earnings are more sensitive to fluctuations in short-term interest rates. Additionally, a reduction in short-term variable rate borrowings also contributed to the improvement. The benefit from the higher interest-earning cash balances was partially offset by lower projected interest income on loans as loan growth assumptions were lowered based on recent loan growth trends.

In the down rate scenarios, the Company’s interest rate risk position notably deteriorated as the higher interest-earning cash balances that benefited net interest income in the up-rate scenarios are projected to cause similar corresponding declines to net interest income in the down-rate rate scenarios. In addition, the Company’s projected net interest income in down rate scenarios was also negatively impacted by revisions to the Bank’s deposit beta assumptions, as the Bank was assumed to lower deposit costs in line with decreases in the Fed Funds Target Rate by the FOMC. As a result, many deposit products reached their rate “floor” sooner than in previous simulations, negatively impacting most down rate scenarios as assets begin to reprice more quickly than deposits. The lower net interest income is in the down rate scenarios is partially offset by assumed increases in mortgage banking income as rates fall and more borrowers gain incentive to refinance.

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, 2024 Compared to Three Months Ended September 30, 2023) and “RESULTS OF OPERATIONS (Nine months ended September 30, 2024 Compared to Nine months ended September 30, 2023).”