REPUBLIC BANCORP INC /KY/ (RBCAA) FY 2023 MD&A

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

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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.

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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 six reportable segments using a multitude of delivery channels. While the Bank operates primarily in its market footprint, its non-brick-and-mortar delivery channels allow it to reach clients across the U.S. 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.

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

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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.

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Broadly speaking, forward-looking statements include:

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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:

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Accounting Standards Updates

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

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Critical Accounting Estimates

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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.

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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.

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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.

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

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ACLL and Provision — As of December 31, 2023, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. Management evaluates the adequacy of the ACLL monthly and presents and discusses the ACLL with the Audit Committee and the Board of Directors quarterly.

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The Company’s CECL method is a “static-pool” method that analyzes historical closed pools of loans over their expected lives to attain a loss rate, which is then adjusted for current conditions and reasonable, supportable forecasts prior to being applied to the current balance of the analyzed pools. Due to its reasonably strong correlation to the Company's historical net loan losses, the Company has chosen to use the U.S. national unemployment rate as its primary forecasting tool. For its CRE loan pool, the Company employs a one-year forecast of general CRE values.

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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.

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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.

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

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

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

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Management considered the absorption rates and exhaustion rates calculated for the Core Bank as of December 31, 2023 and 2022 to be within acceptable ranges under current economic conditions. Based on management’s evaluation, a Core Bank ACLL of $60 million, or 1.21% of total Core Bank loans, was an adequate estimate of expected losses within the loan portfolio as of December 31, 2023 and resulted in Core Banking Provision for its loans of a net charge of $8.5 million during 2023. This compares to an ACLL of $52 million as of both December 31, 2022 and December 31, 2021 with Provisions of a net charge of $312,000 for 2022 and net credit of $319,000 for 2021.

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

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The RPG ACLL as of December 31, 2023 primarily related to loans originated and held for investment through the RCS segment. RCS generally originates small-dollar, consumer credit products. For its healthcare receivable products, the Bank originates the loans, and in some instances, sells 100% of the balances and in other instances retains 100% of the balances. For its LOC products, the Bank originates these products, sells 90% or 95% of the balances within three business days of loan origination, and retains a 5% or 10% interest. RCS LOC products typically earn a higher yield but also have higher credit risk compared to loans originated through Core Banking operations, with a significant portion of RCS clients considered subprime or near-prime borrowers.

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As of December 31, 2023, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables portfolios to as high as 50.89% for its line-of-credit portfolios. A lower reserve percentage was provided for RCS’s healthcare receivables as of December 31, 2023, as such receivables have recourse back to the Company’s third-party service providers in the transactions.

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Management only evaluated the ACLL on its active RCS products that had incurred meaningful losses since their inception, which were its line-of-credit products. Due to the general short-term nature of these products, management utilized the current year net charge-offs for 2022 and 2023 along with the end-of-the-year ACLL to calculate each years’ absorption rate and exhaustion rate. The absorption and exhaustion rates were both considered to be within acceptable ranges as of December 31, 2023 and 2022. Based on management’s calculation, an ACLL of $22 million, or 7.91%, of total RPG loans was an adequate estimate of expected losses within the RPG portfolio as of December 31, 2023.

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RPG’s TRS segment offered its RA credit product during the first two months of 2023, 2022, and 2021, and its ERA credit product during December 2023 and 2022 related to the subsequent first quarter tax filing seasons. An ACLL for losses on RAs and ERAs is estimated during the limited, short-term period the product is offered. RAs originated during the first two months of 2023, were repaid, on average, within 32 days of origination. Provisions for RA and ERA losses are estimated when advances are made and adjusted to actual net charge-offs as of June 30th of each year. The ACLL for ERAs as of December 31, 2023 was $3.9 million for $103 million of ERAs originated during December 2023. The ACLL as of December 31, 2022 was $3.8 million for $98 million of ERAs originated during December 2022. There were no ERAs originated during 2021, and as a result there was no ACLL and corresponding Provision for ERAs as of December 31, 2021.

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

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

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

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RPG recorded a net charge of $39.1 million, $22.0 million, and $15.1 million to the Provision during 2023, 2022, and 2021, with the Provision for each year primarily due to net losses on RAs and growth in short-term, consumer loans originated through the RCS segment. If the number of future charge-offs on RAs and RCS loans differ significantly from assumptions used by management in making its determination, an adjustment to the RPG ACLL and the resulting effect on the income statement could be material.

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Cancelled TRS Sale Transaction

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On June 3, 2022, the Bank and Green Dot entered into a settlement agreement (“Settlement Agreement”) to fully resolve the lawsuit that the Bank filed against Green Dot in the Delaware Court of Chancery on October 5, 2021 (the “Lawsuit”).

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

transaction contemplated in a purchase agreement through which Green Dot would purchase all of the assets and operations of the Bank’s TRS business (“TRS Purchase Agreement”).

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

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OVERVIEW

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Total Company net income was $90.4 million and Diluted EPS was $4.62 for 2023, compared to net income of $91.1 million and Diluted EPS of $4.59 for 2022. Table 1 below presents Republic’s financial performance for the years ended December 31, 2023, 2022, and 2021:

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Table 1 — Summary

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The decrease in net income during 2023 for the Total Company primarily resulted from the nonrecurrence of the following income items recorded during 2022:

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General highlights by reportable segment for the year ended December 31, 2023 consisted of the following:

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Traditional Banking segment

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Warehouse Lending segment

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Mortgage Banking segment

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Tax Refund Solutions segment

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Republic Payment Solutions segment

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Republic Credit Solutions segment

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RESULTS OF OPERATIONS

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This section provides a comparative discussion of Republic’s Results of Operations for the two-year period ended December 31, 2023, unless otherwise specified. Refer to Results of Operations on pages 50-61 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) for a discussion of the 2022 versus 2021 results.

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Net Interest Income

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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.

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

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A large amount of the Company’s financial instruments tracks 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 repeatedly increasing the FFTR. The FOMC’s increases to the FFTR since January 1, 2022 included the following:

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Table 2 — Increases to the Federal Funds Target Rate since January 1, 2022

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The FOMC’s actions and signals continued to place upward pressure on short-term market interest rates throughout 2022 and 2023. While long-term interest rates initially rose in tandem with the increases to the FFTR through the middle part of 2022, they generally moved lower than short-term rates during the second half of 2022. Long-term rates generally maintained this lower level relative to short-term rates throughout 2023 as the market generally began anticipating a recession to take place in the near-term future. As a result of the higher short-term interest rates and the lower long-term interest rates, the yield curve has been inverted for several months, with short-term rates generally higher than long-term rates on the yield curve. Because banks generally price customer deposits based on the shorter-end of the yield curve and price many loans based on the longer-end of the yield curve, an inverted yield curve is generally negative for banks’ net interest income while a steep yield curve, in which long-term rates exceed short-term rates, is generally more favorable for banks.

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As of the date of this filing, the near-term shape of the yield curve is uncertain. The Federal Reserve continues to signal its willingness to implement appropriate monetary policy to reduce inflation and to maintain it at an acceptable level. Many market forecasters, however, believe that near-term interest rate cuts by the FOMC are more likely than near-term interest rate increases or no change to the FFTR at all. Any further monetary tightening by the FOMC in the future will likely cause short-term interest rates to increase. It is unknown what impact additional short-term rate increases by the FOMC could have on long-term market interest rates. Alternatively, future rate cuts are likely to decrease interest rates on the shorter end of the yield curve. Similarly, it is unknown how corresponding long-term rates will move, if at all, if the FOMC does cut short-term interest rates in the near-term. Additionally, if the FFTR experiences no changes in the near-term, it is uncertain if long term rates will remain generally below short-term interest rates or if the yield curve could begin to steepen.

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Total Company net interest income was $288.8 million during 2023 and represented a $52.1 million increase over 2022. Total Company net interest margin expanded to 4.91% during 2023 compared to 4.12% for 2022.

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

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Traditional Banking segment

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The Traditional Banking’s net interest income increased $23.0 million, or 13%, for 2023 compared to 2022. Traditional Banking’s net interest margin was 3.69% for 2023, an increase of 31 basis points from 2022.

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

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While net interest income was higher at the Traditional Bank for the year, it was notably lower during the fourth quarter of 2023 as compared to the fourth quarter of 2022. The decrease in net interest income for the fourth quarter of 2023 was the first quarter-to-same-quarter-last-year decline for the Traditional Bank during 2023. While net interest income was higher for each of the first three quarters of 2023 compared to the same quarter in 2022, each quarter experienced a diminishing magnitude of increase. This diminishing magnitude occurred as the Traditional Bank’s cost of funds increased at a faster pace than its yield on interest earning assets.

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The primary driver of this diminishing benefit was a reduction in interest-earning cash balances combined with an on-going shift in funding mix away from noninterest-bearing deposit balances to higher-costing, interest-bearing deposits and FHLB borrowings. As a result of these factors, the Traditional Bank’s yield on its interest earning assets increased 97 basis points from the fourth quarter of 2022 to the fourth quarter of 2023, while its cost of interest-bearing liabilities increased 218 basis points for the same periods.

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Management believes the Traditional Bank could likely continue to experience net interest margin compression during 2024 as a result of the negative impact of 1) lower interest-earning cash and low-cost deposit balances; 2) larger, higher-costing average balances of FHLB borrowings; and 3) a continuing rise in the cost of interest-bearing deposits in order to maintain client balances. Additional variables which may also impact the Traditional Bank’s net interest income and net interest margin in the future include, but are not limited to, the actual steepness and shape of the yield curve, future demand for the Traditional Bank’s financial products, and the Traditional Bank’s overall future liquidity needs.

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Warehouse

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Net interest income within Warehouse decreased $4.3 million, or 31%, from 2022 to 2023, driven by decreases in both average outstanding balances and net interest margin. Overall average outstanding Warehouse balances declined from $510 million during 2022 to $397 million for 2023, driven largely by the sharp rise in long-term interest rates during 2022, which depressed mortgage-refinancing demand and resulted in a sharp drop in Warehouse line usage.

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In addition, the Warehouse net interest margin decreased 31 basis points from 2.69% during 2022 to 2.38% during 2023. The decline in the Warehouse net interest margin occurred as its funding costs, as charged through the Company’s internal FTP methodology, generally rose in tandem with the increase in short-term interest rates since rates began rising in March 2022, while its yield increases were delayed until the adjustable rates on its clients’ lines of credit surpassed their contractual interest rate floors. These interest rate floors benefited the Warehouse net interest margin substantially during 2020 and 2021 when market rates declined to historical lows

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but have produced margin compression since the onset of the FFTR increases during the first quarter of 2022. In addition, the warehouse industry came under competitive pricing pressures during 2023 as a declining market demand caused the banks that lend to Warehouse clients to lower their margins in order to maintain higher levels of balances on their existing warehouse lines.

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Committed Warehouse lines-of-credit decreased from $1.1 billion as of December 31, 2022 to $1.0 billion as of December 31, 2023, while average usage rates for Warehouse lines were 42% and 44%, respectively, during 2023 and 2022.

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A continuing period of elevated long-term market interest rates or additional increases in long-term market interest rates will likely lead to a continued reduction in average outstanding balances driven by a decline in demand from Warehouse clients. In addition, because the yield on Warehouse lines of credit are generally tied to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, further driving down the yield Warehouse earns on its lines of credits.

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Tax Refund Solutions segment

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Net interest income within the TRS segment was up $12.7 million from 2022 to 2023. Loan-related interest and fees increased $17.2 million for the period and was driven primarily by a $426 million increase in RA origination volume, most of which resulted from a new contract with a large national tax preparation provider. This increase in loan revenue was partially offset by a $3.5 million increase to the segment’s net cost of funds as applied through the Company’s internal net FTP charge.

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See additional detail regarding the RA product under Footnote 4“Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”

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Republic Payment Solutions segment

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The Company’s prepaid card program drove a $10.9 million increase to net interest income for the segment. This increase was generally driven by a higher crediting rate applied through the Company’s internal FTP. The prepaid card FTP credit yield was 4.59% for average prepaid card-related balances of $356 million during 2023 compared to 1.37% for average prepaid card-related balances of $362 million during 2022.

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Republic Credit Solutions segment

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RCS’s net interest income increased $10.1 million, or 34%, from 2022 to 2023. The increase was driven primarily by an increase in fee income from RCS’s LOC II product.

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RCS’s LOC II loan fees, which are recorded as interest income on loans, increased to $19.3 million during 2023 compared to $8.5 million during 2022. The Company first piloted this product during the first quarter of 2021 with limited outstanding balances during the pilot phase. It began to ramp up origination volume for the product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year revenue.

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

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Table 3 presents the average balance sheets for the years ended December 31, 2023 and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

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Table 3 — Total Company Average Balance Sheets and Interest Rates

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Table 4 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.

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Table 4 — Total Company Volume/Rate Variance Analysis

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Provision

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Total Company Provision was a net charge of $47.6 million for 2023 compared to a net charge of $22.3 million for 2022.

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

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Traditional Banking segment

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The Traditional Banking Provision during 2023 was a net charge of $8.7 million compared to a net charge of $1.4 million for 2022. An analysis of the Provision for 2023 compared 2022 follows:

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As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.28% as of December 31, 2023 compared to 1.32% as of December 31, 2022. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of December 31, 2023.

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Warehouse Lending segment

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Warehouse recorded a net credit of $162,000 for 2023 compared to a net credit of $1.1 million for 2022. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances decreased $64 million during 2023 compared to a decrease of $447 million during 2022.

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

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Tax Refund Solutions segment

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TRS recorded a net charge to the Provision of $22.6 million during 2023 compared to a net charge of $10.0 million for in 2022. Substantially all TRS Provision in both periods was related to its RA product, including the ERA product.

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TRS recorded a charge to the Provision for RA loans of $22.5 million, or 2.68% of its $840 million in total RAs and ERAs originated during 2023 compared to a charge to the Provision of $10.5 million, or 2.56 % of its $409 million of RAs originated during 2022. The

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increase in Provision for 2023 was primarily due to the increased volume from the previously mentioned new contract with a large national tax preparation provider, which generated approximately $462 million in new RA volume related to the first quarter 2023 tax filing season.

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

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Republic Payment Solutions segment

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There is no Allowance or Provision for RPS, as the segment offers Prepaid and Debit Solutions to consumers.

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Republic Credit Solutions segment

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As illustrated in Table 5 below, RCS recorded a net charge to the Provision of $16.5 million during 2023 compared to a net charge to the Provision of $12.1 million for 2022. The increase in the Provision was driven primarily by a $2.8 million increase in net charge-offs and a $1.6 million increase in the Allowance based on general formula reserves applied to the growth for RCS’s LOC outstanding balances. Net charge-offs for RCS’s LOC II product were $6.8 million for 2023 compared to $3.2 million of net charge-offs during 2022. As previously disclosed, this product was first piloted during the first quarter of 2021. RCS began to ramp up origination volume for the RCS LOC II product during early 2022 and has steadily increased its volume since then leading to corresponding higher year-over-year net charge-offs in the product.

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While RCS loans generally return higher yields, they also present a greater credit risk than Traditional Banking loan products. As a percentage of total RCS loans, the RCS ACLL was 13.82% as of December 31, 2023 and 13.73% as of December 31, 2022. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of December 31, 2023.

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The following table presents RCS Provision by product:

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Table 5 — RCS Provision by Product

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Noninterest Income

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Table 6 — Analysis of Noninterest Income

NM - Not meaningful

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Total Company noninterest income decreased $18.4 million from 2022.

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

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Traditional Banking segment

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Traditional Banking’s noninterest income increased $4.2 million, or 13%, over 2022, driven primarily by a $1.7 million death benefit payment received during the second quarter of 2023 that was in excess of the cash surrender value of the BOLI policy.

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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 2023 and 2022 were $7.2 million and $6.8 million. The total daily overdraft charges, net of refunds, included in interest income for 2023 and 2022 were $1.2 million and $1.3 million.

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Mortgage Banking segment

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A decrease in Mortgage banking income for 2023 was generally caused by substantially higher long-term market interest rates, which led to a significant slowdown in the origination of mortgage loans to be sold into the secondary market. For 2023, the 30-year mortgage rate fluctuated in a range between 6.00% and 7.50% for most of the period. As a result, the Bank sold $78 million in secondary market loans and achieved an average cash-gain-as-a-percent-of-loans-sold of 2.25% during 2023. During the first two months of 2022, however, long-term interest rates were closer to historical lows, driving total 2022 secondary market loan sales of $238 million with comparable cash-gain-as-a-percent-of-loans-sold of 3.01%.

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Tax Refund Solutions segment

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TRS’s noninterest income decreased $19.4 million, or 55%, during 2023 compared to the same period in 2022. Green Dot paid RB&T a total of $18 million in nonrecurring payments during 2022 related to the now-cancelled TRS Purchase Agreement. These nonrecurring payments included the following:

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Regarding the noninterest income from TRS’s RT product, net RT revenue decreased $1.3 million from $17.0 million during 2022 to $15.7 million during 2023. RT revenue for 2023 was negatively impacted by a general decline in overall RT demand across the industry.

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Republic Payment Solutions segment

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RPS’s noninterest income was flat from 2022 to 2023 at $3.0 million. RPS program fees constituted the substantial majority of noninterest income at RPS. RPS program fees for RPS primarily represents a portion of the net interchange revenue earned for cardholder activity.

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Republic Credit Solutions segment

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RCS’s noninterest income decreased $462,000, or 3%, during 2023 compared to 2022, with program fees representing the substantial majority of RCS’s noninterest income. The decrease in RCS program fees primarily reflected lower sales volume and corresponding gains from RCS’s installment loan product which were substantially offset by higher sales volume and gains from RCS’s LOC II product.

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Proceeds from the sale of RCS's loan products totaled $12.8 million during 2023, a 3% decrease from 2022. Partially offsetting the decrease, RCS sold approximately $460 million of balances for the LOC II product during 2023, an increase of 123% over 2022. This increase in sales volume for the LOC II product contributed to a $2.5 million increase in RCS program fee revenue, which partially

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offset the decline in revenue from the installment product. RCS began to ramp up origination volume for the LOC II product during early 2022 and has steadily increased its volume since then, leading to corresponding higher year-over-year net program revenue.

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The following table presents program fees by RPG Segment:

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Table 7 —Program Fees by RPG Segment

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The following table presents RCS program fees by product:

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Table 8 — Program Fees by RCS Product

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

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Noninterest Expense

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Table 9 — Analysis of Noninterest Expense

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Total Company noninterest expense increased $12.1 million, or 6%, during 2023 compared to 2022.

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

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Traditional Banking segment

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Traditional Banking noninterest expense increased $10.4 million for 2023 compared to 2022. The following primarily drove the change in noninterest expense:

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Mortgage Banking segment

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Noninterest expense at the Mortgage Banking segment decreased $1.9 million, or 19%, during 2023 compared to the same period in 2022, primarily due to a $916,000 decrease in salary and employee benefits expense and a $303,000 decrease in marketing expense. A reduction in shared overhead expense primarily drove the decrease in salary and employee benefits.

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The Company records a credit offset to salary expense for each loan it originates and recognizes the cost of that credit as an adjustment to the loan’s yield over its estimated life. The amount of credit benefit to salary expense during a given period is determined by the overall loan origination volume during that period.

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Republic Payment Solutions segment

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Noninterest expense at the RPS segment increased $370,000, or 11%, during 2023 compared to 2022, primarily due to a $292,000 increase in salary and employee benefits resulting from an increase in staff.

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Republic Credit Solutions segment

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Noninterest expense at the RCS segment increased $3.6 million, or 43%, during 2023 compared to 2022. Approximately $2.7 million of this increase was concentrated within the LOC II product and was a result of a year-over-year increase in marketing activity for the product. Approximately $1.8 of the increase was within Salaries and Benefits and was primarily the result of annual merit increases and an increase in headcount.

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Income Tax Expense

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The Company’s effective tax rate was approximately 20% in 2023 compared to 22% in 2022. The effective tax rate decreased primarily due to the following:

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See additional detail regarding the Company’s Income Tax Expense under Footnote 18 “Income Taxes” of Part II Item 8 “Financial Statements and Supplemental Data.”

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FINANCIAL CONDITION

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Cash and Cash Equivalents

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Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Republic had $317 million in cash and cash equivalents as of December 31, 2023 compared to $314 million as of December 31, 2022. Comparing average balances for 2023 and 2022, the Company had average interest-earning cash and cash equivalent balances of $184 million for 2023 compared to $739 million for 2022. The decline in average interest-earning cash balances from period to period was driven generally by an increase in average loan balances without a similar corresponding increase in funding liabilities.

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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 5.13% during 2023 with a spot balance yield of approximately 5.40% on December 31, 2023. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.

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Investment Securities

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Table 10 — Investment Securities Portfolio

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

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Republic’s total investment portfolio decreased $40 million from December 31, 2022 to December 31, 2023, driven by $105 million in calls and maturities of debt securities and $37 million in paydowns on mortgage-backed securities. These decreases were partially offset by the purchase of $70 million in debt-securities, $15 million in FHLB stock, $17 million of investments acquired as part of the CBank merger, and a $15 million increase in market value following a general decline in longer-term market interest rates.

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Strategies for the investment securities portfolio are influenced by economic and market conditions, loan demand, deposit mix, and liquidity needs. Since early 2020, the Bank has utilized a general investing strategy of purchasing securities with shorter-term durations or maintaining a large amount cash at the Federal Reserve. The Bank utilized this general strategy due to liquidity reasons and as an interest rate risk management tool. This strategy could change in 2024 depending upon several factors including, but not limited to, the Company’s overall current and projected liquidity positions, its customers’ demand for its loans and deposit products, the Company’s overall interest rate risk position, the interest rate environment at the time, as well as the projected interest rate environment for the near term and the long term.

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Table 11 — Available-for-Sale Debt Securities

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Table 12 — Held-to-Maturity Debt Securities

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

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Loan Portfolio

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Table 13 — Loan Portfolio Composition

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*     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.

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Gross loans increased by $724 million, or 16%, during 2023 to $5.2 billion as of December 31, 2023. The most significant components comprising the change in loans by reportable segment follow:

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Traditional Banking segment

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Period-end balances for Traditional Banking loans increased $763 million, or 20%, from December 31, 2022 to December 31, 2023. The following primarily drove the change in loan balances during 2023:

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Warehouse Lending segment

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Outstanding Warehouse period-end balances decreased $64 million from December 31, 2022 to December 31, 2023. Due to the volatility and seasonality of the mortgage market, it is difficult to project future outstanding balances of Warehouse lines of credit. The growth of the Bank’s Warehouse 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.

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As previously discussed, a continuing period of elevated long-term market interest rates or additional increases in long-term market interest rates will likely lead to a continued reduction in average outstanding balances driven by a decline in demand from Warehouse clients. In addition, because the yield on Warehouse lines of credit is generally tied to short-term interest rates, additional increases in short-term interest rates could cause further competitive pricing pressures for the industry and the Core Bank, driving down the yield Warehouse earns on its lines of credits.

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Tax Refund Solutions segment

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Outstanding TRS loans decreased $65,000 from December 31, 2022 to December 31, 2023. TRS loan balances as of December 31, 2022 included ERAs of $98 million originated during December 2022 and $52 million of Commercial-related loan balances originated during the fourth quarter of 2022. These balances were substantially all paid down to $0, or alternatively, charged off during 2023.

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TRS loan balances as of December 31, 2023 included ERAs of $103 million originated during December 2023 and $46 million of Commercial-related loan balances originated during the fourth quarter of 2023. These balances are all expected to pay down to $0 during 2024, or alternatively, be charged off if they are deemed to be uncollectible under the Company’s charge-off policy.

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

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Table 14 — Selected Loan Distribution

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Allowance for Credit Losses

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As of December 31, 2023, the Bank maintained an ACLL for expected credit losses inherent in the Bank’s loan portfolio, which includes overdrawn deposit accounts. The Bank also maintained an ACLS and an ACLC for expected losses in its securities portfolio and its off-balance sheet credit exposures, respectively. Management evaluates the adequacy of the ACLL monthly, and the adequacy of the ACLS and ACLC quarterly. All ACLs are presented and discussed with the Audit Committee and the Board of Directors quarterly.

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The Company’s ACLL increased from $70 million as of December 31, 2022 to $82 million as of December 31, 2023. As a percent of total loans, the total Company’s ACLL increased to 1.57% as of December 31, 2023 compared to 1.56% as of December 31, 2022. An analysis of the ACLL by reportable segment follows:

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Traditional Banking segment

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The Traditional Banking ACLL increased approximately $8 million to $59 million as of December 31, 2023, generally driven primarily by formula reserves tied to loan growth during 2023 partially offset by the $1.5 million release of COVID-related reserves. The release of these reserves coincided with the federal government’s declaration of the official end to the COVID pandemic in May of 2023.

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Warehouse

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

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Tax Refund Solutions

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The TRS ACLL increased $102,000 from December 31, 2023 to $4 million as of December 31, 2023 driven by formula reserves applied to the $6 million of ERA loan growth which occurred during the fourth quarter of 2023. The ACLL for TRS as of December 31, 2022 was substantially all attributable to the $98 million of ERAs originated during December 2022 and the $52 million of Commercial-related loan balances originated during the fourth quarter of 2022. These balances were substantially all paid down to $0 during 2023, or alternatively, charged off during 2023.

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The ACLL for TRS as of December 31, 2023 was substantially all attributable to the $103 million of ERAs originated during December 2023 and the $46 million of Commercial-related loan balances originated during the fourth quarter of 2023. As previously noted, these balances are expected to all be paid down during 2024 to $0, or alternatively, be charged off if they are deemed to be uncollectible under the Company’s charge-off policy.

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Republic Credit Solutions segment

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The RCS ACLL increased $4 million to $18 million as of December 31, 2023, with this increase driven by an increase in the RCS LOC II spot balance and a change in the RCS loan mix as the outstanding healthcare receivables spot balance increased and the RCS LOC I spot balance decreased.

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RCS maintained an ACLL for two distinct credit products offered as of December 31, 2023, including its line-of-credit products and its healthcare-receivables products. As of December 31, 2023, the ACLL to total loans estimated for each RCS product ranged from as low as 0.25% for its healthcare-receivables products to as high as 50.89% 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.

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

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

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Table 15 — Summary of Loan and Lease Loss Experience

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Table 16 — Net Loan Charge-offs (Recoveries) to Average Loans by Loan Category

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