Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated financial statements include the accounts of Republic Bancorp, Inc. (the “Parent Company”) and its wholly owned subsidiaries, Republic Bank & Trust Company and Republic Insurance Services, Inc. As used in this filing, the terms “Republic,” the “Company,” “we,” “our,” and “us” refer to Republic Bancorp, Inc., and, where the context requires, Republic Bancorp, Inc. and its subsidiaries. The term the “Bank” refers to the Company’s subsidiary bank: Republic Bank & Trust Company. The term the “Captive” refers to the Company’s insurance subsidiary: Republic Insurance Services, Inc. All significant intercompany balances and transactions are eliminated in consolidation.
Republic is a financial holding company headquartered in Louisville, Kentucky. The Bank is a Kentucky-based, state-chartered non-member financial institution that provides both traditional and non-traditional banking products through five reportable segments using a multitude of delivery channels. While the Bank operates primarily in its 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 II Item 8 “Financial Statements and Supplementary Data.”
Forward-looking statements discuss matters that are not historical facts. As forward-looking statements discuss future events or conditions, the statements often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” “potential,” or similar expressions. Do not rely on forward-looking statements. Forward-looking statements detail management’s expectations regarding the future and are not guarantees. Forward-looking statements are assumptions based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements, except as required by applicable law.
Broadly speaking, forward-looking statements include:
● the potential impact of inflation on Company operations;
● 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;
● natural disasters impacting the Company’s operations;
● changes in political and economic conditions;
● equity and fixed income market fluctuations;
● client bankruptcies and loan defaults;
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● recession;
● future acquisitions;
● integrations of acquired businesses;
● changes in technology;
● 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;
Accounting Standards Updates
For disclosure regarding the impact to the Company’s financial statements of ASUs, see Footnote 1 “Summary of Significant Accounting Policies” of Part II Item 8 “Financial Statements and Supplementary Data.”
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Critical Accounting Estimates
Republic’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods.
Management continually evaluates the Company’s accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.
Critical accounting policies are those that management believes are the most important to the portrayal of the Company’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.
Republic believes its critical accounting policies and estimates relate to the ACLL and Provision.
As of December 31, 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.
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.
Management’s evaluation of the appropriateness of the ACLL is often the most critical accounting estimate for a financial institution, as the ACLL requires significant reliance on the use of estimates and significant judgment as to the reliance on historical loss rates, consideration of quantitative and qualitative economic factors, and the reliance on a reasonable and supportable forecast.
Adjustments to the historical loss rate for current conditions include differences in underwriting standards, portfolio mix or term, delinquency level, as well as for changes in environmental conditions, such as changes in property values or other relevant factors. One-year forecast adjustments to the historical loss rate are based on the U.S. national unemployment rate and CRE values. Subsequent to the one-year forecasts, loss rates are assumed to immediately revert back to long-term historical averages.
The impact of utilizing the CECL approach to calculate the ACLL is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the ACLL, and therefore, greater volatility to the Company’s reported earnings.
See additional detail regarding the Company’s adoption of ASC 326 and the CECL method under Footnote 4 “Loans and Allowance for Credit Losses” of Part II Item 8 “Financial Statements and Supplementary Data.”
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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 a range of total Core Bank net loan losses to the Total Core Bank ACLL using the 2008 to 2013 “Great Recession” timeframe as a baseline. 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 a range of average annual net Core Bank loan losses, also using the 2008 to 2013 timeframe as a baseline. 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. The timeframe of 2008 to 2013 is the most recent period in which the Core Bank incurred notable loan losses, and as such, Management believes is an appropriate baseline starting point in its overall absorption and exhaustion analyses.
Management considered the range of absorption rates and exhaustion rates calculated for the Core Bank as of December 31, 2024 and 2023 to be within acceptable ranges under current economic conditions. Based on management’s evaluation, a Core Bank ACLL of $61 million, or 1.19% of total Core Bank loans, was an adequate estimate of expected losses within the loan portfolio as of December 31, 2024 and resulted in Core Banking Provision for its loans of a net charge of $3.8 million during 2024. This compares to an ACLL of $60 million as of December 31, 2023 and $52 million as of December 31, 2022 with Provisions of a net charge of $8.5 million for 2023 and net charge of $312,000 for 2022.
If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, an adjustment to the Core Bank ACLL and the resulting effect on the income statement could be material.
The RPG ACLL as of December 31, 2024 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.
As of December 31, 2024, 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 70.63% for its line-of-credit portfolios. A lower reserve percentage was provided for RCS’s healthcare receivables as of December 31, 2024, as such receivables have recourse back to the Company’s third-party service providers in the transactions.
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 2023 and 2024 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, 2024 and 2023. Based on management’s calculation, an ACLL of $21 million, or 16.30%, of total RCS loans was an adequate estimate of expected losses within the RCS portfolio as of December 31, 2024.
RPG’s TRS segment offered its RA credit product during the first two months of 2024, 2023, and 2022, and its ERA credit product during the Decembers of 2024, 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 2024, 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, 2024 was $9.8 million for $139 million of ERAs originated during December 2024. The ACLL 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.
As a result of the final performance of the December 2023 ERAs within TRS, the Company recorded a larger Allowance of $9.8 million for its ERAs during the fourth quarter of 2024 compared to $3.9 million during the fourth quarter of 2023. Approximately $2.3 million of the increase over the fourth quarter 2023 Allowance amount was due to increased volume, with the remaining difference predominately due to an increased loss estimate due to the Company’s experience from the 2024 Tax Season.
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Based on the 2024 Tax Season economics, during the fourth quarter of 2024 the Company revised its agreement with its largest third-party marketer-servicer for RAs and ERAs for the 2025 Tax Season. Under this revised agreement, the Company received a loss cap guarantee specific to ERAs for the 2025 Tax Season. As a result of this new loss cap guarantee, the Company does not anticipate recording any additional loss estimates for the December 2024 ERA originations through this marketer-servicer.
Related to the overall credit losses on RAs and ERAs, the Bank’s ability to control losses is highly dependent upon its ability to predict the taxpayer’s likelihood to receive the tax refund as claimed on the taxpayer’s tax return. Each year, the Bank’s RA and ERA approval model is based primarily on the prior-year’s tax refund funding patterns. Because much of the loan volume occurs each year before that year’s tax refund funding patterns can be analyzed and subsequent underwriting changes made, credit losses during a current year could be higher than management’s predictions if tax refund funding patterns change materially between years.
In response to changes in the legal, regulatory, and competitive environment, management annually reviews and revises the RA and ERA product parameters. Further changes in RA and ERA product parameters do not ensure positive results and could have an overall material negative impact on the performance of the RA and ERA and therefore on the Company’s financial condition and results of operations.
See additional discussion regarding the RA product under the sections titled:
● Part I Item 1A “Risk Factors”
RPG recorded a net charge of $50.6 million, $39.1 million, and $22.0 million to the Provision during 2024, 2023, and 2022, 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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OVERVIEW
Total Company net income was $101.4 million and Diluted EPS was $5.21 for 2024, compared to net income of $90.4 million and Diluted EPS of $4.62 for 2023. Table 1 below presents Republic’s financial performance for the years ended December 31, 2024, 2023, and 2022:
Table 1 — Summary
Percent Increase/(Decrease)
Diluted EPS of Class A Common Stock 5.21 4.62 4.59 13 1
General highlights by reportable segment for the year ended December 31, 2024 consisted of the following:
Traditional Banking segment
● Net income increased $9.7 million, or 21%, from 2023.
● Net interest income increased $8.3 million, or 4%, compared to 2023.
● Noninterest income decreased $422,000, or 1%, from 2023.
● Noninterest expense increased $1.2 million, or 1%, over 2023.
● Total Traditional Bank loans decreased $49 million, or 1%, during 2024.
Warehouse Lending segment
● Net income increased $1.8 million, or 37%, over 2023.
● Net interest income increased $3.0 million, or 32%, over 2023.
● Average Warehouse line usage was 50% during 2024 compared to 42% during 2023.
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Tax Refund Solutions segment
● Net income decreased $2.5 million, or 28%, from 2023.
● Net interest income increased $4.9 million, or 16%, over 2023.
Republic Payment Solutions segment
● Net income decreased $3.1 million, or 27%, from 2023.
● Net interest income decreased $3.9 million, or 25%, from 2023.
● Noninterest expense was $4.1 million for 2024 and $3.7 million for 2023.
Republic Credit Solutions segment
● Net income increased $5.2 million, or 28%, over 2023.
● Net interest income increased $11.1 million, or 28%, over 2023.
● Noninterest income increased $1.9 million, or 15%, over 2023.
● Noninterest expense was $14.1 million for 2024 and $12.0 million for 2023.
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RESULTS OF OPERATIONS
This section provides a comparative discussion of Republic’s Results of Operations for the two-year period ended December 31, 2024, 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, 2023 (the “2023 Form 10-K”) for a discussion of the 2023 versus 2022 results.
Net Interest Income
Banking operations are significantly dependent upon net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits, securities sold under agreements to repurchase, and FHLB advances. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities, as well as market interest rates.
See the section titled “Asset/Liability Management and Market Risk” in this section of the filing regarding the Bank’s interest rate sensitivity.
A large amount of the Company’s financial instruments 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.
The FOMC lowered the FFTR by 50 basis points on September 19, 2024, 25 basis points on November 8, 2024, and 25 more basis points on December 19, 2024 bringing the FFTR to 4.50% as of December 31, 2024. Management currently believes the 50-basis-point decrease to the FFTR in September 2024 was beneficial to the Company’s net interest income and net interest margin in the near term. Management also believes that the two 25-basis-point decreases to the FFTR during the fourth quarter of 2024 were not beneficial to the Company’s net interest income and net interest margin. In addition, Management believes that, based on the Company’s current balance sheet structure, any future reductions to the FFTR will likely have a negative impact to 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 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 $312.2 million during 2024 and represented a $23.4 million increase over 2023. The Total Company net interest margin declined to 4.85% during 2024 compared to 4.91% for 2023.
The following were the most significant components affecting the Company’s net interest income by reportable segment:
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Traditional Banking segment
The Traditional Banking’s net interest income increased $8.3 million, or 4%, for 2024 compared to 2023. The Traditional Banking’s net interest margin was 3.55% for 2024, an decrease of 15 basis points from 2023.
The increase in the Traditional Bank’s net interest income and decrease to the Traditional Bank’s net interest margin during 2024 was primarily attributable to the following factors:
Management believes the Traditional Bank could experience a negative impact to its net interest income and net interest margin during 2025 if there are additional decreases to the FFTR. The amount of this negative impact, 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 $3.0 million, or 32%, from 2023 to 2024, driven primarily by an increase in the Warehouse net interest margin, which increased 27 basis points from 2.38% during 2023 to 2.65% during 2024. The improvement in Warehouse net interest margin occurred as its loan yields increased by 34 basis points from 2023 to 2024, while its internally assigned
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net FTP funding costs rose 4 basis points for the same periods. 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 $397 million during 2023 to $470 million for 2024. Average committed Warehouse lines-of-credit decreased from $1.0 billion for 2023 to $938 million for 2024, while average usage rates for Warehouse lines were approximately 50% and 42% during 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. In addition, if long-term rates were to increase in 2025, Warehouse demand would likely be negatively impacted.
Tax Refund Solutions segment
Net interest income within the TRS segment was up $4.9 million from 2023 to 2024. Loan-related interest and fees increased $5.7 million for the period and was generally driven by a 5% 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 $882,000 increase to the segment’s cost of funds net of its FTP credit for its deposit accounts.
During the fourth quarter of 2024, the Company revised its agreement with its largest third-party marketer-servicer for RAs and ERAs for the 2025 Tax Season. In addition to a new loss cap guarantee specific to ERAs for the 2025 Tax Season that was received under the revised agreement, the Company will also receive an increased fee specific to ERAs for the 2025 Tax Season and a reduced fee applicable to in-season RAs for the 2025 Tax Season. The Company estimates the revised contract will provide approximately $2.8 million of additional fee income for the 2025 Tax Season compared to the 2024 Tax Season. The Company earned approximately $1.4 million of this increased fee income during the fourth quarter of 2024.
See additional detail regarding the RA product under Footnote 4“Loans and Allowance for Credit Losses” of Part I Item 1 “Financial Statements.”
Republic Payment Solutions segment
Net interest income from the Company’s prepaid card division decreased $3.9 million for 2024 compared to 2023. Overall, RPS earned a lower yield of 3.28% applied to the $361 million average of prepaid program balances for 2024 compared to a yield of 4.59% for the $356 million in average prepaid card balances for 2023. In addition to the lower yield earned its average deposits, the segment also incurred a $4.8 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 $11.1 million, or 28%, from 2023 to 2024. 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 $10.1 million during 2024 to $29.4 million, an 52% increase compared to the $19.3 million recorded during 2023. The growth in interest income on loans generally resulted from a $7.9 million, or 51%, increase in average loan balances from 2023 to 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.
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Table 2 presents the average balance sheets for the years ended December 31, 2024, 2023, and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
Table 2 — Total Company Average Balance Sheets and Interest Rates
Years Ended December 31,
Average Average Average Average Average Average
ASSETS
Interest-earning assets:
Noninterest-earning assets:
Net interest spread 3.97 % 4.07 % 4.01 %
Net interest margin 4.85 % 4.91 % 4.12 %
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Table 3 illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Republic’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Table 3 — Total Company Volume/Rate Variance Analysis
Year Ended December 31, 2024 Year Ended December 31, 2023
Compared to Compared to
Year Ended December 31, 2023 Year Ended December 31, 2022
(in thousands) Change Volume Rate Change Volume Rate
Interest income:
Interest expense:
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Provision
Total Company Provision was a net charge of $54.4 million for 2024 compared to a net charge of $47.6 million for 2023.
The following were the most significant components comprising the Company’s Provision by reportable segment:
Traditional Banking segment
The Traditional Banking Provision during 2024 was a net charge of $3.2 million compared to a net charge of $8.7 million for 2023. An analysis of the Provision for 2024 compared 2023 follows:
● For 2024, the Traditional Bank Provision primarily reflected the following:
● For 2023, the Traditional Bank Provision primarily reflected the following:
As a percentage of total Traditional Bank loans, the Traditional Banking ACLL was 1.31% as of December 31, 2024 compared to 1.28% as of December 31, 2023. The Company believes, based on information presently available, that it has adequately provided for Traditional Banking loan losses as of December 31, 2024.
Warehouse Lending segment
Warehouse recorded a net charge of $527,000 for 2024 compared to a net credit of $162,000 for 2023. Provision for both periods reflected changes in general reserves consistent with changes in outstanding period-end balances. Outstanding Warehouse period-end balances increased $211 million during 2024 compared to a decrease of $64 million during 2023.
As a percentage of total Warehouse outstanding balances, the Warehouse ACLL was 0.25% as of December 31, 2024, and December 31, 2023. The Company believes, based on information presently available, that it has adequately provided for Warehouse loan losses as of December 31, 2024.
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Tax Refund Solutions segment
TRS recorded a net charge to the Provision of $30.0 million during 2024 compared to a net charge of $22.6 million for 2023. Substantially all TRS Provision in both periods was related to its RA product.
Included in the Provision for 2024, was a $9.8 million charge related to $139 million of ERAs originated during the fourth quarter of 2024 for tax returns anticipated to be filed during the first quarter of 2025. Included in the Provision for 2023, was a $3.9 million charge related to $103 million of ERAs originated during the fourth quarter of 2023 for tax returns anticipated to be filed during the first quarter of 2024. As a result of the final performance of the December 2023 ERAs within TRS, the Company recorded a larger Allowance for its early season tax loans of $9.8 million during the fourth quarter of 2024 compared to $3.9 million during the fourth quarter of 2023. Approximately $2.3 million of the increase over the fourth quarter 2023 Allowance amount was due to increased volume, with the remaining difference predominately due to an increased loss estimate due to the Company’s experience from the 2024 Tax Season.
In addition to the Provision increase noted above for ERAs, net charge-offs and net Provision were significantly higher for TRS during 2024 compared to 2023 as payments received from the US Treasury during 2024 to pay off RAs and ERAs were lower than the payments received during 2023.
Based on the 2024 Tax Season economics, during the fourth quarter of 2024 the Company revised its agreement with its largest third-party marketer-servicer for RAs and ERAs for the 2025 Tax Season. Under this revised agreement, the Company received a loss cap guarantee specific to ERAs for the 2025 Tax Season. As a result of this new loss cap guarantee, the Company does not anticipate recording any additional loss estimates for the December 2024 ERA originations through this marketer-servicer.
See additional detail regarding the RA and ERA products under Footnote 4 “Loans and Allowance for Credit Losses” of Part II Item 8 “Financial Statements and Supplemental Data.”
Republic Payment Solutions segment
There is no Allowance or Provision for RPS, as the segment offers Prepaid and Debit Solutions to consumers.
Republic Credit Solutions segment
As illustrated in Table 4 below, RCS recorded a net charge to the Provision of $20.6 million during 2024 compared to a net charge to the Provision of $16.5 million for 2023. The increase in the Provision was driven primarily by a $5.0 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 $2.0 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 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 16.30% as of December 31, 2024 and 13.82% as of December 31, 2023. The Company believes, based on information presently available, that it has adequately provided for RCS loan losses as of December 31, 2024.
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The following table presents RCS Provision by product:
Table 4 — RCS Provision by Product
Years Ended Dec. 31,
(dollars in thousands) 2024 2023 $ Change % Change
Product:
Hospital receivables (19) 43 (62) (144)
Noninterest Income
Table 5 — Analysis of Noninterest Income
Percent Increase/(Decrease)
Net losses on other real estate owned (206) (211) (211) 2 —
Contract termination fee — — 5,000 NM (100)
Legal settlement — — 13,000 NM (100)
NM - Not meaningful
Total Company noninterest income increased $1.2 million from 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 $422,000, or 1%, for 2024 compared to 2023 and was primarily driven by the following:
2) a $576,000 decrease in swap fee income; and
The $576,000 decrease in swap fee income during 2024 was substantially driven by the Company’s pricing strategy during the year in response to the inverted yield curve. As a result, overall origination volume during 2024 across all Traditional Bank loan products was down meaningfully from 2023.
The $394,000 decrease in fee income related to one-way sales of off-balance sheet deposits through the Promontory network was driven by the Company’s strategy to increase on-balance sheet liquidity throughout 2023 and 2024.
The decrease in noninterest income resulting from the above items was substantially offset by a $1.9 million increase in mortgage banking income, which resulted from a brief reduction in long-term interest rates during mid-2024 leading to an up-tick in consumer loan demand for 15- and 30-year fixed rate mortgage loans. Altogether, the Bank sold $253 million in secondary market loans and
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achieved an average cash-gain-as-a-percent-of-loans-sold of 1.22% during 2024 compared to secondary market loan sales of $78 million with comparable cash-gain-as-a-percent-of-loans-sold of 2.25% for 2023.
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 2024 and 2023 were $7.4 million and $7.2 million. The total daily overdraft charges, net of refunds, included in interest income for 2024 and 2023 were both $1.2 million.
Tax Refund Solutions segment
TRS’s noninterest income decreased $553,000, or 3%, during 2024 compared in 2023, driven by a 2%, or $392,000, 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 2024 declined approximately 3% from 2023. In addition, net RT revenue was also negatively impacted as the volume mix during 2024 shifted toward Tax Providers with revenue sharing arrangements that were less favorable to Republic.
Republic Payment Solutions segment
RPS’s noninterest income increased $287,000, or 10%, for 2024 compared to 2023. 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.
Republic Credit Solutions segment
RCS’s noninterest income increased $1.9 million, or 15%, during 2024 compared to 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. The total dollar volume of loans sold for these two products in 2024 was $846 million, which was a $171 million, or 25%, increase over their 2023 volume of loans sold. Program fees from the sale of RCS's loan products totaled $14.7 million during 2024, a 15% increase from 2023. Program fees from the sale of RCS’s LOC II product totaled $5.9 million for 2024, compared to $4.7 million for 2023.
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The following table presents program fees by RPG Segment:
Table 6 —Program Fees by RPG Segment
Years Ended Dec. 31,
Years Ended December 31, (in thousands) 2024 2023 $ Change % Change
Segment:
TRS $ — $ — $ — NA %
The following table presents RCS program fees by product:
Table 7 — Program Fees by RCS Product
Years Ended Dec. 31,
Years Ended December 31, (in thousands) 2024 2023 $ Change % Change
Product:
Hospital receivables 189 196 (7) (4)
*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
Table 8 — Analysis of Noninterest Expense
Percent Increase/(Decrease)
Merger expense 41 2,160 — (98) —
Total Company noninterest expense increased $3.3 million, or 2%, during 2024 compared to 2023.
The following were the most significant components comprising the increase in noninterest expense by reportable segment:
Traditional Banking segment
Traditional Bank noninterest expense increased $1.2 million from 2023 to 2024. The following primarily drove the change in noninterest expense:
Republic Payment Solutions segment
Noninterest expense at the RPS segment increased $391,000, or 11%, during 2024 compared to 2023, primarily due to a $197,000 increase in salary and employee benefits resulting from an increase in staff.
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Republic Credit Solutions segment
Noninterest expense at the RCS segment increased $2.1 million, or 18%, during 2024 compared to 2023. The most notable items driving this increase were in the LOC II product, including a $1.5 million increase in third-party servicing costs for growth in the product and a $848,000 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.
Income Tax Expense
The Company’s effective tax rate was approximately 20.6% in 2024 compared to 20.2% in 2023. The effective tax rate increased primarily due to the following:
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.”
FINANCIAL CONDITION
Cash and Cash Equivalents
Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Republic had $432 million in cash and cash equivalents as of December 31, 2024 compared to $317 million as of December 31, 2023. Comparing average balances for 2024 and 2023, the Company had average interest-earning cash and cash equivalent balances of $473 million for 2024 compared to $184 million for 2023.
During the first nine months of 2024, the Company maintained higher cash balances due to the inverted yield curve and the more attractive pricing for interest-earning cash as compared to longer-term securities. While the yield curve began to steepen during the fourth quarter of 2024, the Company continued to maintain higher cash balances during the quarter, in general, due to near-term funding requirements for tax loans related to the 2025 Tax Season.
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 5.26% during 2024 with a spot balance annualized yield of approximately 4.45% as of December 31, 2024. For cash held within the Bank’s banking center and ATM networks, the Bank does not earn interest.
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Investment Securities
Table 9 — Investment Securities Portfolio
Available-for-sale debt securities (fair value):
Private label mortgage-backed security 1,550 1,773 2,127
Held-to-maturity debt securities (amortized cost):
U.S. Treasury securities and U.S. Government agencies — 65,000 75,000
Mortgage backed securities - residential 23 25 27
Obligations of state and political subdivisions — — 125
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.
Republic’s investment portfolio decreased $72 million from December 31, 2023 to December 31, 2024. The decrease was driven by $346 million in calls and maturities of debt securities and $35 million in paydowns on mortgage-backed securities, which were partially offset by the purchase of $300 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.
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. The Company’s overall strategy for 2025 and beyond will be dependent upon many 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 steepness of the yield curve and the overall 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 10 — Available-for-Sale Debt Securities
Weighted
Weighted Average
Amortized Fair Average Maturity in
December 31, 2024 (dollars in thousands) Cost Value Yield Years
U.S. Treasury securities and U.S. Government agencies:
Due from five years to 10 years — — — —
Corporate bonds:
Due in one year or less — — — —
Due from five years to ten years — — — —
Table 11 — Held-to-Maturity Debt Securities
Weighted
Weighted Average
Amortized Fair Average Maturity in
December 31, 2024 (dollars in thousands) Cost Value Yield Years
U.S. Treasury securities and U.S. Government agencies:
Due from one year or less $ — $ — — % —
Due from one year to five years — — — —
Total U.S. Treasury securities and U.S. Government agencies — — — —
Corporate bonds:
Due from one year or less — —
Due from five years to ten years — — — —
Total mortgage backed securities - residential 23 24 5.48 9.77
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
Table 12 — Loan Portfolio Composition
Traditional Banking:
Residential real estate:
Consumer:
Republic Processing Group*:
Tax Refund Solutions:
* Identifies loans to borrowers located primarily outside of the Bank’s market footprint.
** Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.
Gross loans increased by $200 million, or 4%, during 2024 to $5.4 billion as of December 31, 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 $49 million, or 1%, from December 31, 2023 to December 31, 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 second 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 continue to maintain this stricter pricing strategy into 2025, as long as
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the yield curve remains inverted or generally flat and incremental funding costs remain elevated This stricter loan pricing strategy will likely cause new loan origination volume to remain muted while it remains in effect. In addition, loan payoffs and paydowns could outpace new originations leading to a decline in the Traditional Bank’s loan balances during periods in the future.
Warehouse Lending segment
Outstanding Warehouse period-end balances increased $211 million from December 31, 2023 to December 31, 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 increased $42 million from December 31, 2023 to December 31, 2024. 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 to tax providers originated during the fourth quarter of 2023. These balances were substantially all paid down to $0, or alternatively, charged off during 2024.
TRS loan balances as of December 31, 2024 included ERAs of $139 million originated during December 2024 and $52 million of Commercial-related loan balances to tax providers originated during the fourth quarter of 2024. These balances are all expected to pay down to $0 during 2024, or alternatively, be charged off in line with the Company’s charge-off policy.
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The table below illustrates the Bank’s fixed and variable rate loan maturities: