Republic Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Unless noted, dollar figures are in millions. Republic Bancorp is a Louisville-based financial holding company operating traditional banking, warehouse lending, tax refund, payment solutions and consumer credit businesses. Mortgage banking was folded into Traditional Banking for segment reporting in Q1 2024 after management deemed it immaterial as a separate segment.
Financial results and position
- Earnings: Net income was $30.6 million, up 9% from $28.1 million in Q1 2023. Diluted EPS was $1.58 for Class A and $1.43 for Class B, versus $1.42 and $1.29, respectively.
- Revenue and margins: Net interest income rose 5% to $96.9 million; noninterest income increased 3% to $23.4 million. Total net revenue was $120.3 million versus $115.3 million. Net interest margin declined to 5.87% from 6.52% a year earlier; net interest spread fell to 4.99% from 6.08%.
- Interest costs: Interest income rose to $130.6 million from $100.4 million, but interest expense increased to $33.7 million from $7.7 million, led by deposit costs and FHLB borrowing costs. Noninterest expense fell 3% to $51.0 million, including lower merger costs than in Q1 2023.
- Credit costs: Provision for on-balance-sheet credit losses was $30.6 million, up from $26.8 million. The allowance for loan losses increased to $108.7 million, or 2.08% of loans, from $82.1 million, or 1.57%, at year-end. Net loan charge-offs were $4.1 million; the annualized ratio to average loans rose to 0.30% from 0.23%.
- Assets and loans: Total assets were $6.88 billion, up from $6.59 billion at year-end. Loans were $5.22 billion, nearly unchanged overall; warehouse lines increased $123.5 million while Traditional Banking loans declined $44.9 million. Stockholders’ equity was $935.6 million, versus $912.8 million.
- Deposits, debt and liquidity: Deposits grew 7% to $5.42 billion. Noninterest-bearing deposits fell to $1.36 billion from $1.68 billion, while interest-bearing deposits rose. FHLB advances declined to $270 million from $380 million; short-term repurchase and other borrowings were $84.5 million. Cash and equivalents rose to $546.4 million. Liquid assets plus available borrowing capacity totaled $2.16 billion, including $1.01 billion of FHLB capacity and $100 million of unsecured lines.
- Cash flow: Operating activities provided $71.2 million; investing activities used $77.7 million; financing activities provided $236.3 million. Cash increased $229.8 million during the quarter.
- Capital: At March 31, the Company’s total risk-based capital ratio was 16.44%, common equity tier 1 ratio 15.19%, and tier 1 leverage ratio 12.73%. Regulators classified the Bank as well capitalized.
Material changes versus comparable periods
- Net income and diluted EPS improved year over year, supported by higher net interest income and lower expenses. However, sharply higher funding costs compressed the net interest margin.
- Traditional Banking net interest income fell 4%; management attributed pressure to migration from noninterest-bearing deposits to higher-cost deposits and borrowings. Its segment net income rose, helped by lower provision and expenses, including the absence of $2.1 million of CBank merger costs recorded in Q1 2023.
- Tax Refund Solutions net income declined 11%. Refund Advance originations increased to $771 million from $737 million, while provision rose to $25.8 million from $21.8 million. Management said U.S. Treasury refund payments lagged the prior-year pace through March 31.
- Republic Credit Solutions net income rose 14% to $6.1 million, but provision increased to $4.2 million from $1.8 million, driven mainly by higher LOC II charge-offs and balances. RCS nonperforming loans rose to 1.63% of segment loans from 1.11% at year-end.
- Total nonperforming loans were $21.4 million, or 0.41% of loans, compared with $20.6 million, or 0.39%, at year-end. Classified and special-mention loans increased $5.6 million to $79.4 million.
- Management reclassified $69 million of correspondent mortgage loans from held for investment to held for sale and recorded a $1.0 million fair-value impairment. Mortgage loans held for sale consequently rose to $80.9 million from $3.2 million.
Outlook, commentary and risks
- Management expects Traditional Banking could continue to experience net interest margin compression during the remainder of 2024, citing deposit mix shifts, higher-cost deposits and FHLB borrowing, and competitive deposit pricing. No specific full-year earnings or revenue guidance is provided.
- Management’s rate-sensitivity model projected a 1.2% increase in Bank net interest income under an instantaneous +100-basis-point rate move and a 2.6% decrease under a -100-basis-point move for the following 12 months. The filing cautions that model assumptions are uncertain and actual results may differ.
- Tax Refund Solutions is seasonal. Its March 31 allowance for refund advances is an estimate; final losses depend on subsequent tax-refund collections, with unpaid advances generally charged off by June 30. The segment’s $26.0 million allowance represented 3.37% of Q1-season originations.
- Liquidity risks include deposit competition and concentration: uninsured deposits were $1.8 billion, or 34% of deposits. The loan-to-deposit ratio excluding brokered deposits was 103%. Management notes replacement funding could cost more and reduce earnings.
- Other stated risks include inflation and credit losses, interest-rate and yield-curve changes, recession, loan defaults, competition, regulatory or legal changes, cybersecurity incidents and reliance on third-party providers. RCS serves many subprime or near-prime borrowers and carries higher credit risk than Traditional Banking.
- The filing reports no material change in previously disclosed risk factors and no pending or threatened legal proceeding known to management that could materially adversely affect the Company. Disclosure controls were considered effective; no material change in internal control over financial reporting was reported.
Investor verification points
- Track deposit mix, brokered and listing-service funding, uninsured deposits, deposit pricing and liquidity capacity.
- Monitor net interest margin and interest-rate sensitivity as rates and the yield curve change.
- Verify final Tax Refund Solutions losses against the March 31 allowance after June charge-offs and collections.
- Assess RCS LOC II delinquency, charge-offs, reserve coverage and growth in light of its higher-risk borrower base.
- Review the $69 million correspondent-loan sale, the $1.0 million valuation adjustment and subsequent disposition or performance.
- Follow classified and special-mention loans, commercial real estate exposures, allowance coverage and nonperforming-loan trends.