REPUBLIC BANCORP INC quarterly report, Q3 FY2023

Republic Bancorp, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Republic Bancorp is a Louisville-based financial holding company operating traditional banking, warehouse lending, mortgage banking, tax refund, and consumer credit businesses. It completed its acquisition of CBank on March 15, 2023, expanding its Cincinnati-area presence.

Financial performance and condition

Unless otherwise noted, amounts are in millions. Income-statement and cash-flow comparisons are year over year; balance-sheet comparisons are with December 31, 2022.

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Net interest income	$64.8	$58.6	$222.0	$173.6
Provision for credit losses	$3.7	$1.6	$36.6	$14.5
Noninterest income	$14.0	$15.1	$56.4	$76.7
Noninterest expense	$48.0	$46.2	$152.0	$142.4
Net income	$21.6	$19.9	$70.7	$72.6
Diluted Class A EPS	$1.10	$1.01	$3.60	$3.65

• Q3 net interest margin (NIM) was 4.35%, up from 4.09% a year earlier. The nine-month NIM was 5.09%, versus 3.99%.
• Total assets were $6.39 billion; loans, net, were $5.01 billion; and stockholders’ equity was $893.4 million. Loans grew 13% from year-end, with CBank and organic lending contributing.
• Deposits totaled $4.79 billion, up $255.7 million from year-end. Noninterest-bearing deposits declined to $1.70 billion from $1.91 billion, while interest-bearing deposits increased to $3.09 billion from $2.63 billion.
• FHLB advances rose to $465 million from $95 million; repurchase agreements and other short-term borrowings declined to $80.8 million from $217.0 million. The loan-to-deposit ratio, excluding wholesale brokered deposits, was 106%, versus 99% at year-end.
• Cash and cash equivalents were $219.7 million, down from $313.7 million. Available borrowing capacity was $638.6 million at the FHLB and $125 million through unsecured lines; total liquid assets and borrowing capacity were $1.50 billion.
• Nine-month operating cash flow was $86.3 million, compared with $134.8 million. Investing activities used $411.2 million, largely reflecting loan growth and acquisition-related outflows; financing activities provided $230.9 million.
• Allowance for credit losses on loans was $74.6 million, or 1.47% of loans. Nonperforming loans were $19.2 million (0.38% of loans), up from $16.3 million (0.36%) at year-end. Nine-month net charge-offs were $32.7 million, versus $14.2 million.
• Regulatory capital remained above well-capitalized thresholds: Republic’s total risk-based capital ratio was 16.24%, CET1 was 15.06%, and Tier 1 leverage was 14.05%.

Material changes versus comparable periods

• Q3 net income rose $1.7 million year over year as higher net interest income more than offset greater credit provision, lower noninterest income, and increased expenses. For the first nine months, net income fell $1.9 million, or 3%, and diluted Class A EPS declined from $3.65 to $3.60.
• Higher loan yields and growth lifted net interest income, but funding costs rose sharply. Q3 interest expense increased to $21.0 million from $2.0 million; nine-month interest expense was $43.3 million versus $4.1 million.
• Nine-month noninterest income fell $20.3 million. The prior-year period included $18 million of Green Dot payments—a $5 million contract termination fee and a $13 million legal settlement—related to a cancelled sale of the tax refund business. Mortgage banking income also declined amid lower loan originations.
• Credit provision increased materially, particularly for tax refund advances and Republic Credit Solutions (RCS). Total loans grew 13%, while the allowance rose to $74.6 million from $70.4 million.
• The March acquisition of CBank was completed for approximately $51 million in cash. Republic recorded approximately $24.2 million of goodwill; acquired loans were recorded at fair value.
• Q3 total company net interest margin improved year over year, but management reported compression in Traditional Banking as deposit and borrowing costs rose. Traditional Banking’s Q3 NIM fell 13 basis points to 3.50%.

Outlook, risks, contingencies, and unusual items

• Management expects Traditional Banking NIM to continue compressing in Q4 2023, citing lower cash and low-cost deposits, higher-cost FHLB funding, and rising deposit pricing. The yield curve remained inverted at September 30, and management noted its uncertain outlook.
• Management expects higher mortgage rates to continue weighing on mortgage originations and mortgage banking income. Warehouse lending also faces lower demand if long-term rates rise further, and possible pricing pressure if short-term rates increase.
• Tax refund advances are seasonal and carry credit risk: repayment depends on tax refunds, and the bank generally has no recourse to borrowers for insufficient refunds. The 2023 tax-season advance loss rate was reported at 3.79% in the discussion of incurred losses; the filing also reports 3.09% net losses recognized for the season in its performance table. The different measures should be reviewed in the filing.
• RCS serves many subprime or near-prime borrowers and has higher credit risk than traditional banking. Its allowance was 13.00% of RCS loans; RCS delinquent loans were 9.71% of segment loans. Management attributes rising LOC II charge-offs partly to increased product volume.
• Uninsured deposits were estimated at $1.7 billion, or 36% of deposits. The filing identifies deposit outflows, higher funding costs, and potential securities-sale losses as liquidity and earnings risks. AFS securities had $42.4 million of gross unrealized losses; management said it did not intend, and was not likely to be required, to sell before recovery.
• Off-balance-sheet commitments totaled $2.21 billion, including $557.5 million of unused warehouse lines, $439.1 million of unused home-equity lines, and $1.20 billion of other unused loan commitments. Funding demands could create liquidity and interest-rate risk.
• The board approved dissolution of the captive insurance subsidiary, expected during Q4 2023. The filing reports no pending or threatened legal proceeding that management believes could materially adversely affect the company.
• Disclosure controls were deemed ineffective at quarter-end because of previously reported material weaknesses in internal control over financial reporting. Remediation actions were underway, but management could not say when they would be complete or assure they would succeed.
• The company repurchased 206,832 Class A shares in Q3 for an average $44.98 per share; 186,507 shares remained authorized for repurchase at quarter-end.

Most important facts for investors to verify

• Whether the expected Q4 Traditional Banking margin compression and deposit-pricing pressure materialize, and how deposit balances and funding mix develop.
• Uninsured-deposit concentration, liquidity coverage, access to borrowing capacity, and the potential cost of replacing withdrawn deposits.
• Credit performance and reserve adequacy, especially tax refund advances and RCS LOC II; reconcile the filing’s different reported 2023 tax-season loss measures.
• Loan growth, CBank integration costs and synergies, and any effects of the acquisition on credit quality and capital.
• Progress in remediating the material weaknesses in internal control and whether disclosure controls become effective.
• Actual timing and financial impact of the captive dissolution, and the extent to which nonrecurring prior-year Green Dot income affects comparisons.