Republic Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Republic Bancorp is a Louisville-based financial holding company operating banking, mortgage, tax-refund and consumer-credit businesses. Unless noted, amounts below are in millions.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $64.5 | $51.8 | $157.2 | $115.0 |
| Provision for credit losses | $6.1 | $3.7 | $32.9 | $12.9 |
| Noninterest income | $19.7 | $30.6 | $42.3 | $61.6 |
| Noninterest expense | $51.5 | $47.7 | $104.0 | $96.2 |
| Net income | $21.1 | $24.3 | $49.1 | $52.7 |
| Diluted EPS, Class A | $1.07 | $1.22 | $2.50 | $2.64 |
| Net interest margin | 4.46% | 3.55% | 5.48% | 3.94% |
- At June 30, total assets were $6.37 billion, loans $5.05 billion, deposits $4.73 billion, and stockholders’ equity $887.0 million. Loans increased 12% and assets increased 9% from year-end 2022, reflecting organic growth and the CBank acquisition.
- Cash and cash equivalents were $242.0 million, down from $313.7 million at year-end. For the first six months, operating cash flow was $64.9 million (versus $94.6 million); investing cash outflow was $386.0 million (versus $29.0 million); financing cash inflow was $249.4 million (versus a $27.4 million outflow).
- FHLB advances rose to $520 million from $95 million; $450 million were overnight advances. Repurchase-agreement and other short-term borrowings declined to $92.1 million from $217.0 million. Available borrowing capacity was $542.7 million at the FHLB and $125 million in unsecured lines.
- Total liquid assets were $757.6 million; liquid assets plus available borrowing capacity totaled $1.43 billion. The loan-to-deposit ratio, excluding wholesale brokered deposits, was 107%.
- Regulatory capital ratios remained above “well-capitalized” thresholds: Republic’s total risk-based capital ratio was 16.39% and CET1 ratio 15.20%; the Bank’s were 15.69% and 14.50%, respectively.
Material changes versus comparable periods
- Q2 net interest income rose 25% year over year and reported NIM expanded to 4.46%, helped by higher asset yields and loan growth. However, deposit costs and borrowing costs rose sharply; Q2 interest expense was $14.5 million versus $1.1 million a year earlier.
- Q2 net income fell 14% and diluted Class A EPS declined from $1.22 to $1.07. Higher net interest income was more than offset by increased provision and lower noninterest income.
- Q2 noninterest income included a $1.7 million BOLI death-benefit gain. The prior-year quarter included a $13 million Green Dot legal settlement. For the first half, prior-year noninterest income also included a $5 million contract termination fee; these two 2022 Green Dot payments totaled $18 million.
- First-half net income declined 7%. Provision expense increased to $32.9 million, largely reflecting tax-refund advance losses and loan growth. Net charge-offs were $31.3 million versus $13.0 million, primarily from Tax Refund Solutions and Republic Credit Solutions.
- Mortgage banking income fell to $0.9 million in Q2 from $1.8 million; secondary-market mortgage loan sale proceeds were $12 million versus $68 million, amid mortgage rates near 7%.
Outlook, commentary and risks
- Management expects Traditional Banking NIM to compress on a linked-quarter basis during the remainder of 2023, citing lower cash and low-cost deposit balances, higher-cost FHLB funding and continued deposit-pricing pressure. The filing provides no specific earnings or full-year financial guidance.
- Management expects elevated mortgage rates to continue weighing on mortgage originations and mortgage banking income. Warehouse lending is exposed to reduced mortgage demand and potential competitive pricing pressure.
- Tax Refund Solutions originated $834.6 million of advances for the 2023 tax season; its reported incurred loss rate was 3.09%, versus 2.85% for the 2022 season. All unpaid advances were charged off by June 30 under the company’s policy; approximately $1 million was expected to be recovered under a guaranty. Management cautions that tax-refund patterns can change and make losses difficult to predict.
- Republic Credit Solutions lends to a substantial proportion of subprime or near-prime customers. Its loans carry higher credit risk; the segment’s allowance was 12.88% of its loans. RCS delinquent loans were 8.46% of segment loans.
- Uninsured deposits were $1.7 billion, or 36% of total deposits. The company warns that deposit competition, bank-industry concerns and withdrawals could increase funding costs or liquidity pressure. Rising rates also expose earnings to deposit repricing and securities valuation risk. AFS securities had $43.2 million of gross unrealized losses; management attributed these mainly to interest rates and stated it did not intend, and was not likely required, to sell before recovery.
- The March 15 acquisition of CBank and its subsidiary CIF cost approximately $51 million in cash and added approximately $24.2 million of preliminary goodwill. Fair-value estimates remain subject to revision. The acquisition was intended to expand the Cincinnati footprint.
- The Board voted to dissolve the Captive insurance subsidiary, with dissolution expected in the second half of 2023. The company also repurchased 155,813 Class A shares in Q2 for an average $42.66 per share.
- Disclosure controls were deemed ineffective at quarter-end because of previously identified material weaknesses in internal control over financial reporting. Remediation actions included enhanced RCS reporting, hiring a new RPG Chief Accounting Officer and adopting an enhanced reconciliation policy; management gave no assurance of successful or timely remediation.
- Other stated risks include inflation, recession, CRE conditions, interest-rate and yield-curve changes, regulatory and FDIC assessment changes, cyber incidents, third-party service-provider reliance, and acquisition integration. The filing reports no pending or threatened legal proceeding expected by management to cause a material adverse change.
Important facts for investors to verify
- Whether deposit balances stabilize and deposit pricing, FHLB reliance and NIM develop as management anticipates.
- Credit performance and reserve adequacy, especially 2023 tax-refund advance recoveries, RCS delinquencies and losses, and CRE exposures.
- Progress and effectiveness of internal-control remediation, including the impact of the material weaknesses on reporting reliability.
- Final CBank purchase accounting, integration costs and realized benefits; completion and financial impact of the Captive dissolution.
- Cash-flow and liquidity trends, uninsured-deposit concentration, and the availability and cost of borrowing capacity.