Republic Bancorp, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it is not a filing limited to the fourth quarter. Louisville-based Republic operates through Traditional Banking, Warehouse Lending, Mortgage Banking, Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS). The first three comprise Core Banking. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Financial performance and condition
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Total net revenue (net interest income plus noninterest income) | $307.5 | $319.4 | Down about 3.7% |
| Net interest income | $220.6 | $232.3 | Down 5.0% |
| Provision for credit losses | $14.8 | $31.3 | Lower year over year |
| Noninterest income | $86.9 | $87.1 | Essentially flat |
| Noninterest expense | $182.3 | $185.5 | Down 1.7% |
| Net income | $86.8 | $83.2 | Up 4.3% |
| Diluted EPS, Class A | $4.24 | $3.99 | Up 6.3% |
| Net interest margin | 3.75% | 4.10% | Down 35 basis points |
| Return on average assets / equity | 1.38% / 10.27% | 1.38% / 10.37% | ROA flat; ROE slightly lower |
| Cash and cash equivalents, year-end | $757.0 | $485.6 | Up $271.4 |
| Gross loans / total deposits, year-end | $4,496.6 / $4,840.4 | $4,813.1 / $4,733.2 | Loans down 6.6%; deposits up 2.3% |
| Total assets / stockholders’ equity | $6,093.6 / $834.2 | $6,168.3 / $823.3 | Assets lower; equity higher |
Net cash provided by operating activities was $99.4 million; investing activities provided $306.6 million and financing activities used $134.6 million. Cash increased $271.4 million during the year. The filing reports $2.0 billion of liquid assets and borrowing capacity at year-end, including $976.7 million of liquid assets. Estimated uninsured deposits were $1.97 billion.
Credit indicators were mixed but generally improved: allowance for credit losses on loans was $64.6 million, or 1.44% of loans, versus $61.1 million, or 1.27%, in 2020. Net charge-offs were 0.25% of average loans versus 0.42%. Nonperforming loans were $20.6 million, or 0.46% of loans, compared with $23.6 million, or 0.49%. Classified and Special Mention loans, however, rose to $138.7 million from $122.2 million, primarily reflecting hospitality and leisure commercial loans.
Regulatory capital remained strong: year-end total risk-based capital was 17.47% at the Company and 17.14% at the Bank; CET1 was 16.37% and 16.05%, respectively. The Bank was categorized as well-capitalized. The Company redeemed approximately $40 million of trust preferred securities and repaid the related subordinated note in September 2021. Year-end FHLB advances fell to $25 million from $235 million; repurchase-agreement and other short-term borrowings increased to $291.0 million from $211.0 million.
For fourth-quarter context, net income was $16.8 million versus $20.4 million in Q4 2020. Q4 2021 diluted EPS was $0.84 for Class A and $0.76 for Class B; declared quarterly dividends were $0.308 and $0.280 per share, respectively.
Material changes versus 2020
- Net income increased despite lower total net revenue, as credit-loss provision expense declined substantially and noninterest expense decreased.
- Traditional Banking net income increased 78% to $35.7 million; its net interest margin fell to 3.18% from 3.42%. PPP fees and interest partially offset margin pressure.
- Mortgage Banking income declined 37% to $20.0 million as secondary-market loan sales fell to $718 million from $788 million and the average gain rate fell to 3.22% from 3.64%.
- TRS net income rose 8%; Easy Advance originations declined to $250 million from $388 million, while its provision fell to $6.7 million from $13.2 million.
- RCS net income fell 13% to $15.1 million. Its provision rose to $8.4 million from $1.2 million, and its allowance increased to $13.0 million.
- Warehouse net income was $16.4 million, up 1%, but average line usage dropped to 53% from 66%; usage declined further late in 2021.
- Total deposits grew by $107 million, while gross loans contracted by $317 million, largely because PPP balances declined by $336 million.
- The Company repurchased 979,672 shares during 2021 for approximately $47.5 million and declared $24.9 million in common dividends.
Outlook, risks, contingencies, and unusual items
- Interest rates and lending activity: Management expected further Federal Reserve tightening and rising market rates in 2022. It anticipated lower mortgage demand, Mortgage Banking revenue, Warehouse usage and earnings, and warned that competition could pressure pricing. Higher rates may benefit Traditional Banking near term, but deposit costs, yield-curve shape, and customer behavior could offset that benefit. The filing provides no numerical earnings or revenue guidance.
- Credit and concentration risks: COVID-related borrower accommodations, economic conditions, and CRE values could affect losses. At year-end, $2 million of Traditional Bank loans remained under hardship accommodation. Commercial real estate loans totaled $1.46 billion; 36% of collateral securing Warehouse lines was located in California. Management’s ACL estimates depend on forecasts and assumptions.
- RPG exposure: TRS and RCS earnings depend on seasonal tax-refund activity, consumer demand, credit performance, third-party providers, and evolving consumer-finance regulation. RCS loans carry higher credit risk, and segment earnings are concentrated in its line-of-credit products. Tax refund timing, fraud controls, and changes in government stimulus or tax-credit programs could affect TRS demand and losses.
- Green Dot transaction and litigation: The planned sale of substantially all TRS assets and operations did not close after Green Dot said it could not obtain regulatory approval or non-objection. The Bank terminated the purchase agreement in January 2022 and received a $5 million termination fee in Q1 2022. The Bank says it may seek additional damages and equitable relief; the extent of any additional recovery is unresolved.
- LIBOR transition: At year-end, approximately $1.4 billion of assets referenced LIBOR, including $851 million of short-term Warehouse balances; LIBOR-referenced derivative notional was approximately $250 million. The Bank selected SOFR as its primary alternative for most transaction types and noted possible contract, operational, valuation, and litigation risks.
- Other items: The Company reported a $979,000 life-insurance death benefit in 2021 and a $6.6 million after-tax reduction in accumulated other comprehensive income, largely reflecting unrealized investment-security losses. Auditors issued unqualified opinions on the financial statements and internal control; the ACLL forecast adjustments were identified as a critical audit matter.
Most important facts for investors to verify
- Whether rising rates and weaker mortgage activity produce the forecast declines in Mortgage Banking and Warehouse earnings, and how deposits reprice.
- Whether the increase in Special Mention loans, particularly hospitality and leisure exposures, leads to higher credit losses or reserve needs.
- RCS reserve adequacy and performance: its year-end allowance was $13.0 million, and its line-of-credit allowance rate was substantially higher than Core Banking’s.
- The duration and cost of the Green Dot dispute, including any additional damages beyond the $5 million termination fee received in 2022.
- Deposit stability and liquidity exposure, including the $1.97 billion estimated uninsured deposits and reliance on large relationships.
- Progress in transitioning LIBOR contracts to SOFR, and the effects of AFS securities valuation changes on capital and accumulated other comprehensive income.
- The sustainability of earnings and capital returns, including share repurchases, dividends, and the impact of the $40 million trust preferred redemption.