Republic Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Republic Bancorp is a Louisville-based financial holding company with traditional banking, warehouse lending, mortgage banking, tax refund solutions, and consumer credit businesses. Results were materially affected by the COVID-19 pandemic and related economic disruption.
Financial performance and condition
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total net revenue | $70.96 | $69.07 | $174.26 | $168.79 |
| Net interest income | $52.21 | $53.95 | $124.94 | $126.25 |
| Provision for expected credit losses | $6.53 | $4.46 | $29.29 | $21.69 |
| Noninterest expense | $44.83 | $43.43 | $91.79 | $88.94 |
| Net income | $15.80 | $18.01 | $42.50 | $47.52 |
| Diluted EPS, Class A | $0.76 | $0.86 | $2.04 | $2.28 |
| Net interest margin | 3.62% | 4.12% | 4.55% | 4.88% |
- Balance sheet at June 30: Assets were $6.46 billion, up from $5.62 billion at December 31, 2019. Loans were $5.07 billion, up 14%; this included $511 million of Paycheck Protection Program (PPP) loans. Deposits were $5.02 billion, up 33%, and stockholders’ equity was $795.6 million, up from $764.2 million.
- Cash flow: For the first six months, operating activities provided $41.4 million; investing activities used $651.4 million; and financing activities provided $784.9 million. Cash and cash equivalents increased $174.9 million to $560.2 million.
- Borrowings and liquidity: At June 30, FHLB advances were $137.5 million, PPPLF borrowings were $169.2 million, short-term borrowings and repurchase agreements were $177.4 million, and subordinated notes were $41.2 million. The Bank reported $814 million of available FHLB capacity and $125 million of unsecured lines of credit. Its loan-to-deposit ratio excluding brokered deposits was 110%, versus 126% at year-end.
- Credit and capital: The loan allowance was $55.1 million, or 1.09% of loans, versus $43.4 million, or 0.98%, at year-end. Nonperforming loans were $20.4 million, 0.40% of loans, compared with $23.5 million, 0.53%, at year-end. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 15.18% and its common equity Tier 1 ratio was 14.22%.
Material changes and management commentary
- Q2 net income fell 12% year over year, and first-half net income fell 11%. Higher credit-loss provisions and lower net interest income weighed on earnings. Lower funding costs partly offset reduced asset yields; management said net interest margins were likely to decline further in the near term as earning assets repriced lower.
- Mortgage banking income rose to $8.4 million in Q2 from $2.4 million, amid refinancing activity and favorable sale pricing. Mortgage originations for sale were $219 million versus $82 million. Warehouse lending net interest income increased 53% as average line usage rose to 68% from 57%.
- Traditional Banking net income declined 52% in Q2, reflecting lower net interest income and fee income and increased provision. Deposit service charges and interchange income weakened as customer spending and overdraft activity fell; the Bank suspended daily overdraft charges in Q2 and expected to reinstate them in Q3, subject to pandemic conditions.
- The Tax Refund Solutions segment recorded a $4.4 million Q2 provision charge and $19.5 million for the first half, mainly for Easy Advance loans. The company attributed slower Treasury repayments to pandemic-related IRS processing delays and charged off remaining unpaid advances at June 30 under its customary policy. Later collections would be recorded as recoveries.
- Republic adopted CECL on January 1, 2020. Adoption increased the loan allowance by $6.7 million and established allowances for securities and off-balance-sheet exposures; a $4.3 million cumulative adjustment reduced opening retained earnings. Management’s credit-loss forecast assumed U.S. unemployment would remain above 8% over the next year, followed by reversion to historical loss rates.
- The Bank had $793 million of COVID-19 loan accommodations at June 30, equal to 20% of Traditional Banking loans; about 80% of accommodated balances were in commercial real estate and commercial-and-industrial loans. Most accommodations were about three months. Management expected most borrowers to resume repayment after accommodations expired, but warned that failures to do so could raise delinquencies and nonperforming loans significantly.
- Deposits grew partly from PPP-related funds, a flight to safety, additional brokered deposits, and the May acquisition of approximately $250 million of prepaid-card balances. Management said the persistence of pandemic-related deposits and future PPPLF use were uncertain. A new corporate-center lease, commencing in August 2020, was expected to add approximately $19 million of right-of-use assets and lease liabilities.
Outlook, risks, and contingencies
- The filing does not provide a formal earnings or revenue guidance range. Management highlighted likely near-term margin pressure and uncertainty about the duration and economic effects of COVID-19.
- Key risks include credit deterioration after borrower accommodations, commercial real estate and industry exposures, uncertainty in CECL forecasts, deposit outflows and liquidity needs, interest-rate and yield-curve changes, and volatility in mortgage banking and warehouse activity.
- Other stated risks include cybersecurity threats, third-party service-provider dependence, potential impairment of goodwill or mortgage servicing rights, and the possibility of negative interest rates. Management reported no pending or threatened legal proceeding expected to cause a material adverse change. Disclosure controls were assessed as effective.
Investor verification priorities
- Track accommodation expirations and borrower performance, especially the $633 million of commercial real estate and C&I accommodations, and compare subsequent delinquencies and credit provisions with the June 30 outlook.
- Verify repayment and recovery trends for 2020 Easy Advances following the $19.6 million first-half provision and June 30 charge-off of unpaid balances.
- Assess PPP loan forgiveness, fee recognition, and related PPPLF repayment, alongside the effect of PPP balances on loan growth and deposits.
- Monitor deposit stability, brokered funding, available borrowing capacity, and liquidity if pandemic-related deposits decline or warehouse balances change.
- Compare future net interest margin, mortgage banking gains and volumes, and credit-loss allowances with management’s stated expectations and assumptions.