Republic Bancorp, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Republic Bancorp is a Louisville-based financial holding company operating traditional banking, warehouse lending, mortgage banking, tax refund services and consumer credit businesses. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Management said COVID-19 affected the quarter, particularly credit-loss estimates and operations.
Key financial metrics
| Metric | Q1 2020 / Mar. 31, 2020 | Comparison |
|---|---|---|
| Net interest income | $72.7 million | $72.3 million, up 1% |
| Noninterest income | $30.6 million | $27.4 million, up 11% |
| Net income | $26.7 million | $29.5 million, down 10% |
| Diluted EPS, Class A | $1.28 | $1.41 |
| Net interest margin | 5.57% | 5.66% |
| Credit loss expense | $22.8 million | $17.2 million |
| Total assets | $5.72 billion | $5.62 billion at Dec. 31, 2019 |
| Total loans / allowance for credit losses | $4.52 billion / $70.4 million | $4.43 billion / $43.4 million at Dec. 31, 2019 |
| Total deposits | $4.07 billion | $3.79 billion at Dec. 31, 2019 |
| Cash and cash equivalents | $316.3 million | $385.3 million at Dec. 31, 2019 |
| Stockholders’ equity | $784.0 million | $764.2 million at Dec. 31, 2019 |
Cash flow. Operating activities provided $28.2 million, versus $44.3 million in Q1 2019. Investing activities used $155.2 million, versus $103.3 million; financing activities provided $58.0 million, versus $53.1 million. Cash and cash equivalents fell $69.0 million during the quarter.
Debt and liquidity. FHLB advances were $572.5 million, down from $750.0 million at year-end; short-term borrowings and repurchase agreements were $126.1 million, and the subordinated note was $41.2 million. The loan-to-deposit ratio, excluding brokered deposits, was 118% versus 126% at year-end. Available FHLB borrowing capacity was $409 million, with $125 million in unsecured lines at other institutions. The Bank reported that it met Board-approved liquidity policies at quarter-end, though not on every day of the quarter.
Capital. The Bank was categorized as well-capitalized. At March 31, the Company’s total risk-based capital ratio was 17.33%, common equity Tier 1 ratio 15.35%, and Tier 1 leverage ratio 14.35%. The filing says regulatory ratios defer the CECL impact under the permitted transition.
Material changes versus the prior comparable period
- Net income fell $2.8 million, principally due to higher credit-loss expense amid COVID-19 uncertainty. The Company recorded $7.2 million of additional first-quarter credit-loss expense related to expected pandemic effects.
- Net interest margin declined 9 basis points. Management attributed pressure to lower asset yields and reduced value from noninterest-bearing funding; it expected margin to remain under pressure as assets reprice and further liability-cost reductions become limited.
- Noninterest income rose, led by mortgage banking income, which increased to $4.8 million from $1.5 million. Mortgage originations for sale increased to $125 million from $41 million as lower rates supported refinancing.
- Tax refund transfer fees declined to $15.8 million from $17.1 million. Easy Advance originations were similar year over year at about $388 million, but estimated credit-loss expense rose to $15.2 million from $13.4 million.
- Warehouse lending balances increased 19% from year-end to $850.5 million, amid stronger mortgage refinancing activity. Traditional Banking loans declined $59.1 million; total loans nevertheless rose 2% to $4.52 billion.
- Deposits increased $285.4 million from year-end. The increase included roughly $140 million of seasonal tax-refund deposits expected to leave shortly after quarter-end, as well as other noninterest-bearing deposits management associated partly with a pandemic-related flight to safety.
Outlook, commentary, risks and unusual items
- COVID-19 and credit risk: Management’s CECL forecast assumed U.S. unemployment would exceed 8% over the coming year, with loss rates then reverting to historical levels. Management cautioned that estimates could change as pandemic conditions evolve. The filing identifies risks to borrowers, collateral values, loan performance, MSRs, investments and liquidity.
- Borrower relief and PPP: By April 30, 2020, the Bank had recorded deferral agreements on 1,291 loans totaling $573.8 million and forbearance on 23 loans totaling $6.7 million. Separately, it had recorded 2,256 PPP loans totaling $435.7 million and borrowed $175 million through the Federal Reserve’s PPPLF. PPP activity occurred after quarter-end.
- Liquidity uncertainty: Management raised $100 million of brokered deposits after quarter-end and pledged additional collateral to the FHLB and Federal Reserve discount window. It warned that the duration of pandemic-related deposit inflows is uncertain and that a disruption to PPPLF availability could pressure liquidity supporting PPP loans.
- Interest-rate risk: Management warned that further margin declines and a possible negative-rate environment could adversely affect earnings. The filing’s March 31 simulation projected net interest income declines under all modeled rate scenarios, from down 100 to up 400 basis points.
- Other risks and contingencies: The filing cites potential loan losses in affected industries and warehouse lending, real-estate valuation pressure, remote-work cybersecurity exposure, reliance on third parties, and possible operational or regulatory restrictions. It reports ordinary-course legal proceedings but no known matter expected to cause a material adverse change.
- Accounting and shareholder items: The Company adopted CECL on January 1, 2020; the adoption increased the loan allowance by $6.7 million and reduced opening retained earnings by $4.3 million, with no adoption-entry impact on 2020 earnings. The Company declared quarterly dividends of $0.286 per Class A share and $0.260 per Class B share, and repurchased 85,437 Class A shares during the quarter.
- Guidance: The filing provides no formal earnings or revenue guidance. Management described substantial uncertainty around the pandemic’s effects.
Important facts for investors to verify
- How subsequent loan deferrals, forbearances and PPP activity affect credit quality, liquidity, fee income and capital.
- Whether CECL assumptions—especially the unemployment forecast and expected credit losses—remain appropriate as economic data and borrower performance develop.
- The amount and timing of seasonal tax-refund deposits leaving the Bank, and the persistence of other pandemic-related deposit inflows.
- Trends in the Easy Advance portfolio: unpaid advances were 6.77% of Q1 2020 originations at March 31, versus 5.89% a year earlier; unpaid amounts were scheduled for charge-off by June 30.
- Whether margin compression, mortgage refinancing activity and warehouse-line usage develop as management anticipated, including risks from changing interest rates.
- The Bank’s ongoing liquidity position and availability of FHLB, unsecured and PPPLF funding, particularly if funding sources or customer deposits change.