REPUBLIC BANCORP INC annual report, FY2020

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Republic Bancorp, Inc. — FY2020 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. Louisville-based Republic operates through five segments: Traditional Banking, Warehouse Lending, Mortgage Banking, Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS). At year-end, it reported $6.17 billion of assets, $4.73 billion of deposits, $823.3 million of stockholders’ equity, and 42 banking centers.

Financial results and condition

  • Revenue and earnings: Net interest income was $232.3 million, down 2% from $236.1 million. Noninterest income rose 16% to $87.1 million; net revenue (net interest income plus noninterest income) was $319.4 million, up from $311.1 million. Net income fell 9% to $83.2 million from $91.7 million. Class A diluted EPS was $3.99 versus $4.39.
  • Margins and returns: Net interest margin declined to 4.10% from 4.46%; net interest spread was 3.87% versus 4.07%. Return on average assets was 1.38% versus 1.64%, and return on average equity was 10.37% versus 12.49%. The efficiency ratio was 58%, compared with 57%.
  • Credit costs and quality: Provision for expected credit losses was $31.3 million, versus $25.8 million. The allowance for credit losses on loans increased to $61.1 million, or 1.27% of loans, from $43.4 million, or 0.98%. Net charge-offs to average loans improved to 0.42% from 0.61%. Nonperforming loans were $23.6 million, or 0.49% of loans, compared with $23.5 million, or 0.53%; classified and special-mention loans increased to $122.2 million from $57.1 million.
  • Cash flow: Operating activities provided $68.4 million, down from $97.2 million. Investing activities used $415.0 million, and financing activities provided $446.9 million. Cash and cash equivalents increased by $100.3 million to $485.6 million. The filing’s cash-flow statement does not present a free-cash-flow measure.
  • Loans, deposits and liquidity: Gross loans rose 9% to $4.81 billion, including $392 million of PPP loans net of unaccreted fees. Deposits increased 25% to $4.73 billion, including substantial growth in noninterest-bearing and prepaid-card deposits. Cash and cash equivalents were $485.6 million; the Bank also reported $683 million of available FHLB borrowing capacity, $274 million of unencumbered debt securities, and $125 million of available unsecured lines. The Bank’s loan-to-deposit ratio, excluding brokered deposits, was 108%, versus 126%.
  • Debt and capital: FHLB advances declined to $235 million from $750 million; repurchase-agreement and other short-term borrowings were $211.0 million, and the subordinated note was $41.2 million. Total liabilities were $5.35 billion. The Bank was categorized as well-capitalized; Republic’s total risk-based capital ratio was 18.52%, CET1 ratio 16.61%, and Tier 1 leverage ratio 13.70%. The company elected to defer CECL’s regulatory-capital impact.

Material changes versus FY2019

  • Lower interest rates compressed Traditional Banking net interest margin to 3.42% from 3.76%; PPP fees partly offset weaker yields and loan balances. Company-wide interest expense fell to $19.9 million from $44.8 million.
  • Mortgage Banking income increased to $31.8 million from $9.5 million as secondary-market originations rose to $783 million from $356 million. Cash gain margin on loans sold rose to 3.8% from 2.3%.
  • Warehouse net income increased 77%; average outstanding balances grew to $813 million from $654 million and margin rose to 3.19% from 2.42%.
  • TRS net income decreased 4%; its provision rose to $13.2 million from $11.2 million, with management citing slower tax-refund repayment patterns during the pandemic. RCS net income increased 9%, while its provision fell to $1.2 million from $11.4 million as the company reduced marketing and balances for its line-of-credit product.
  • FY2019 included a $7.8 million pretax gain on a branch divestiture and a $900,000 provision credit related to divested loans. FY2020 included $2.1 million of penalties for early repayment of $60 million of FHLB advances.
  • Republic adopted CECL on January 1, 2020. Adoption increased the loan allowance by $6.7 million and reduced opening retained earnings by $4.3 million; these adoption entries did not affect FY2020 earnings.

Outlook, risks and unusual items

  • Management gave no specific company-wide earnings or revenue guidance. It cited an MBA forecast of a 24% decline in U.S. mortgage originations in 2021 and said lower volume could reduce mortgage and warehouse income. Management expects mortgage gain margins could normalize toward a historical 2.0%–3.0% range if refinance demand slows, versus 3.8% in 2020.
  • The Bank began participating in the new PPP round in Q1 2021 and reported approximately $100 million of additional PPP loans funded through February 19, 2021. It expected most 2020 PPP loans to be forgiven or repaid in less than one year, while noting that timing depends on forgiveness and repayment.
  • COVID-19 remains a major uncertainty. The Bank had accommodated approximately $808 million of Traditional Bank loans during 2020; $14 million remained under accommodation at year-end. Management cautioned that borrower performance after accommodations end is uncertain.
  • COVID-related risk exposures include hospitality and other affected industries, commercial real estate, elevated criticized loans, and potential delayed credit losses. Special Mention loans rose substantially, with an additional $20 million in CRE and C&I loans downgraded in January 2021.
  • Other material risks include interest-rate and yield-curve changes, mortgage prepayments and MSR valuation, Warehouse Lending concentration and volatility, credit losses in subprime RCS products and tax advances, third-party servicing and compliance, cybersecurity, regulation, and the LIBOR transition.
  • Quarterly cash dividends remain subject to Board discretion and regulatory restrictions. The Bank could declare approximately $183 million in dividends to the parent without prior approval at year-end. The Board increased the Class A share repurchase authorization to 1 million shares in January 2021.
  • The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. Management reported no pending or threatened legal proceeding expected to cause a material adverse change.

Key facts for investors to verify

  • Whether borrowers exiting COVID-19 accommodations resume payments and whether criticized, delinquent, and nonperforming loans rise.
  • How CECL assumptions and the $61.1 million loan allowance compare with realized losses, especially in CRE, hospitality, and consumer portfolios.
  • Whether the unusually strong mortgage originations and 3.8% gain margin persist, and the impact of lower mortgage volume on Mortgage Banking and Warehouse results.
  • Whether deposit growth—particularly pandemic-related balances and prepaid-card deposits—remains stable, and how funding needs and borrowing costs evolve.
  • Whether TRS tax-refund repayment rates and RCS loan performance, marketing, and regulatory conditions affect provisions and earnings.
  • How the company manages LIBOR-linked instruments through the transition and the effects of interest-rate changes on net interest income and MSR values.
  • Confirm the treatment of prior-year branch-sale benefits when comparing earnings, and the continuing effect of the $2.1 million FHLB prepayment penalty.