Republic Bancorp, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2018; the filing was signed March 15, 2019. Republic Bancorp is a Louisville-based financial holding company whose principal subsidiary is Republic Bank & Trust Company. Its five reportable segments are Traditional Banking, Warehouse Lending, Mortgage Banking, Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS). The Bank had 45 banking centers and one loan production office.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total assets, year-end | $5.24 billion | $5.09 billion | Up 3% |
| Total deposits, year-end | $3.46 billion | $3.43 billion | Up 1% |
| Gross loans, year-end | $4.15 billion | $4.01 billion | Up 3% |
| Net interest income | $226.1 million | $198.5 million | Up 14% |
| Noninterest income | $63.4 million | $58.4 million | Up 9% |
| Provision for loan and lease losses | $31.4 million | $27.7 million | Up 13% |
| Noninterest expense | $163.9 million | $150.8 million | Up 9% |
| Income before tax | $94.3 million | $78.4 million | Up 20% |
| Net income | $77.9 million | $45.6 million | Up 71% |
| Diluted EPS, Class A | $3.74 | $2.20 | Up 70% |
| Net interest margin | 4.62% | 4.32% | Up 30 basis points |
| Efficiency ratio | 57% | 59% | Improved 2 percentage points |
Total net revenue, defined as net interest income plus noninterest income, was $289.5 million, up from $256.9 million. Return on average assets was 1.52% (0.95% in 2017); return on average equity was 11.67% (7.26%). Core Bank net interest margin was 3.70%, up from 3.55%.
Operating cash flow was $119.2 million, compared with $77.8 million in 2017. Investing activities used $121.5 million and financing activities provided $54.4 million; cash and cash equivalents increased $52.1 million to $351.5 million.
At year-end, stockholders’ equity was $689.9 million. Total capital to risk-weighted assets was 16.80% at the Company and 14.52% at the Bank; Common Equity Tier 1 ratios were 14.92% and 13.53%, respectively. Regulators classified the Bank as well-capitalized.
Funding included $3.46 billion in deposits, $810 million in Federal Home Loan Bank advances, $183.0 million in repurchase agreements and other short-term borrowings, and a $41.2 million subordinated note. The Bank reported $254 million of available FHLB borrowing capacity, $125 million of unsecured credit lines, and $300 million of unencumbered securities. Its loan-to-deposit ratio excluding brokered deposits was 120%.
Material changes versus the prior year
- Net interest income growth reflected margin expansion and loan growth. Traditional Banking loans grew 5%; commercial and industrial lending rose $89 million and commercial real estate rose $42 million. Deposit costs increased: the cost of average deposits rose to 0.47% from 0.29%.
- Net income growth substantially exceeded pretax growth because the 2018 effective tax rate fell to 17.41% from 41.79%. The 2017 comparison included a $6.3 million charge to revalue deferred tax assets after the Tax Cuts and Jobs Act.
- 2018 included $3.4 million of additional federal tax benefits from cost-segregation and R&D studies and a tax-accounting-method change; approximately $3.2 million related to prior years.
- Credit costs rose, particularly in RPG: its provision was $27.8 million versus $23.9 million. TRS provision increased to $10.9 million from $6.5 million as EA originations and losses rose. EA originations were $430 million, with net losses equal to 2.50% of originations, versus 2.07% in 2017.
- Total net charge-offs increased to $29.5 million from $17.9 million; the ratio to average loans rose to 0.72% from 0.47%. Nonperforming loans were $16.1 million, or 0.39% of loans, compared with $15.1 million, or 0.38%.
- The RCS credit-card portfolio sale was agreed in 2018 and settled in January 2019. New installment-loan originations were suspended in the second quarter of 2018 while the Bank assessed changes in state law.
Outlook, commentary, risks and unusual items
The filing provides no formal company earnings or revenue guidance. Management said higher short-term rates had generally supported net interest income, but deposit competition, a flatter yield curve and liquidity needs could reduce margins. The Bank’s model projected net interest income changes over the next 12 months of minus 2.9% for a 100-basis-point rate decline, plus 0.9% for a 100-basis-point increase, and minus 1.7% for a 400-basis-point increase. Management cited an industry forecast for U.S. mortgage originations to decline 2% in 2019, which could pressure Warehouse Lending.
For the 2019 tax season, TRS increased the maximum EA advance and began charging a direct fee to customers; the stated APR for the customer’s portion of the fee is below 36%. EA credit risk remains sensitive to tax-refund delays, fraud controls, tax-return errors and changes in refund funding patterns. RPG products also carry heightened credit, compliance, third-party and reputational risks; RCS revenue is concentrated in its line-of-credit product and third-party relationship.
Other significant risks include interest-rate and liquidity exposure, large deposit relationships, warehouse-line fluctuations, commercial real estate and other credit losses, cyber incidents and service-provider disruptions, extensive banking regulation, and dependence on Fannie Mae and Freddie Mac for much of the mortgage secondary market. The Bank’s 20 largest non-sweep deposit relationships totaled $519 million, or 15% of deposits. Management said the Bank was in compliance with Board-approved liquidity policies at year-end but expected liquidity to remain near internal minimums.
The Company identified potential tax penalties and interest related to IRS scrutiny of certain captive-insurance arrangements. It reported no pending or threatened legal proceeding expected to cause a material adverse change. Goodwill of $16.3 million was assessed as not impaired. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective. The Company adopted lease accounting on January 1, 2019, recording $41 million of right-of-use assets and $42 million of lease liabilities, and expected CECL adoption in 2020 to increase the credit-loss allowance by an amount not yet determined.
Important facts for investors to verify
- How much of the 2018 earnings and EPS increase was recurring operating improvement versus lower taxes and the $3.4 million of tax benefits, including prior-year benefits.
- Whether rising deposit costs, the yield curve and liquidity funding needs constrain future net interest margin and earnings.
- RPG loss experience and underwriting: EA losses, the RCS line-of-credit allowance and delinquency trends, and the performance of healthcare receivables.
- Loan portfolio trends, especially commercial real estate and C&I growth, nonperforming loans, charge-offs, and adequacy of the $44.7 million allowance.
- Whether major depositors, wholesale funding, or warehouse-line usage create liquidity or earnings pressure; confirm the availability and terms of reported borrowing facilities.
- Results of the 2019 EA product changes, the completed RCS credit-card sale, and any further changes to RCS installment lending or applicable state laws.
- Potential effects of CECL, captive-insurance tax matters, and the new lease liabilities on future financial results and capital measures.