Republic Bancorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Republic Bancorp is a Kentucky-based bank holding company operating traditional banking, warehouse lending, mortgage banking and Republic Processing Group (RPG). Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $31.1 | $27.6 | $60.1 | $54.9 |
| Provision for loan losses | $0.9 | $0.7 | $1.1 | ($0.01) credit |
| Noninterest income | $9.5 | $9.1 | $32.5 | $29.8 |
| Noninterest expense | $27.2 | $26.3 | $58.2 | $56.5 |
| Net income | $8.3 | $6.3 | $22.1 | $18.3 |
| Diluted EPS, Class A / Class B | $0.40 / $0.36 | $0.30 / $0.29 | $1.07 / $0.97 | $0.88 / $0.85 |
| Net interest margin | 3.32% | 3.35% | 3.23% | 3.29% |
| Net cash from operating activities | — | $18.8 | $18.9 | |
| Net cash used in investing activities | — | ($295.2) | ($179.0) | |
| Net cash from financing activities | — | $296.2 | $73.5 |
Financial position and liquidity
- At June 30, total assets were $4.07 billion, up from $3.75 billion at December 31, 2014. Gross loans rose 9% to $3.32 billion; deposits increased 11% to $2.28 billion.
- Cash and cash equivalents were $92.8 million, versus $72.9 million at year-end. Stockholders’ equity was $573.0 million, compared with $558.7 million.
- Total liabilities were $3.49 billion. FHLB advances were $916.5 million, up from $707.5 million; repurchase agreements and other short-term borrowings fell to $229.8 million from $356.1 million. Subordinated notes remained $41.2 million.
- The loan-to-deposit ratio, excluding brokered deposits, was 157%. The Bank reported $254 million of additional FHLB borrowing capacity and $166 million in unsecured lines. It also reported $387 million in overnight FHLB advances.
- Regulatory capital remained above well-capitalized requirements. At June 30, the Bank’s total risk-based capital ratio was 16.42%, common equity Tier 1 ratio 15.57%, and Tier 1 leverage ratio 11.81%. The filing says Basel III rules became applicable in 2015.
Material changes and asset quality
- Q2 net income grew 32% year over year; first-half net income rose 21%. Growth in net interest income was supported by loan expansion, particularly warehouse lending, partly offset by lower asset yields and margin compression.
- Warehouse loans increased to $488.9 million from $319.4 million at year-end; commitments reached $645 million and average utilization was 64% in Q2 versus 47% a year earlier. Management cited mortgage-market activity and low long-term rates, alongside competitive pricing pressure.
- Mortgage banking income was $1.2 million in Q2, up 51%; first-half income rose 99% to $2.6 million. Secondary-market loan sale proceeds were $54 million in Q2 and $94 million for the first half.
- RPG first-half net refund transfer fees increased to $17.2 million from $16.2 million, with refund-transfer volume up 39%. Q2 RPG earnings also benefited from a $450,000 reversal of accrued TRS incentive compensation.
- The allowance for loan and lease losses was $25.2 million, or 0.76% of loans. Nonperforming loans were $24.6 million (0.74% of loans), versus $23.7 million and 0.78% at year-end. Delinquencies fell to 0.34% from 0.52%; other real estate owned declined to $2.9 million from $11.2 million.
- Impaired loans were $76.4 million, down from $86.2 million. Troubled debt restructurings totaled $61.0 million; $15.9 million were on nonaccrual. Management considered the allowance adequate, while noting higher provision related in part to revised expected lives for retail TDRs.
Outlook, risks and unusual items
- Management expects downward repricing of earning assets to continue to pressure net interest income and margins; it provided no specific earnings or revenue guidance. It estimated approximately $1.0 million of accretion income on acquired-loan discounts for the remainder of 2015.
- TRS is seasonal, generating substantially all revenue in the first half and historically operating at a loss in the second half. Management said future TRS earnings depend heavily on volume growth because competition and contract terms are pressuring refund-transfer margins; it did not expect a near-term reversal in that margin trend.
- Approximately $24 million of deposit growth was short-term tax-refund float expected to leave the Bank in Q3. Large depositor concentration, reliance on FHLB and brokered funding, and a high loan-to-deposit ratio are liquidity considerations.
- The Bank reported $746.9 million of off-balance-sheet commitments, including unused warehouse and home-equity lines, other loan commitments, loan purchase commitments and standby letters of credit. These may create funding needs; warehouse balances can fluctuate with mortgage-market activity.
- The Company was considering whether to redeem its $40 million trust preferred securities at par beginning October 2015, extend their fixed-rate period using a swap, or allow them to float at a spread to three-month LIBOR. No final decision was disclosed.
- Interest-rate risk, credit quality, mortgage-market conditions, competition, regulatory changes, cyber risks and tax-refund product performance are among the disclosed risks. The company reported ordinary-course legal proceedings but no known matter expected to materially adversely affect its business or financial position.
- Other notable items: an $88,000 gain on the call of an available-for-sale security; continued OREO write-downs; and a new 2015 stock incentive plan approved by shareholders.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further margin compression, and how the mix of warehouse, correspondent and commercial lending evolves.
- Whether TRS volume growth offsets lower refund-transfer margins and the expected seasonal second-half loss.
- Credit trends and reserve adequacy, especially nonperforming residential and commercial real estate loans, TDR performance, and collateral valuations.
- Liquidity and funding composition, including the departure of tax-refund float, large depositor concentration, brokered deposits and overnight FHLB advances.
- The Company’s decision on the trust preferred securities and its impact on funding costs and capital.
- Actual results versus management’s interest-rate sensitivity model; the filing’s upward-rate scenarios are estimates and do not constitute earnings guidance.