Republic Bancorp, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Republic is a bank holding company headquartered in Louisville, Kentucky, with Traditional Banking, Mortgage Banking and Republic Processing Group (RPG) segments. The figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $27.6 | $28.8 | $54.9 | $57.9 |
| Provision for loan losses | $0.7 | $0.9 | $(0.01) credit | $0.3 |
| Non-interest income | $9.5 | $10.8 | $31.0 | $33.3 |
| Non-interest expense | $26.7 | $29.7 | $57.7 | $61.0 |
| Income before tax | $9.7 | $8.9 | $28.2 | $29.9 |
| Net income | $6.3 | $6.1 | $18.3 | $19.5 |
| Diluted EPS, Class A / Class B | $0.30 / $0.29 | $0.30 / $0.28 | $0.88 / $0.85 | $0.94 / $0.90 |
| Net interest margin | 3.35% | 3.56% | 3.29% | 3.56% |
Q2 net income rose 3% year over year; first-half net income fell 6%. Q2 net interest income declined 4%, while lower expenses and improved RPG results more than offset weaker Mortgage Banking income. First-half net interest income declined 5%.
Financial position, cash flow and liquidity
- At June 30, total assets were $3,465.3, loans net of allowance were $2,702.2, deposits were $2,005.0 and stockholders’ equity was $555.3. Total assets increased from $3,371.9 and equity from $542.8 at December 31, 2013.
- Cash and cash equivalents fell to $84.3 from $170.9. For the first six months, operating cash flow was $18.9, investing cash outflow was $179.0 and financing cash inflow was $73.5; cash declined $86.6 overall. Loan growth and investment activity were significant uses of cash.
- Borrowings at June 30 included $640.0 of FHLB advances, $197.4 of repurchase agreements and other short-term borrowings, and a $41.2 subordinated note. FHLB advances were up $35.0 from year-end; short-term borrowings were up $31.9.
- The Bank’s loan-to-deposit ratio, excluding brokered deposits, was 143%, versus 139% at year-end. Available additional FHLB borrowing capacity was $277, and unsecured lines at other institutions totaled $166. Management said liquidity was sufficient for routine lending and withdrawals, while noting reliance on large deposit relationships and potential higher costs if brokered deposits were needed.
- Regulatory capital ratios at June 30: Company total risk-based 24.87%, Tier 1 risk-based 23.93%, and Tier 1 leverage 16.83%; Bank ratios were 19.31%, 18.37%, and 12.91%, respectively. Management expected both to exceed Basel III well-capitalized requirements, including the conservation buffer, when effective.
Material changes and credit quality
- Gross loans grew $135.2, or 5%, to $2,725.0 from year-end. Warehouse lines rose $94.6 to $244.1. The Bank began correspondent mortgage lending in May and had acquired $11.8 of loans by quarter-end.
- Non-performing loans declined to $20.3 from $21.1; non-performing assets fell to $32.0 from $38.2, largely alongside lower other real estate owned ($11.6 versus $17.1). Non-performing loans were 0.75% of loans, versus 0.81% at year-end; delinquencies were 0.44% versus 0.63%.
- The allowance was $22.8, or 0.84% of loans, versus $23.0, or 0.89%, at year-end. First-half net charge-offs were $0.2. Impaired loans were $93.0, down from $108.0; troubled debt restructurings totaled $69.6, with 80% performing under modified terms.
- Mortgage Banking income fell to $0.8 in Q2 from $2.2 and to $1.3 for the first half from $5.5. Mortgage loan sale proceeds were $15 in Q2 versus $122 a year earlier, reflecting weaker refinance demand after higher long-term rates.
- RPG reported Q2 net income of $0.4 versus a $0.9 loss; first-half net income was $7.0 versus $4.3. Tax refund volume processed increased 47% in Q2 and 74% in the first half; first-half net refund-transfer revenue rose 18% to $16.2.
Outlook, risks and unusual items
- Management expects downward repricing of loans and investments to continue pressuring net interest income and margin. It cautioned that results depend on rates, asset and funding mix, loan demand, liquidity needs and management actions. Interest-rate sensitivity modeling showed net interest income excluding loan fees up 1.31% under a 100-basis-point increase, but down 3.27% under a 400-basis-point increase; model results depend on assumptions.
- Management estimated about $0.6 of remaining 2014 accretion from acquired-loan discounts. It said future workout recoveries could increase accretion. The Bank’s use of short-term FHLB borrowing to support correspondent-loan growth benefits its base-rate outlook but increases exposure in a rising-rate environment.
- RPG is seasonal and historically incurs losses in the second half while preparing for tax season. A major tax-service provider’s renewed three-year agreement is expected to yield about 18% less annual net refund-transfer revenue from that provider, absent offsetting volume. A new Liberty Tax agreement starting with the 2015 tax season is expected to increase RPG annual net revenue by an average of about 16% over its 2013 level for the two-year term; added overhead is expected to be minimal. Competition and partners taking on program-manager functions may further pressure RPG margins.
- In May, Republic Bank merged into Republic Bank & Trust Company; the filing says the merger did not materially affect consolidated statements. After quarter-end, the Company formed a wholly owned captive insurance subsidiary. The overdraft-fee class action was dismissed in April after settlement; accrued costs were paid in Q2 and were not material.
- Other items include a $25.0 first-half purchase of bank-owned life insurance, a $0.7 unrealized gain on Freddie Mac preferred stock recorded in other comprehensive income, and the absence of the $1.3 bargain-purchase gain recorded in first-half 2013. The filing identifies interest-rate, credit, liquidity, regulatory, litigation, competition and tax-processing risks.
Most important facts for investors to verify
- Whether net interest margin stabilizes as asset yields reprice and funding costs adjust.
- Whether warehouse and correspondent loan growth is profitable and remains within acceptable credit and interest-rate risk limits.
- Whether credit quality and allowance adequacy hold as loans grow, particularly in construction and land development, residential real estate, and restructured credits.
- Whether tax-refund volume and new contracts offset partner revenue-share pressure and the projected decline from a major provider.
- Whether liquidity remains adequate given the 143% loan-to-deposit ratio excluding brokered deposits, lower cash, and reliance on significant deposit relationships and borrowings.