Republic Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. Republic is a Louisville-based financial holding company with Traditional Banking, Warehouse Lending, Mortgage Banking, Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS) segments.
Financial results and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $58.0 | $53.1 | $171.9 | $171.3 |
| Net interest margin | 4.05% | 3.61% | 3.95% | 3.86% |
| Noninterest income | $15.0 | $18.8 | $76.6 | $69.5 |
| Noninterest expense | $46.1 | $44.4 | $142.3 | $138.0 |
| Provision for credit losses | $1.6 | $1.3 | $14.5 | $12.2 |
| Net income | $19.5 | $20.0 | $71.3 | $70.0 |
| Diluted EPS, Class A | $0.99 | $0.99 | $3.58 | $3.39 |
- Q3 performance: Net income declined $0.5 million year over year, as higher net interest income was more than offset by lower Mortgage Banking income and higher expenses. Total net revenue was $73.1 million, compared with $72.0 million.
- Nine-month performance: Net income increased $1.3 million. Results included $18 million in nonrecurring Green Dot payments: a $5 million contract termination fee and a $13 million legal settlement. Mortgage Banking income fell $11.1 million, and PPP interest and fees declined $15.6 million; non-PPP net interest income increased $16.2 million.
- Balance sheet at September 30: Assets were $6.00 billion, down from $6.09 billion at year-end 2021. Gross loans were $4.29 billion, down 5%; net loans were $4.22 billion. Traditional Banking loans grew 7%, while Warehouse lines fell 48% to $442 million.
- Deposits and funding: Deposits totaled $4.80 billion, down 1% from December 31, 2021. Noninterest-bearing deposits were $2.01 billion and interest-bearing deposits $2.79 billion. Period-end repurchase agreements and other short-term borrowings were $209 million; FHLB advances were $20 million. The subordinated note shown at year-end 2021 was no longer outstanding.
- Liquidity: Cash and cash equivalents were $754 million. The filing reports $1.15 billion in liquid assets, plus $940 million of FHLB borrowing capacity and $125 million of unsecured credit lines. The loan-to-deposit ratio, excluding brokered deposits, was 96%.
- Cash flow, first nine months: Operating activities provided $135.1 million, investing activities provided $20.0 million, and financing activities used $157.7 million. Cash declined $2.6 million to $754.4 million.
- Credit and capital: The allowance for loan losses was $64.9 million, or 1.51% of loans. Nonperforming loans were $16.4 million, 0.38% of loans, versus $20.6 million and 0.46% at year-end. Total risk-based capital was 18.55% at the holding company and 17.92% at the Bank; regulators categorized the Bank as well capitalized.
Material changes and notable items
- Q3 net interest income rose 9% year over year, with company NIM up 44 basis points. Management attributed the improvement mainly to higher rates and balance-sheet positioning. Deposit interest expense increased, but remained low relative to interest income.
- Higher long-term rates sharply reduced mortgage originations and Warehouse utilization. Q3 mortgage loan-sale proceeds fell to $39 million from $182 million; Mortgage Banking income declined 78% to $1.2 million. Warehouse average outstanding balances fell to $474 million from $717 million, and line usage was 38% versus 51%.
- RCS generated higher fees and sales, but its higher-risk credit profile remains material: its allowance was 14.73% of RCS loans, and nine-month RCS provision expense rose to $8.8 million from $5.0 million. Company net charge-offs were 0.44% of average loans for the first nine months, versus 0.30% a year earlier.
- Available-for-sale securities had $46.0 million of gross unrealized losses at September 30, versus $3.4 million at December 31, 2021. Accumulated other comprehensive loss was $33.3 million, compared with $1.9 million of accumulated other comprehensive income at year-end. Management attributed the securities losses primarily to interest rates and illiquidity, and reported no allowance for credit losses on the AFS portfolio.
- Green Dot paid Republic $18 million in total during 2022 under the terminated TRS sale agreement and settlement; the lawsuit was dismissed. The payments are nonrecurring and materially affect year-to-date comparisons.
Outlook, commentary, and risks
- Management expected further Federal Reserve tightening could raise short- and long-term rates into 2023. It viewed higher rates as potentially beneficial to Traditional Banking near term, but warned that deposit retention and pricing, a flatter or inverted yield curve, and liquidity needs could erode the benefit. The filing’s model projected one-year net interest income changes of +3.9%, +7.7%, and +11.8% under parallel rate increases of 100, 200, and 300 basis points; decreases of 100 and 200 basis points modeled declines of 4.2% and 8.3%. These are scenario estimates, not guidance.
- Management expected rising mortgage rates to continue weighing on Mortgage Banking activity. Higher long-term rates may also reduce Warehouse client demand and line usage, potentially offsetting benefits from higher rates.
- TRS results are seasonal and management expected Q4 2022 results to compare unfavorably with Q4 2021, in part due to lost tax-provider volume and repayments under a provider loan-loss-guaranty arrangement. A new agreement signed October 19 makes TRS the exclusive refund-advance provider for a large Tax Provider through October 2025. Management expected 2023 refund-advance originations to increase by an additional $400 million to $600 million over 2022 originations of $311 million.
- On October 26, 2022, Republic agreed to acquire Cincinnati-based CBank for approximately $51 million in cash, to be funded from existing Bank resources. Closing remains subject to customary conditions, including regulatory and CBank shareholder approval. The agreement provides a $2.04 million termination fee in certain circumstances.
- Risks highlighted include inflation, recession and credit losses; changing interest rates and securities valuations; deposit outflows and funding costs; reliance on third-party providers and tax-season volumes; cybersecurity and operational risks; and risks to regulatory approval, integration, and expected benefits of the CBank acquisition. Management stated that no pending or threatened legal proceeding known to it was expected to result in a material adverse change.
Most important facts for investors to verify
- How much of nine-month earnings growth depends on the $18 million in nonrecurring Green Dot payments, and how TRS performs without them.
- Whether deposit balances and funding costs remain consistent with the assumptions behind management’s rising-rate benefit and liquidity outlook.
- Whether increased RCS charge-offs and delinquencies persist, and whether its elevated allowance is adequate for the higher-risk portfolio.
- Whether mortgage and Warehouse volumes stabilize as higher rates affect refinancing and client demand.
- Whether the CBank transaction receives approvals, closes on the stated terms, and delivers benefits without material integration or credit costs; also track the unrealized securities losses and their effect on equity.