Republic Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Republic is a Louisville-based financial holding company operating traditional banking, warehouse lending, mortgage banking, tax refund and consumer credit businesses. Figures below are in U.S. dollars; financial statement amounts are converted to millions unless noted.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $52.3m | $52.0m | $155.3m | $156.3m |
| Provision for credit losses, continuing operations | $3.6m expense | $5.8m expense | $4.4m expense | $15.6m expense |
| Noninterest income, continuing operations | $18.0m | $19.4m | $50.0m | $49.8m |
| Noninterest expense, continuing operations | $42.6m | $43.8m | $130.0m | $129.1m |
| Income from continuing operations | $18.4m | $17.3m | $55.2m | $49.3m |
| Net income, including discontinued operations | $20.0m | $20.4m | $70.0m | $62.9m |
| Diluted EPS, Class A | $0.99 | $0.98 | $3.39 | $3.02 |
- Continuing-operations net interest margin was 3.55% in Q3 (3.57% prior year) and 3.46% year to date (3.69% prior year). Q3 continuing-operations net revenue, defined as net interest income plus noninterest income, was $70.3m versus $71.4m; nine-month net revenue was $205.3m versus $206.1m.
- Q3 total net income declined 2%, while diluted Class A EPS rose 1%; management attributed the per-share improvement partly to repurchases. Nine-month total net income increased 11%. Lower credit-loss provision supported continuing-operations earnings, while weaker mortgage banking income was an offset.
- Mortgage banking income fell to $5.3m from $10.8m in Q3 and to $16.7m from $24.0m year to date. Q3 originations of secondary-market loans were $170m versus $204m; the gain as a percentage of loans sold declined to 2.94% from 4.49%.
- RCS, which serves a significant subprime and near-prime customer base, recorded a $3.8m Q3 credit-loss provision, versus a $12,000 credit. Its allowance was 9.99% of RCS loans at quarter-end, up from 7.94% at year-end 2020.
- At September 30, total assets were $6.19bn; loans, net, were $4.28bn; deposits were $4.95bn; and stockholders’ equity was $838.7m. Cash and cash equivalents rose to $1.01bn from $485.6m at December 2020. Management said it had held excess cash rather than materially increasing securities investments, citing inflation and rate risk, and began reviewing deployment options after a subsequent steepening of the yield curve.
- Nine-month operating cash flow was $88.1m, versus $62.0m. Investing activities provided $476.3m, chiefly reflecting reductions in loans and warehouse balances; financing activities used $38.8m. Cash increased $525.7m during the period.
- Liquidity included a 95% loan-to-deposit ratio excluding brokered deposits, $898m of FHLB borrowing capacity, $125m of unsecured credit lines, and $187m of unencumbered debt securities. The 20 largest non-sweep deposit relationships totaled $609m, or 12% of deposits.
- Period-end funding included $260.6m of repurchase agreements and other short-term borrowings and $25m of FHLB advances. The approximately $40m subordinated trust preferred securities were redeemed at par on September 30; the filing says capital remained well above “well capitalized” levels. Parent-company total risk-based capital was 18.25% and Tier 1 leverage was 13.13%.
Material changes and significant events
- Total loans declined $445.6m, or 9%, from December 2020, including a $266.0m decrease in PPP loans and a $212.1m decrease in warehouse lines. Deposits increased $214.8m, or 5%; core bank deposits increased $207.9m.
- Nonperforming loans were $20.9m, or 0.48% of loans, compared with $23.6m, or 0.49%, at year-end. Total delinquent loans were 0.40% of loans versus 0.42%. Special Mention loans increased to $108.1m from $90.1m, largely due to hospitality and leisure commercial loans; classified loans fell to $26.2m from $32.1m.
- The Company agreed in May 2021 to sell substantially all Tax Refund Solutions (TRS) assets and operations to Green Dot. After quarter-end, Green Dot announced on October 4 it had not obtained Federal Reserve approval or non-objection and would not close. The Bank sued Green Dot on October 5 for breach of contract and seeks, among other relief, specific performance. Management said the outcome and financial impact could not be predicted. TRS results are presented as discontinued operations in this filing.
- Republic repurchased 387,032 Class A shares during Q3 at an average $48.16 per share. About 251,000 shares remained authorized for repurchase at September 30.
Outlook, risks and contingencies
- No quantified company-wide earnings or revenue guidance is provided. Management expects lower contractual rate floors on warehouse lines, introduced amid competitive pressure, to weigh on warehouse margins. Management also said mortgage gain percentages had moved toward more normal levels and expected that trend to continue through the remainder of 2021.
- Management viewed higher short-term rates as generally favorable to near-term net interest income, but noted deposit pricing and retention, yield-curve flattening or inversion, loan demand and liquidity needs could alter the outcome. Its September interest-rate simulation projected net interest income changes of -1.8% at +100 basis points, -1.7% at +200, +2.8% at +300 and +7.3% at +400 over the following 12 months.
- COVID-19 effects remain uncertain. Only $3m, or less than 1% of the Traditional Bank portfolio, remained under hardship accommodations, but the Company warned that borrowers’ ability to resume payments could affect credit quality. It also cited possible adverse effects on asset valuations, operations and results.
- Other notable risks include higher-credit-risk RCS lending and third-party servicing dependencies; interest-rate and market risks; the Green Dot transaction litigation and regulatory approval; cybersecurity and information-security incidents; and transition of approximately $1.3bn in LIBOR-referenced assets and more than $250m in LIBOR-referenced derivative notional.
- Management’s credit-loss estimates depend on historical losses, qualitative adjustments and forecasts, including unemployment and commercial real estate values; actual losses may differ. The filing reports commitments of $1.81bn, including $658m of unused warehouse lines and $788m of other unused loan commitments.
Important facts for investors to verify
- Current status and potential financial consequences of the Green Dot dispute, including whether TRS remains classified as discontinued operations in subsequent reporting.
- Whether the large cash balance can be redeployed at attractive yields, and the resulting effect on net interest margin as rates and the yield curve change.
- Developments in RCS delinquencies, charge-offs and allowance adequacy, given its higher-risk borrowers and rising provision.
- Mortgage banking volumes and sale gains, and warehouse utilization and margins following lower rate floors.
- Deposit stability and concentration, liquidity availability, and capital ratios after redemption of the trust preferred securities.
- Performance of COVID-accommodated and Special Mention loans, and progress in replacing LIBOR contract references.