Republic Bancorp, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Republic Bancorp is a Louisville-based financial holding company with banking, mortgage, tax-refund, and consumer-credit businesses. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are to 2018 unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $55.5 million | $53.0 million | $181.7 million | $171.8 million |
| Provision for loan losses | $3.2 million | $4.1 million | $24.8 million | $26.3 million |
| Noninterest income | $12.8 million | $11.5 million | $55.4 million | $53.3 million |
| Noninterest expense | $42.4 million | $41.2 million | $131.3 million | $124.9 million |
| Net income | $18.4 million | $17.4 million | $65.9 million | $60.5 million |
| Diluted EPS, Class A | $0.88 | $0.83 | $3.15 | $2.90 |
| Net interest margin | 4.07% | 4.32% | 4.60% | 4.67% |
- Growth and balance sheet: Total assets were $6.10 billion at September 30, up from $5.24 billion at year-end 2018. Loans were $4.66 billion, up 12%; deposits were $3.88 billion, up 12%. Stockholders’ equity was $744.4 million.
- Cash flow: Nine-month operating cash flow was $59.9 million, versus $85.7 million in 2018. Investing activities used $764.0 million, mainly reflecting increased warehouse lending and other loan growth and purchases of securities. Financing activities provided $749.7 million, including $421.0 million of net deposit growth and $360.0 million net proceeds from FHLB advances. Cash and equivalents ended at $397.1 million.
- Funding and liquidity: FHLB advances totaled $1.17 billion, compared with $810 million at year-end. Available FHLB borrowing capacity fell to $16 million from $254 million; the Bank also reported $125 million in unsecured lines. The loan-to-deposit ratio excluding brokered deposits was 184%, versus 172% at year-end. Management said the Bank remained in compliance with its liquidity policies at quarter-end but had not always been within policy limits during the quarter.
- Capital: The Bank was categorized as well-capitalized. At September 30, the Company’s total risk-based capital ratio was 15.59%, common equity Tier 1 was 13.91%, and Tier 1 leverage was 13.40%.
Material changes versus prior periods
- Q3 net income rose 6%; nine-month net income rose 9%. Growth in net interest income and mortgage banking income contributed, while the nine-month comparison also reflects lower loan-loss provision expense.
- Net interest margin declined year over year in both periods. Interest expense rose faster than interest income: Q3 interest expense was $12.6 million versus $8.1 million, as interest-bearing deposit costs and borrowing costs increased.
- Mortgage banking income increased to $3.1 million in Q3 from $1.4 million. Mortgage originations for sale were $124 million versus $49 million, supported by lower mortgage rates and increased mortgage activity.
- Warehouse lending balances grew sharply: period-end lines were $974 million, up $505 million from year-end. Higher utilization supported balances, but pricing pressure compressed the segment’s margin.
- Nonperforming loans increased to $20.7 million from $16.1 million at year-end; the ratio rose to 0.44% from 0.39%. Classified and special-mention loans increased by $10.1 million to $53.8 million, primarily following commercial-loan downgrades.
Outlook, commentary, risks, and unusual items
- Management provided no specific earnings or financial guidance. It said a flat or inverted yield curve and falling short-term rates could pressure net interest income and margin; the dynamic model projected net interest income declines under rate decreases of 100–200 basis points.
- In July 2019, the Bank agreed to sell four Kentucky banking centers to Limestone Bank. At quarter-end, approximately $131 million of loans and $142 million of deposits were designated for transfer; the expected blended deposit premium was approximately $8.1 million, subject to final calculation. Closing was anticipated in Q4 2019, subject to customary conditions.
- The filing clarifies that the branch sale did not qualify for discontinued-operations presentation. The October 18 earnings release had presented the centers as discontinued operations; this 10-Q instead classifies related assets and liabilities as held for sale. The change did not affect reported net income or diluted EPS.
- Tax effects affected comparability: Q3 effective tax rate was 19%, versus 9% in 2018, when one-time tax benefits contributed to a lower rate. Kentucky tax-law changes and other tax benefits supported 2019’s nine-month effective rate of 18.5%.
- Republic’s tax-refund business is seasonal and typically operates at a loss in the second half while preparing for the next tax season. Easy Advance originations were $389 million in the first nine months, down from $430 million; the 2019 maximum advance increased to $6,250 from $3,500, with revised fee terms. Management cautioned that changes in tax-refund payment patterns could increase credit losses.
- The RCS business serves primarily subprime or near-prime borrowers and carries higher credit risk. The Bank discontinued its credit-card product and completed the portfolio sale in 2019. RCS’s allowance was 13.32% of its loans at quarter-end.
- The Company expects CECL adoption on January 1, 2020 to increase its allowance, but the amount was undetermined. Other risks include interest-rate and funding pressures, commercial credit deterioration, LIBOR’s planned discontinuance after 2021, and cyber and third-party service-provider risks.
- Management reported no pending or threatened legal proceeding known to it that could materially adversely affect the Company. Disclosure controls were assessed as effective; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the Limestone transaction closed on expected terms, including final loans, deposits, and deposit premium.
- Subsequent warehouse-line usage, available borrowing capacity, deposit mix and costs, and liquidity-policy compliance.
- Trends in net interest margin after the 2019 rate cuts and under further yield-curve changes.
- Performance of downgraded commercial relationships, nonperforming loans, and the allowance for credit losses, including CECL’s eventual impact.
- Easy Advance repayment, charge-off and recovery experience, and RCS delinquency and loss trends.
- Progress on transitioning LIBOR-linked loans, borrowings, and derivatives to an alternative reference rate.