Republic Bancorp, Inc. — Q1 2016 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2016, with balance-sheet comparisons to December 31, 2015 and income and cash-flow comparisons to Q1 2015. Republic is a Kentucky-based bank holding company with Traditional Banking, Warehouse Lending, Mortgage Banking, and Republic Processing Group (RPG) businesses. RPG’s tax-refund business is seasonal, with most activity in the first half of the year.
Key financial results
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q1 2016 / Mar. 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $39.4 | $29.0 in Q1 2015 |
| Noninterest income | $24.9 | $23.0 in Q1 2015 |
| Net income | $17.7 | $13.8 in Q1 2015 |
| Diluted EPS, Class A / Class B | $0.85 / $0.77 | $0.66 / $0.64 in Q1 2015 |
| Net interest margin | 3.78% | 3.14% in Q1 2015 |
| Net cash from operating activities | $25.8 | $16.7 in Q1 2015 |
| Cash and cash equivalents | $198.2 | $210.1 at Dec. 31, 2015 |
| Total assets | $4,246.8 | $4,230.3 at Dec. 31, 2015 |
| Total loans, gross | $3,352.0 | $3,326.6 at Dec. 31, 2015 |
| Total deposits | $2,736.6 | $2,487.5 at Dec. 31, 2015 |
| Allowance for loan and lease losses | $31.5 | $27.5 at Dec. 31, 2015 |
| Total stockholders’ equity | $591.6 | $576.5 at Dec. 31, 2015 |
Net interest income plus noninterest income totaled $64.4 million, compared with $52.0 million in Q1 2015. The provision for loan and lease losses was $5.2 million, versus $0.2 million; noninterest expense was $32.5 million, versus $31.1 million. Income before taxes was $26.6 million, versus $20.7 million.
Cash flows included $25.8 million provided by operating activities, $25.3 million used in investing activities, and $12.4 million used in financing activities. Cash declined $11.9 million during the quarter. Financing included $249.2 million of net deposit inflows, $182.0 million of FHLB advance repayments, and $75.5 million of net repayments of repurchase agreements and other short-term borrowings.
Material changes and notable items
- Earnings growth was driven substantially by new Easy Advances (EA). RPG originated $123.2 million of EAs and recorded $5.2 million of related interest income. The product generated a $3.6 million provision; $4.3 million remained outstanding at quarter-end, with a $3.2 million allowance. EA income was a major contributor to the increase in company net interest margin.
- RPG tax-refund fees increased. Net refund transfer fees were $17.1 million, up from $15.3 million. RPG net income rose to $9.7 million from $7.2 million; Core Banking net income was $8.1 million, versus $6.6 million.
- Credit-quality measures improved overall, but loss provisioning rose. Nonperforming loans declined to $19.9 million from $21.9 million at year-end; nonperforming loans to total loans fell to 0.59% from 0.66%. Delinquencies were 0.26% of loans, versus 0.35%. The allowance increased to 0.94% of loans from 0.83%, primarily reflecting EA and RPG loan growth. Total net charge-offs were $1.2 million, compared with net recoveries of $36,000 in Q1 2015.
- Funding mix shifted. Deposits increased $249.2 million, including $166.1 million of noninterest-bearing deposits. Approximately $102 million of that noninterest-bearing increase was seasonal RPG tax-refund float, which the company expected to leave by June 30, 2016. FHLB advances fell $182.0 million to $517.5 million, and short-term borrowings fell $75.5 million to $319.9 million.
- Acquisition pending. Republic expected to acquire Cornerstone Bancorp for approximately $32.3 million in cash, funded from existing resources, with closing anticipated in Q2 2016. Cornerstone reported approximately $250 million in assets, $190 million in loans, and $210 million in deposits at March 31.
- Capital remained above regulatory well-capitalized thresholds. At March 31, the Bank’s total risk-based capital ratio was 16.43%, common equity Tier 1 ratio 15.43%, and Tier 1 leverage ratio 10.88%. The company reported no share repurchases during the quarter.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Management noted that higher short-term rates could help near-term net interest income, but the effect depends on funding costs, the yield curve, customer demand, liquidity needs, and other factors. The bank’s modeled net interest income rose 3.7% under an instantaneous 100-basis-point increase and 0.8% under a 400-basis-point increase; the model excluded loan fees and RPG.
- Liquidity is a significant disclosed concern. The loan-to-deposit ratio excluding brokered deposits was 137%. The bank disclosed that it was not meeting a newly adopted internal policy limit for unencumbered liquid assets to total assets. Management planned to reduce reliance on repurchase agreements and potentially increase securities and FHLB funding; it also cited a longer-term plan to grow deposits through a digital platform and branches. Increased borrowing could weigh on earnings. The bank had $734 million of additional FHLB borrowing capacity and $170 million of unsecured credit lines.
- Funding concentration warrants attention: 20 large non-sweep deposit relationships totaled about $339 million, or 66% of the $516 million held in 72 such relationships. Management said replacement funding could cost more.
- Other stated risks include interest-rate and market changes, competition, credit losses, acquisition integration and approvals, regulatory changes, cyber and information-security events, and uncertainty in tax-refund volumes and EA charge-offs. EA advances had no recourse to taxpayers if refunds were insufficient; unpaid balances are generally charged off within 81 days after tax return submission.
- The filing reports ordinary-course legal proceedings, but management knew of no pending or threatened matter expected to cause a material adverse change. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether EA repayments and charge-offs matched assumptions about IRS funding patterns, and whether the $3.2 million allowance covered remaining losses.
- How much seasonal RPG tax-refund cash left after quarter-end and whether liquidity-policy compliance was restored without excessive reliance on wholesale funding.
- Whether the Cornerstone acquisition closed on schedule, its final purchase accounting and funding impact, and integration costs.
- Whether loan growth, allowance coverage, delinquencies, nonperforming loans, and commercial and residential credit concentrations continued to develop as reported.
- Whether reported earnings and margin growth persist when seasonal EA income and other tax-season effects normalize.