Republic Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. Republic is a Kentucky-based bank holding company with Traditional Banking, Warehouse Lending, Mortgage Banking and Republic Processing Group (RPG) businesses.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $39.4 million | $31.4 million | $114.4 million | $91.5 million |
| Noninterest income | $11.3 million | $7.8 million | $47.0 million | $40.3 million |
| Provision for loan losses | $2.5 million | $2.2 million | $9.5 million | $3.3 million |
| Noninterest expense | $33.5 million | $28.2 million | $97.9 million | $86.5 million |
| Net income | $9.8 million | $5.6 million | $35.9 million | $27.7 million |
| Diluted EPS, Class A / Class B | $0.47 / $0.43 | $0.27 / $0.25 | $1.73 / $1.57 | $1.34 / $1.22 |
| Net interest margin | 3.65% | 3.31% | 3.62% | 3.26% |
- Q3 net income rose 74% year over year; nine-month net income rose 29%. Nine-month comprehensive income was $36.8 million, including $0.9 million of other comprehensive income.
- Operating cash flow was $38.4 million for the first nine months, versus $35.3 million a year earlier. Cash and cash equivalents ended September at $302.2 million, up from $210.1 million at December 31, 2015.
- At September 30, total assets were $4.83 billion, loans $3.82 billion gross ($3.79 billion net), deposits $3.14 billion and stockholders’ equity $600.6 million. Since year-end 2015, loans rose 15%, deposits 26% and assets 14%.
- Borrowings included $862.5 million of FHLB advances, $152.5 million in repurchase agreements and other short-term borrowings, and a $41.2 million subordinated note. FHLB advances included $430 million overnight at 0.40%.
- Liquidity resources included $312 million of remaining FHLB capacity, $323 million of unencumbered securities and $170 million in unsecured credit lines at September 30. Those lines were reduced to $150 million in October. The loan-to-deposit ratio excluding brokered deposits was 139%.
- The Bank was categorized as well-capitalized. At September 30, Bank total risk-based capital was 13.98%, common equity Tier 1 was 13.20%, and Tier 1 leverage was 11.45%. Republic Bancorp’s corresponding ratios were 16.55%, 14.79% and 13.67%.
Material changes versus comparable periods
- Higher average loan balances and improved margins drove net interest income growth. The company-wide margin increase reflected loan growth and high-yield RPG consumer lending, including the 2016 Easy Advance product.
- Growth was partly acquisition-driven: Republic completed its $31.8 million cash acquisition of Cornerstone Bancorp on May 17, expanding its Tampa, Florida presence. Acquired loans were recorded at preliminary fair value; approximately $6.1 million of goodwill was recorded, and purchase accounting remained subject to revision.
- Warehouse loans increased to $661.2 million from $386.7 million at year-end; total commitments rose to $915 million. Mortgage Banking income benefited from a July bulk sale of $71 million of correspondent loans, generating a $1.1 million gain.
- Credit costs increased substantially year over year for the nine-month period, chiefly from RPG: provision was $9.5 million versus $3.3 million, and net charge-offs were $6.5 million versus $0.8 million. RPG accounted for $5.6 million of nine-month net charge-offs.
- Asset-quality indicators improved against year-end: nonperforming loans were $18.0 million, or 0.47% of loans, versus $21.9 million, or 0.66%; delinquent loans were 0.23% versus 0.35%. The allowance was $30.4 million, 0.80% of loans, versus $27.5 million, 0.83%.
- Noninterest expense increased, including higher salaries and benefits associated with 116 additional full-time-equivalent employees year over year (36 from Cornerstone and 80 supporting other initiatives). The quarter also included an $846,000 FHLB prepayment penalty for repaying $50 million of advances early.
Outlook, commentary and risks
- The filing provides no consolidated earnings or revenue guidance. Management said higher short-term rates could support near-term net interest income, but warned that funding costs or a flatter yield curve could offset the benefit. The Bank’s model projected net interest income increases of 2.10% to 3.61% under instantaneous rate increases of 100 to 400 basis points; model assumptions are uncertain.
- Management planned to offer Easy Advance again for the 2017 tax season, with multiple advance amounts and different provider pricing. In 2016, $123.2 million was originated, $5.2 million of interest income was recorded, and net charge-offs were $3.1 million (2.54% of originations); all advances had been collected or charged off by September 30. Management cautioned that larger advances and government tax-refund verification delays could raise losses or delay repayment.
- MemoryBank, a branchless banking platform, opened on October 25, 2016. Its initial EarnMore account offered a 1.0% APY plus a qualifying first-year deposit bonus of 0.5%; management had no definitive timing for national marketing and was evaluating potential loan offerings for 2017.
- Funding concentration is a risk: 20 large non-sweep deposit relationships represented approximately $405 million, or 13% of deposits. Management noted that replacing withdrawals or lost credit lines with brokered deposits could increase funding costs. It reported compliance with Board-approved liquidity policies at quarter-end.
- Other stated risks include economic and interest-rate changes, loan defaults, competition, acquisition integration, regulation, technology and cybersecurity. Management reported effective disclosure controls and no material change in internal control over financial reporting. It knew of no pending or threatened legal proceeding expected to cause a material adverse change.
Most important facts for investors to verify
- Whether RPG and Easy Advance growth can sustain earnings while containing credit losses, particularly under the planned 2017 product changes and refund delays.
- Whether loan and deposit growth, including Cornerstone integration, can be funded without increased reliance on higher-cost or concentrated funding sources.
- Whether elevated noninterest expenses and the 2016 acquisition costs translate into durable earnings growth; distinguish recurring performance from the bulk loan-sale gain and FHLB prepayment penalty.
- How asset quality and the allowance evolve as the loan book expands, especially in RPG, warehouse lending and commercial real estate.
- Final Cornerstone purchase accounting, capital ratios after growth, and liquidity availability following the October credit-line reduction.