Republic Bancorp, Inc. — Q1 2023 Form 10-Q
Business context and period. Republic Bancorp is a Louisville-based financial holding company with traditional banking, warehouse lending, mortgage banking, tax refund and consumer-credit operations. This unaudited report covers the three months ended March 31, 2023; income and cash-flow comparisons are with Q1 2022, while balance-sheet comparisons are with December 31, 2022. On March 15, 2023, the company acquired CBank and its subsidiary for approximately $51 million to expand in the Cincinnati market.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $92.6 million | $63.2 million in Q1 2022 |
| Net interest margin | 6.52% | 4.34% in Q1 2022 |
| Net income | $28.1 million | $28.4 million in Q1 2022 |
| Diluted EPS, Class A | $1.42 | $1.42 in Q1 2022 |
| Net interest income plus noninterest income | $115.3 million | $94.2 million in Q1 2022 |
| Net cash from operating activities | $70.7 million | $80.9 million in Q1 2022 |
| Cash and cash equivalents | $249.3 million | $313.7 million at December 31, 2022 |
| Total assets | $6.07 billion | $5.84 billion at December 31, 2022 |
| Total loans / allowance for credit losses on loans | $4.77 billion / $96.1 million | $4.52 billion / $70.4 million at December 31, 2022 |
| Total deposits | $4.80 billion | $4.54 billion at December 31, 2022 |
| Short-term repurchase borrowings / FHLB advances | $134.4 million / $108.0 million | $217.0 million / $95.0 million at December 31, 2022 |
The reported 6.52% net interest margin reflects the company’s mix of businesses, including high-yield tax refund advances; Core Banking’s margin was 3.98%, versus 2.92% in Q1 2022. Total stockholders’ equity was $882.2 million. Republic’s total risk-based capital ratio was 17.18% and its common equity tier 1 ratio was 16.00%; regulators categorized the Bank as well capitalized. Available liquid assets and borrowing capacity totaled approximately $1.78 billion at quarter-end.
Material changes versus prior periods
- Net interest income rose 47%, but net income decreased 1%. Interest expense increased to $7.7 million from $0.9 million as rates and funding costs rose.
- Provision for expected credit losses increased to $26.8 million from $9.2 million, principally reflecting higher tax refund advance volume and a $2.7 million initial provision for acquired CBank non-PCD loans. The allowance for loan losses rose to 2.01% of loans from 1.56% at year-end.
- Noninterest income fell to $22.7 million from $31.0 million. Q1 2022 included a $5.0 million pretax Green Dot contract termination fee; refund-transfer fees and mortgage banking income also declined.
- Noninterest expense increased 8% to $52.4 million, including $2.1 million of CBank merger expenses. Mortgage banking income fell 70% amid lower loan volume; warehouse lending income also weakened as line commitments and usage declined.
- Loans increased 6% from year-end, including growth from the CBank acquisition. Deposits increased 6% overall, but Core Bank legacy deposits declined $122 million, or 3%, excluding acquired deposits.
- Operating cash flow was positive, but investing and financing cash outflows contributed to a $64.4 million decrease in cash during the quarter. The investing outflow included $41.0 million of net cash paid in the acquisition.
Outlook, management commentary and risks
- Management expects linked-quarter Core Bank margin compression for the remainder of 2023, as higher deposit pricing and lower cash balances may outweigh benefits from rising short-term rates. It plans to market selected higher-rate deposits; management is uncertain whether that will reverse deposit outflows.
- Management expects elevated long-term rates to continue weighing on mortgage originations. Higher market rates may also reduce demand for warehouse credit. The filing provides no specific full-year earnings or revenue guidance.
- Tax refund advances originated were $737 million versus $311 million a year earlier, substantially reflecting a new large tax-preparation-provider contract. The Q1 2023 provision for those advances was $22.0 million, or 2.98% of originations. The loss estimate remains provisional at March 31; final charge-offs are determined in the second quarter and may differ materially.
- Credit risk includes RCS’s unsecured, generally higher-risk consumer lending. RCS delinquent loans were 10.50% of RCS loans, up from 8.53% at year-end. Company-wide delinquency rose to 0.76% from 0.34%, driven substantially by seasonal refund advances; nonperforming loans were 0.35% of loans, down from 0.36%.
- Uninsured deposits were $1.8 billion, or 38% of deposits. The filing warns that deposit withdrawals, competition for funding, higher borrowing costs, or forced securities sales could pressure liquidity, earnings and the securities portfolio. FDIC assessments may also rise.
- Interest-rate, recession, inflation, credit-loss, acquisition-integration, litigation, regulatory, tax-season volume, third-party-provider and cybersecurity risks are among the factors identified by management. AFS securities had $39.2 million of gross unrealized losses at quarter-end; management attributed these principally to rates and liquidity, not credit quality, and stated it did not expect to have to sell before recovery.
- Disclosure controls were concluded to be ineffective at quarter-end because of previously identified material weaknesses in internal control over financial reporting. Remediation has begun, but management could not determine when it would be complete or assure it would succeed.
- CBank purchase accounting remains preliminary and may be revised during the measurement period. The acquisition added approximately $25.3 million of preliminary goodwill.
Important facts for investors to verify
- Whether Core Bank deposit outflows stabilize, the cost of new deposits, and the resulting margin and liquidity effects.
- Final tax refund advance repayment and charge-off performance, especially for the new provider’s volume and the Q1 allowance estimate.
- RCS delinquency, charge-offs and reserve adequacy, alongside changes in overall loan quality and commercial real estate exposure.
- Progress and effectiveness of internal-control remediation, and any updated disclosures about the material weaknesses.
- Final CBank fair-value adjustments, integration costs and contribution to earnings; also monitor acquisition-related goodwill.
- Whether uninsured-deposit levels, available borrowing capacity and unrealized securities losses change materially.