Republic Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020 unless stated otherwise. Republic is a Louisville-based financial holding company with traditional banking, warehouse lending, mortgage banking, tax refund, and consumer credit businesses. Results were affected by the COVID-19 pandemic and related government stimulus.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $67.8 million | $72.7 million, Q1 2020 |
| Provision for expected credit losses | $15.3 million | $22.8 million, Q1 2020 |
| Noninterest income | $29.0 million | $30.6 million, Q1 2020 |
| Noninterest expense | $47.8 million | $47.0 million, Q1 2020 |
| Net income / diluted EPS (Class A) | $26.1 million / $1.25 | $26.7 million / $1.28, Q1 2020 |
| Net interest margin | 4.66% | 5.57%, Q1 2020 |
| Total assets / stockholders’ equity | $6.48 billion / $837.7 million | $6.17 billion / $823.3 million |
| Cash and cash equivalents | $984.9 million | $485.6 million |
| Total loans / allowance for credit losses | $4.67 billion / $75.3 million | $4.81 billion / $61.1 million |
| Total deposits | $5.27 billion | $4.73 billion |
Net revenue, defined by the company as net interest income plus noninterest income, was $96.8 million versus $103.3 million in Q1 2020. Operating cash flow was $15.3 million versus $28.2 million; investing activities provided $201.5 million and financing activities provided $282.5 million. Cash increased $499.3 million during the quarter.
At March 31, borrowings included $175.6 million of repurchase agreements and other short-term borrowings, $25.0 million of FHLB advances, and a $41.2 million subordinated note. FHLB advances fell from $235.0 million at year-end. Available liquidity included $871 million of FHLB borrowing capacity, $125 million of other unsecured lines, and $257 million of unencumbered securities. The loan-to-deposit ratio, excluding brokered deposits, was 99%, compared with 108% at year-end.
Regulatory capital remained above well-capitalized thresholds: the company reported total risk-based capital of 19.15%, CET1 of 17.07%, Tier 1 risk-based capital of 17.90%, and Tier 1 leverage of 13.73%. The Bank was categorized as well-capitalized.
Material changes versus comparable periods
- Net income declined 2% year over year, and diluted Class A EPS fell from $1.28 to $1.25. Core Banking net income rose 65% to $16.5 million, while Tax Refund Solutions net income fell $6.0 million.
- Net interest income decreased 7% and NIM contracted 91 basis points. Lower asset yields and a larger share of lower-yielding cash and securities weighed on results, partly offset by substantially lower funding costs and $5.6 million of PPP lender fees recognized by Traditional Banking.
- The credit-loss provision fell to $15.3 million from $22.8 million. The 2020 comparison included pandemic-related reserve building; Q1 2021 provision was concentrated in Tax Refund Solutions’ Easy Advance product.
- Mortgage banking income increased 50% to $7.2 million. Originations of secondary-market loans rose to $214 million from $125 million, and the gain as a percentage of loans sold rose to 3.95% from 2.80%.
- Net refund transfer fees fell 20% to $12.7 million. Easy Advance originations declined to $250 million from $388 million, and the provision on those advances rose to $16.0 million from $15.2 million.
- Loans declined 3% from year-end while deposits rose 11%; cash roughly doubled. Classified and Special Mention loans together increased 17% to $142.9 million, primarily reflecting hospitality and leisure downgrades to Special Mention.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It said mortgage gain margins had begun to normalize and could move toward a historical level near 2.50% during the rest of 2021.
- Management did not expect FHLB advances to be used materially in the near term given current liquidity, but noted uncertainty about how long stimulus-related and other elevated deposits will remain. Seasonal tax-refund deposits were expected to leave during the following quarter.
- COVID-19 remains a material uncertainty for economic conditions, borrower repayment, asset valuations, and credit losses. $33 million, or 1% of Traditional Banking loans, remained under COVID-related hardship accommodation at quarter-end.
- Easy Advance credit performance depends on tax-refund payment patterns. The 2021 provision equaled 6.4% of originations, versus 3.9% in 2020; unpaid advances are charged off by June 30. Management said its estimate reflected information available at filing, but final losses remained uncertain.
- Interest-rate sensitivity is mixed: the model projected net interest income changes of -1.1% for a 100-basis-point decline and -2.0%, -0.6%, +3.6%, and +8.4% for rate increases of 100, 200, 300, and 400 basis points, respectively. Management cautioned that model assumptions and actual rate movements may differ.
- Other risks include commercial real estate and borrower credit quality, higher-risk subprime and near-prime RCS lending, deposit concentration and funding costs, and reliance on third-party service providers. The filing reported no material change in previously disclosed risk factors and no known legal proceeding expected to materially affect the company.
Important facts for investors to verify
- Track Easy Advance collections, charge-offs by June 30, and whether the 6.4% provision adequately captures losses.
- Monitor COVID-19 accommodation outcomes and the growth in Special Mention loans, especially hospitality and leisure exposures.
- Assess the durability and cost of deposit growth, including stimulus-related, prepaid-card, brokered, and large non-sweep deposits.
- Check whether mortgage gains normalize toward management’s cited historical level and how lower rates or market activity affect originations and servicing.
- Review the continuing loan decline, allowance coverage, liquidity position, and capital ratios as PPP loans are forgiven and funding balances change.