Republic Bancorp, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet comparisons are to December 31, 2011. Amounts below are in millions unless stated otherwise. Republic is a bank holding company with Traditional Banking, Mortgage Banking and Republic Processing Group (RPG) operations.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $34.1 | $34.4 | $147.5 | $161.5 |
| Net interest income | $28.6 | $27.2 | $130.1 | $138.0 |
| Provision for loan losses | $2.1 | $(0.1) credit | $13.7 | $17.5 |
| Noninterest income | $34.8 | $10.5 | $155.7 | $113.2 |
| Noninterest expense | $29.8 | $26.4 | $98.4 | $97.8 |
| Net income | $20.7 | $7.9 | $112.7 | $87.9 |
| Diluted Class A EPS | $0.98 | $0.38 | $5.36 | $4.19 |
- Q3 total interest and noninterest income was $69.0 million versus $44.9 million; nine-month total was $303.3 million versus $274.7 million. The increase reflects acquisition-related bargain purchase gains, not solely recurring operations.
- Net interest margin was 3.54% in Q3 versus 3.60% a year earlier. For the first nine months, the reported company margin was 5.11% versus 5.60%; RPG tax-related interest income affects the consolidated comparison.
- At September 30, assets were $3.44 billion, net loans $2.62 billion, deposits $2.06 billion and stockholders’ equity $557.8 million. Total assets were little changed from year-end, while net loans increased $357 million and deposits increased $322 million.
- Cash and equivalents fell to $96.2 million from $363.0 million. Nine-month operating cash flow was $103.3 million versus $134.0 million; investing cash flow was positive $906.6 million, primarily reflecting $921.2 million of net cash received in FDIC-assisted transactions. Financing cash flow was negative $1.28 billion.
- Total liabilities were $2.88 billion. FHLB advances declined to $553.5 million from $934.6 million; short-term borrowings and repurchase agreements were $169.8 million, and the subordinated note was $41.2 million. The Bank reported $434 million of additional FHLB borrowing capacity, $196 million in unsecured bank lines, and a separate $20 million holding-company line.
- The Bank was categorized as well-capitalized. At September 30, Republic Bancorp reported total risk-based capital of 26.25% and Tier I leverage capital of 18.28%; Republic Bank & Trust reported 24.82% and 15.61%, respectively.
Material changes and notable items
- Q3 net income rose $12.8 million year over year, substantially aided by a $27.1 million pretax bargain purchase gain from the September acquisition of First Commercial Bank (FCB). The gain was recorded in Traditional Banking.
- Nine-month net income included $54.7 million in pretax bargain purchase gains from FCB and Tennessee Commerce Bank (TCB). The TCB gain was $27.6 million; FCB’s initial gain was $27.1 million.
- Republic acquired TCB in January and FCB in September through FDIC-assisted transactions, entering the Nashville and Minneapolis markets. At September 30, acquired loans had a carrying value of about $160 million and acquired deposits totaled $186 million. FCB purchase accounting remained preliminary; management warned that revisions could be significant.
- Traditional Banking’s Q3 net interest income rose 5% to $28.4 million, while its margin declined 7 basis points to 3.54%. The nine-month segment net interest income rose 7% to $84.4 million and margin increased 3 basis points to 3.51%.
- Mortgage Banking income rose 68% in Q3 and 81% for the first nine months, supported by increased secondary-market mortgage volume. RPG reported a Q3 net loss of $1.3 million; its nine-month net income was $63.0 million, down from $68.9 million.
- Loan quality indicators were mixed: nonperforming loans fell to $21.1 million from $23.3 million at year-end, and loans over 30 days past due declined to $17.9 million from $24.4 million. However, nonperforming assets increased to $46.2 million from $34.3 million, largely as other real estate owned rose to $25.1 million from $11.0 million. Troubled debt restructurings increased to $81.1 million from $67.0 million.
- The allowance for loan losses was $24.1 million, or 0.91% of total loans. Nine-month net charge-offs were $13.7 million, including $7.2 million net provision expense attributable to the discontinued refund-anticipation-loan portfolio.
Outlook, risks and contingencies
- Management expects continuing downward repricing of loans and securities to compress net interest income and margin. It also cautioned that additional longer-term FHLB advances used to manage interest-rate risk would reduce near-term earnings. The filing’s rate simulation showed traditional banking net interest income declining 2.19% under a 100-basis-point increase and 2.02% under a 200-basis-point increase from the modeled base case.
- RB&T discontinued Refund Anticipation Loans (RALs) after April 30, 2012 under its FDIC agreement. Management said the loss of RALs and competitive pressure could materially reduce future Tax Refund Solutions (TRS) profitability; it estimated 2013 TRS net income could be up to 90% below 2012, while noting that pricing and revenue-sharing arrangements remained under discussion.
- Liberty Tax Service and Jackson Hewitt terminated TRS contracts in Q3. Together, their offices represented approximately 59% of TRS gross revenue for the nine months ended September 30 in both 2012 and 2011. Republic disputes the terminations and is pursuing or evaluating contractual remedies; management expects a material adverse impact on results in 2013 and beyond.
- Management cited additional FDIC oversight of TRS as a risk to retaining tax-preparer relationships and continuing to offer refund-transfer products. RPG’s new prepaid-card business was being developed, while Republic Credit Solutions planned pilot unsecured consumer lending; management expected initial RCS losses and capped planned capital at risk at $5 million until the program may become profitable.
- The FCB acquisition gain may be revised as further appraisals and borrower information become available. The Bank also disclosed potential additional impairment of up to $5.8 million on its illiquid private-label mortgage-backed security if economic conditions deteriorate.
- A putative class action over overdraft-fee practices was stayed pending other courts’ decisions. Management could not estimate any possible loss or range of loss.
- Unfunded loan commitments, excluding mortgage-banking commitments, were $509 million; standby letters of credit were $18 million. The loan-to-deposit ratio excluding brokered deposits was 136%. Management also noted possible deposit outflows, including following expiration of unlimited FDIC coverage for certain noninterest-bearing accounts at year-end 2012.
Important facts for investors to verify
- How much of reported earnings is sustainable after excluding the $54.7 million of acquisition bargain purchase gains, and what final FCB purchase-accounting adjustments are recorded?
- Whether the Liberty and Jackson Hewitt contract disputes are resolved, and the resulting effect on TRS volume, pricing and 2013 earnings after RAL discontinuation.
- Whether net interest margin pressure, deposit repricing and funding needs develop as management anticipates, including any additional FHLB borrowings.
- Whether rising OREO, TDRs and classified or impaired loans lead to further provisions, charge-offs or valuation adjustments.
- Whether the bank sustains strong liquidity and capital ratios while funding loan growth, acquired-bank integration and any deposit runoff.