Republic Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Republic Bancorp is a bank holding company operating Traditional Banking, Mortgage Banking and Republic Processing Group (RPG), including tax-refund processing. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.
Key financial results
| Metric | Q1 2013 | Q1 2012 or prior date |
|---|---|---|
| Net interest income | $29.1 million | $73.2 million |
| Noninterest income | $22.5 million | $106.8 million |
| Net income | $13.4 million | $82.5 million |
| Diluted EPS, Class A / Class B | $0.64 / $0.62 | $3.92 / $3.90 |
| Net interest margin | 3.55% consolidated; 3.60% Traditional Banking | 7.76% consolidated; 3.58% Traditional Banking |
| Net cash from operating activities | $17.9 million | $118.3 million |
| Cash and cash equivalents | $207.5 million | $137.7 million at Dec. 31, 2012 |
| Total assets | $3.40 billion | $3.39 billion at Dec. 31, 2012 |
| Total deposits | $2.07 billion | $1.98 billion at Dec. 31, 2012 |
| Gross loans / allowance for loan losses | $2.60 billion / $23.6 million | $2.65 billion / $23.7 million at Dec. 31, 2012 |
| FHLB advances; short-term borrowings; subordinated note | $572.6 million; $120.2 million; $41.2 million | $542.6 million; $250.9 million; $41.2 million at Dec. 31, 2012 |
| Stockholders’ equity | $542.7 million | $536.7 million at Dec. 31, 2012 |
The filing does not present a single consolidated revenue line. Net interest income plus noninterest income was $51.7 million, versus $180.0 million in Q1 2012. The consolidated comparison is substantially affected by the prior-year tax-refund loan business and failed-bank acquisition gains.
Changes and business drivers
- Net income declined 84% year over year. The largest drivers were the end of refund anticipation loans (RALs), effective April 30, 2012, and lower refund-transfer (RT) activity following termination of material Liberty Tax Service and Jackson Hewitt contracts in 2012. Q1 2012 included $45.0 million of RAL interest income, $27.9 million of Tennessee Commerce Bank bargain purchase gain, and $71.7 million of net refund-transfer fees. Q1 2013 included $12.0 million of net refund-transfer fees and a $1.3 million First Commercial Bank bargain purchase gain.
- Consolidated net interest income fell 60%, while Traditional Banking net interest income rose 4% to $29.0 million and its margin increased two basis points to 3.60%. Management attributed the consolidated margin decline mainly to the discontinued RAL product. It also cited loan and investment repricing as continuing sources of margin pressure.
- Mortgage Banking income increased to $3.3 million from $1.4 million. Customer rate-lock volume for secondary-market loans rose to $173 million from $97 million, supported by low rates and a no-closing-cost promotion.
- Gross loans decreased about $52 million from year-end, including a seasonal decline in warehouse lending balances ($173 million outstanding versus $217 million). Deposits increased $88.9 million; the filing notes that tax-refund-related balances and a large customer transfer into deposits contributed to growth.
- Nonperforming loans declined to $20.9 million from $21.7 million, and nonperforming assets to $39.6 million from $47.9 million. The allowance was $23.6 million, or 0.91% of loans. Impaired loans rose to $116.0 million from $105.7 million; troubled debt restructurings (TDRs) totaled $103.8 million, with 82% performing to modified terms.
Liquidity, capital and outlook
- Cash and cash equivalents were $207.5 million. The bank reported $470 million of additional FHLB borrowing capacity and $196 million of unsecured credit lines at the bank, plus a $20 million holding-company line. The loan-to-deposit ratio excluding brokered deposits was 134%. Approximately $48 million of cash related to short-term tax-refund funds was expected to leave in Q2.
- Management said the bank was well-capitalized. At March 31, Republic Bancorp, Inc. reported total risk-based capital of 26.23%, Tier 1 risk-based capital of 25.23%, and Tier 1 leverage capital of 16.44%; Republic Bank & Trust Co. reported 21.61%, 19.52%, and 12.43%, respectively.
- No quantified full-year earnings or revenue guidance is provided. Management expected fewer FDIC-assisted acquisition opportunities in 2013 and potentially less favorable deal pricing. It anticipated further downward repricing of loans and investments and said additional longer-term FHLB borrowings may be used to mitigate rising-rate exposure, at a cost to current earnings.
- The company began offering 15-year fixed-rate commercial real-estate loans in Q1; approximately $20 million had closed and a further $75 million was in its underwriting pipeline at quarter-end. The RPS prepaid-card and RCS online consumer-credit initiatives were being developed and were expected to be immaterial near term.
Risks, contingencies and unusual items
- RPG faces reduced RT volume and pricing pressure after ending RALs and losing Liberty and Jackson Hewitt, which together represented about 53% of 2012 RT volume. The FDIC-related ERO Plan imposes additional oversight and training requirements; management said RT revenue could remain reduced beyond 2013 if these disadvantages continue.
- Interest-rate risk is a significant market risk. The filing’s model estimated Traditional Banking net interest income, excluding loan fees, would increase 1.67%, 2.61% and 4.56% under parallel rate increases of 100, 200 and 300 basis points, respectively; management cautioned that actual results may differ materially from model estimates.
- Large depositor concentration is a liquidity exposure: 52 non-sweep relationships above $2 million totaled approximately $299 million, and the ten largest totaled approximately $154 million. Replacing withdrawn balances with brokered deposits could raise funding costs.
- Acquired-bank assets remain subject to valuation and credit risk. Q1 included a $1.3 million FCB bargain purchase gain adjustment and a negative $1.1 million adjustment to acquired FCB other real estate owned. Management considered the FCB measurement period closed but reserved the possibility of future adjustment if material acquisition-date information emerges.
- A putative class action alleges improper overdraft-fee assessment. The case was stayed pending appellate consideration of a standing issue; management could not estimate any potential loss or range of loss.
- The bank held a $5.7 million illiquid private-label mortgage-backed security valued using Level 3 assumptions. Management did not consider its securities portfolio other-than-temporarily impaired at quarter-end.
Most important facts for investors to verify
- How much of future earnings depends on RT processing after the RAL exit and termination of the Liberty and Jackson Hewitt contracts.
- Whether loan quality, impaired loans, TDR performance and acquired-bank assets continue to improve, and whether the current allowance remains adequate.
- The sustainability and composition of deposit growth, including tax-refund float, large relationships and brokered funding needs.
- The effect on earnings of further asset repricing and any additional longer-term FHLB borrowing.
- Whether FCB acquisition fair-value estimates or the overdraft-fee litigation result in further adjustments or losses.