Republic Bancorp, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Republic Bancorp is a Louisville-based bank holding company operating Traditional Banking, Mortgage Banking and Republic Processing Group (RPG). Figures below are consolidated unless noted; dollar amounts are in millions.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income | $113.2 | $160.7 |
| Provision for loan losses | $3.0 | $15.0 |
| Non-interest income | $48.0 | $165.1 |
| Non-interest expense | $117.7 | $126.7 |
| Net income | $25.4 | $119.3 |
| Diluted EPS, Class A | $1.22 | $5.69 |
| Net interest margin | 3.48% | 4.82% |
| Return on average assets / equity | 0.75% / 4.65% | 3.35% / 22.51% |
| Efficiency ratio | 73% | 39% |
| Operating cash flow | $25.4 | $89.9 |
- Year-end assets were $3.37 billion, gross loans $2.59 billion, deposits $1.99 billion and stockholders’ equity $542.8 million. Cash and equivalents were $170.9 million.
- Year-end funding included $605 million in Federal Home Loan Bank advances, $165.6 million in repurchase agreements and other short-term borrowings, and a $41.2 million subordinated note. Total liabilities were $2.83 billion.
- Liquidity sources included $282 million of additional available FHLB borrowing capacity and $166 million of unsecured lines of credit. The loan-to-deposit ratio excluding brokered deposits was 139%. The Bank reported $391 million in 58 large deposit relationships, including $282 million among its 20 largest.
- Capital remained high: consolidated total risk-based capital was 26.71%, Tier 1 risk-based capital 25.67%, and Tier 1 leverage 16.81%. The Bank was categorized as well-capitalized; management expected to meet future Basel III requirements.
- Credit indicators improved in several areas: non-performing loans were $21.1 million (0.81% of loans), delinquent loans $16.2 million (0.63%), and net charge-offs were 0.14% of average loans. OREO declined to $17.1 million from $26.2 million. The allowance was $23.0 million, or 0.89% of loans.
Material changes versus 2012
- Net income fell $93.9 million. The comparison is heavily affected by $55.4 million of 2012 bargain-purchase gains from the FDIC-assisted Tennessee Commerce Bank and First Commercial Bank acquisitions, and by the wind-down of the tax-refund lending business.
- RPG shifted from $60.9 million of net income in 2012 to a $1.4 million loss in 2013. The Company discontinued Refund Anticipation Loans (RALs) in April 2012; that product generated $45.2 million of 2012 interest income. Net refund-transfer fees fell 82% to $13.9 million, following lost tax-preparer contracts and competitive pricing pressure.
- Traditional Banking net income was $23.9 million, down from $55.2 million, primarily reflecting the prior-year acquisition gains. Segment net interest income declined 2% to $112.6 million and margin fell 13 basis points to 3.51%. Gross loans declined 2%; deposits were nearly flat.
- Mortgage Banking income declined 14% to $7.3 million as rising long-term rates reduced mortgage demand. Higher rates also supported a $345,000 reversal of prior MSR impairment charges.
- Total company net interest income declined 30%, largely due to the absence of RAL income. Excluding the RAL business, traditional bank asset yields also compressed. The consolidated margin fell 134 basis points.
- Net cash provided by operating activities was $25.4 million; investing activities provided $40.4 million and financing activities used $32.7 million. Cash and equivalents increased $33.2 million during the year. 2012 cash flows included $921.2 million received in FDIC-assisted transactions.
Outlook, commentary and risks
- Management anticipated further declines in Traditional Banking net interest income and margin in 2014, citing ongoing asset repricing and limited ability to reduce already-low funding costs. The filing does not provide a numerical earnings or revenue forecast.
- Management projected approximately $1.6 million of 2014 accretion from acquired-loan discounts. A $25 million BOLI purchase was expected to generate about $750,000 of tax-exempt income in 2014; a further purchase was under consideration.
- New two-year agreements with Jackson Hewitt and Liberty were expected to add RPG annual net revenue, respectively, about 12% above 2013 beginning in 2014 and an average of about 16% above 2013 during the contract term beginning with the 2015 tax season. These are management estimates, not guaranteed outcomes.
- Interest-rate and mortgage-market exposure is significant. Management said rising or stagnant long-term rates could reduce mortgage originations and warehouse lending; extended asset repricing durations and hedges intended to manage rate risk may weigh on current earnings. In 2013, the Bank exceeded certain internal economic-value-of-equity limits before taking additional hedging actions.
- Other principal risks include loan and collateral valuation, acquired-bank credit quality, deposit concentration and replacement funding costs, dependence on mortgage-market channels, and regulatory limits or compliance costs. RPG remains exposed to FDIC oversight requirements and the risk that its tax-refund products become less profitable or unavailable.
- The Bank held a $5.5 million illiquid private-label mortgage-backed security; management noted that further deterioration could lead to impairment charges. A putative class-action overdraft-fee lawsuit remained in discovery after some claims were dismissed; the filing did not state a clear estimate of potential loss.
- Unusual items included $3.0 million of RPG legal expenses in 2013, including $2.2 million related to Jackson Hewitt arbitration, and $1.1 million of additional fourth-quarter state-tax uncertainty accruals. Management expected no further legal expense for the resolved Jackson Hewitt and Liberty disputes or terminated H&R Block transaction.
- After year-end, three banking centers were closed in Florida, Minnesota and Kentucky, reducing the network from 45 to 42. The Company also filed an application to merge its two bank subsidiaries, subject to regulatory approval.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported effective internal controls as of year-end.
Most important facts for investors to verify
- How much of the 2013 earnings decline reflects nonrecurring 2012 acquisition gains and discontinued RAL activity, versus continuing pressure on core banking margins and earnings?
- Whether the Jackson Hewitt and Liberty agreements deliver the projected revenue increases, and whether RPG can sustain profitability under its regulatory and competitive constraints.
- Whether deposit concentration, the 139% loan-to-deposit ratio excluding brokered deposits, and reliance on FHLB and other borrowing capacity remain manageable as funding needs change.
- Whether acquired-bank loans, OREO and the allowance remain adequately valued and reserved, particularly given acquired-bank non-performing assets of $11.7 million.
- Whether interest-rate hedging and the evolving loan mix contain rate risk without causing further material reductions in net interest income, and whether regulatory, tax and overdraft-litigation exposures change.