Republic Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Republic Bancorp is a Louisville-based financial holding company with traditional banking, warehouse lending, mortgage banking, tax refund solutions and consumer credit businesses. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $51.2 | $50.3 | $113.8 | $118.2 |
| Provision for credit losses | $3.7 expense | $4.3 credit | $12.9 expense | $10.9 expense |
| Noninterest income | $30.6 | $21.6 | $61.6 | $50.7 |
| Noninterest expense | $47.7 | $45.7 | $96.2 | $93.6 |
| Net income | $23.9 | $23.9 | $51.8 | $50.0 |
| Diluted EPS, Class A | $1.20 | $1.16 | $2.59 | $2.41 |
| Net interest margin | 3.51% | 3.33% | 3.90% | 3.98% |
- Q2 net income was essentially flat year over year; six-month net income rose about 4%. Results included a $13.0 million Green Dot legal settlement in Q2 and a $5.0 million contract termination fee in Q1.
- Q2 net interest income increased 2%, while the six-month amount declined 4%. Six-month interest income fell as PPP income decreased by $10.2 million; higher core loan balances partly offset that decline. Q2 NIM improved year over year, but six-month NIM declined.
- At June 30, total assets were $6.11 billion, loans net of allowance were $4.30 billion, deposits were $4.83 billion, and stockholders’ equity was $842.2 million. Compared with December 31, 2021, gross loans declined 3%, deposits were nearly unchanged, and assets were broadly stable.
- Cash and cash equivalents were $795.1 million, up from $757.0 million at year-end. Six-month operating cash flow was $94.0 million versus $55.3 million in 2021; investing activities used $29.0 million, and financing activities used $26.9 million. Net cash increased $38.2 million.
- Borrowings included $303.3 million of repurchase agreements and other short-term borrowings and $20.0 million of FHLB advances. The company reported $1.04 billion of liquid assets and $1.03 billion of available borrowing capacity, or $2.06 billion combined. The loan-to-deposit ratio, excluding brokered deposits, was 97%.
- Regulatory capital ratios remained above “well-capitalized” thresholds: the company reported total risk-based capital of 18.07%, CET1 of 16.94%, and Tier 1 leverage of 13.69%.
Material changes and segment trends
- Core Traditional Banking loans grew 5% to $3.67 billion, including 8% growth in commercial real estate and 16% growth in commercial and industrial loans. Warehouse balances declined 30% to $596.7 million as mortgage refinancing and line usage weakened; average Q2 usage fell to 41% from 51%.
- Mortgage Banking income fell 58% in Q2 and 61% for the first six months, as rising long-term rates reduced secondary-market loan sales. Six-month sales proceeds were $187 million versus $380 million, and the sale gain rate declined to 2.23% from 3.26%.
- TRS Q2 results benefited from the $13.0 million settlement, while net refund-transfer fees fell $2.0 million year over year. For the six months, TRS also recorded the $5.0 million termination fee. Tax season timing and lost product volume to Green Dot affect period comparisons.
- RCS, which lends primarily to subprime or near-prime consumers, recorded higher credit costs: Q2 provision was $3.4 million versus $1.6 million, and six-month provision was $4.8 million versus $1.2 million. RCS’s allowance was 14.41% of its loans at quarter-end.
- Unrealized AFS securities losses drove a $23.5 million after-tax decline in accumulated other comprehensive income for the first six months; AOCI moved from $1.9 million of income at year-end to a $21.7 million loss. Management attributed most securities losses to rates and illiquidity, not credit quality, and stated it did not intend or expect to be required to sell affected securities before recovery.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected further Federal Reserve tightening and higher market rates during 2022. Its interest-rate model projected 12-month net interest income changes from the June 30 base of -1.8% for a 100-basis-point decline and +1.6%, +4.0%, +6.6% and +9.3% for increases of 100, 200, 300 and 400 basis points, respectively. These are model scenarios, not guidance.
- Management said higher rates could benefit Traditional Banking near term, but deposit repricing or retention pressures and a flatter or inverted yield curve could reduce that benefit. Higher long-term rates may further weaken mortgage and warehouse demand; management expected mortgage income to face continued pressure and warehouse line floors’ negative impact could ease if rates rise as anticipated.
- Management expected TRS comparisons for the remainder of 2022 to be less favorable than 2021, particularly for refund-transfer revenue and recoveries of charged-off advances. Lost volume to Green Dot may persist if the business is not won back. EAs are seasonal and unsecured to taxpayers, and losses depend on tax-refund payment patterns; the 2022 season’s EA loss rate was 2.85% of originations versus 4.09% in 2021.
- Key risks include inflation, recession and borrower defaults, interest-rate and market volatility, COVID-related effects, competition, cyber and third-party service-provider risks, regulatory changes, and the LIBOR transition. At June 30, approximately $773 million of legacy assets and $232 million of derivative notional referenced LIBOR.
- Off-balance-sheet commitments totaled $2.07 billion, including $865.8 million of unused warehouse lines and $828.6 million of other unused loan commitments. These may create funding and liquidity needs, although some commitments may expire unused. The filing reported no pending or threatened legal proceeding expected by management to cause a material adverse change; the Green Dot lawsuit was settled and dismissed.
Most important facts for investors to verify
- How much of reported 2022 earnings growth depends on the one-time $18.0 million in Green Dot payments, and what are underlying recurring TRS results?
- Whether declining mortgage and warehouse activity, including lower warehouse usage, persists as rates rise.
- RCS credit performance, charge-offs and reserve adequacy, given its higher-risk borrowers and rising provision.
- Deposit retention and funding costs, and the company’s ability to maintain liquidity if large deposit relationships leave.
- Whether unrealized securities losses, interest-rate sensitivity and LIBOR contract transitions create further balance-sheet or earnings effects.
- Whether credit quality remains sound: nonperforming loans were $16.2 million (0.37% of loans), while classified and special-mention loans totaled $99.9 million at June 30, 2022.