Republic Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Republic Bancorp is a Louisville-based financial holding company operating traditional banking, warehouse lending, mortgage banking, tax refund solutions, and consumer credit businesses. Unless noted otherwise, amounts below are in U.S. dollars and millions.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income, continuing operations | $49.6 | $51.8 | $103.0 | $104.3 |
| Noninterest income, continuing operations | $15.8 | $15.7 | $32.0 | $30.4 |
| Income from continuing operations | $16.5 | $17.8 | $36.8 | $32.1 |
| Net income, including discontinued operations | $23.9 | $15.8 | $50.0 | $42.5 |
| Diluted Class A EPS, total | $1.16 | $0.76 | $2.41 | $2.04 |
| Net interest margin, continuing operations | 3.27% | 3.58% | 3.42% | 3.75% |
- Balance sheet at June 30: Total assets were $6.18 billion, net loans $4.49 billion, deposits $5.02 billion, and stockholders’ equity $845.1 million.
- Cash flow, first half: Operating activities provided $47.6 million; investing activities provided $234.9 million; financing activities used $21.1 million. Cash and cash equivalents rose $261.4 million to $747.0 million.
- Borrowings: Repurchase agreements and other short-term borrowings were $142.9 million; FHLB advances were $25.0 million, down from $235.0 million at year-end; subordinated notes were $41.2 million. Available FHLB capacity was $909 million, with another $125 million of unsecured lines reported.
- Liquidity and capital: The loan-to-deposit ratio, excluding brokered deposits, was 98% versus 108% at December 31, 2020. The company reported total risk-based capital of 18.93% and a 13.51% Tier 1 leverage ratio; the Bank was categorized as well-capitalized.
- Credit quality: Allowance for credit losses was $60.3 million, or 1.32% of loans. Nonperforming loans were 0.49% of loans. Classified and Special Mention loans together increased $20.0 million to $142.2 million since year-end.
Material changes versus comparable periods
- Q2 total net income rose 51%, but continuing-operations income fell $1.3 million and continuing net interest income declined 4%. The increase in total profit largely reflected a $9.4 million improvement in discontinued TRS results, including a favorable provision swing on Easy Advances.
- For the first half, net income increased 18% and continuing-operations income rose $4.8 million, primarily reflecting lower continuing-operations credit-loss provision, partly offset by lower net interest income.
- Net interest margin compressed year over year in both the quarter and first half. Management attributed pressure in Traditional Banking to growth in lower-yielding cash and cash equivalents; PPP fee recognition partly offset that pressure.
- Gross loans declined $235 million, or 5%, from year-end, mainly from a $141 million decrease in PPP loans and a $123 million decline in warehouse balances. Deposits rose $284 million, or 6%; management associated growth in part with government stimulus funds and PPP proceeds.
- Mortgage banking income fell 50% in Q2 as secondary-market originations decreased to $141 million from $219 million and gain-on-sale declined to 2.84% from 3.98%. For the first half, originations increased modestly, but gain-on-sale also declined year over year.
Outlook, commentary, risks and unusual items
- TRS sale: On May 13, 2021, the Bank agreed to sell substantially all Tax Refund Solutions assets and operations to Green Dot for approximately $165 million cash. The filing reports the business as discontinued operations. Although the parties had expected to close by August 22, the filing notes that Green Dot sought Federal Reserve approval or non-objection after the Federal Reserve requested information; Green Dot no longer expected to close by that date. The filing states this approval was not a contractual closing condition, while customary conditions remained.
- Mortgage outlook: Management said favorable mortgage-market conditions were normalizing and could continue to do so, potentially bringing gain-on-sale closer to or below approximately 2.50% for the remainder of 2021. This is commentary, not formal earnings guidance.
- Interest rates: Management viewed higher short-term and overall rates as generally favorable near term, but cautioned that deposit repricing, deposit retention, and a flatter or inverted yield curve could adversely affect net interest income and margin. The company’s model projected NII declines in scenarios of up to +200 basis points and increases at +300 and +400 basis points.
- Credit and pandemic risks: $25 million, or 1%, of the Traditional Bank portfolio remained under COVID-19 hardship accommodation. Management said the effect on future delinquencies and credit classifications was uncertain. The filing also cites uncertainty around COVID-19 effects, borrower defaults, rates, competition, regulation, cyber risks, and the proposed TRS transaction.
- Consumer-credit exposure: RCS loans generally yield more but carry higher credit risk; a significant share of customers are subprime or near-prime. Management expected pandemic-related conditions to continue weighing on some RCS loan-fee income.
- Other notable items: The company repurchased 255,060 Class A shares in Q2 for approximately $11.8 million and declared quarterly dividends of $0.308 per Class A share and $0.280 per Class B share. In July, the Board approved redemption of the trust preferred securities and repayment of the related subordinated note at the end of Q3 2021.
- The filing reported effective disclosure controls, no material change in internal control over financial reporting, and no known pending or threatened legal proceeding expected to cause a material adverse change.
Most important facts for investors to verify
- Whether and when the Green Dot TRS sale closes, the final cash proceeds, and transition-service obligations.
- Whether stimulus-related deposit growth persists and how runoff affects liquidity, funding costs, and the loan-to-deposit ratio.
- Whether continuing net interest margin stabilizes as PPP fees fade and rates, deposit pricing, and loan demand change.
- Whether the increase in Special Mention loans and remaining COVID-19 accommodations leads to higher delinquencies, provisions, or charge-offs.
- Whether mortgage gain-on-sale and RCS program fees develop in line with management’s commentary, and the effect of the planned subordinated-note repayment on capital and earnings.