Republic Bancorp, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2019, with balance-sheet comparisons to December 31, 2018 and operating comparisons to Q1 2018. Louisville-based Republic Bancorp operates through Traditional Banking, Warehouse Lending, Mortgage Banking, Tax Refund Solutions (TRS), and Republic Credit Solutions (RCS). TRS results are seasonal, with most activity in the first half of the year.
Key financial metrics
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior date |
|---|---|---|
| Total net revenue | $99.7 million | $95.2 million in Q1 2018; up 5% |
| Net interest income | $72.3 million | $67.7 million in Q1 2018; up 7% |
| Net interest margin | 5.66% | 5.50% in Q1 2018 |
| Provision for loan and lease losses | $17.2 million | $17.3 million in Q1 2018 |
| Noninterest income | $27.4 million | $27.5 million in Q1 2018 |
| Noninterest expense | $45.5 million | $43.0 million in Q1 2018; up 6% |
| Net income | $29.5 million | $27.5 million in Q1 2018; up 7% |
| Diluted EPS, Class A / Class B | $1.41 / $1.28 | $1.32 / $1.20 in Q1 2018 |
| Operating cash flow | $44.3 million | $52.0 million in Q1 2018 |
| Cash and cash equivalents | $345.5 million | $351.5 million at December 31, 2018 |
| Total assets | $5.37 billion | $5.24 billion at December 31, 2018 |
| Total loans, gross | $4.30 billion | $4.15 billion at December 31, 2018; up 4% |
| Total deposits | $3.77 billion | $3.46 billion at December 31, 2018; up 9% |
| Allowance for loan and lease losses | $58.0 million; 1.35% of loans | $44.7 million; 1.08% at December 31, 2018 |
| FHLB advances | $560 million | $810 million at December 31, 2018 |
| Stockholders’ equity | $717.1 million | $689.9 million at December 31, 2018 |
The filing does not report a single consolidated operating margin; the reported net interest margin is 5.66%. Q1 2019 total net revenue is net interest income plus noninterest income. Net income increased despite higher operating expenses, supported by stronger net interest income and lower provision than Q1 2018.
Material changes and drivers
- Net interest income rose $4.6 million year over year. Management attributed growth to higher loan fees in RPG, growth in average Core Bank loans, and management of funding costs. Total interest expense increased to $10.3 million from $6.2 million, led by higher deposit costs.
- Traditional Banking net income increased $1.7 million year over year; net interest income rose 8%. Traditional loans grew $47 million from year-end, while segment expenses increased 6%, including higher compensation and occupancy costs.
- Warehouse Lending net income decreased $623,000 year over year as average balances and line usage fell; average usage was 39%, versus 44% in Q1 2018.
- Mortgage Banking income increased 51% to $1.5 million, with mortgage originations of $41 million versus $29 million in Q1 2018.
- TRS net income increased $798,000. Net refund transfer fees rose 5% to $17.1 million, while Easy Advance originations declined to $389 million from $430 million.
- RCS net income decreased $123,000. Its credit-card portfolio sale settled in January 2019, generating a nonrecurring $478,000 gain; lower credit-card fees also reduced program income.
- Q1 cash flow from operations was $44.3 million; investing activities used $103.3 million, principally reflecting growth in warehouse lines and other loans. Financing activities provided $53.1 million, mainly from deposit growth, partly offset by net FHLB repayments.
Outlook, risks, contingencies, and unusual items
- Credit and Easy Advance exposure: Q1 provision included $13.4 million for TRS Easy Advances, equal to 3.44% of $389 million originated, versus 3.09% in Q1 2018. Management linked the higher unpaid balance share to the partial federal government shutdown. Unpaid advances are generally charged off by June 30; actual losses depend on tax-refund payment patterns and may differ from estimates.
- Total delinquent loans rose to 0.80% of loans from 0.38% at year-end, largely because $19.1 million of Easy Advances were delinquent at quarter-end. Management stated these would be charged off by June 30 if not repaid. Nonperforming loans were lower at $15.6 million, or 0.36% of loans, versus $16.1 million, or 0.39%, at year-end. RCS delinquent loans were 7.90% of RCS loans.
- RCS serves many subprime or near-prime borrowers and has higher credit risk than Traditional Banking. The company’s on-balance-sheet Board limit constrains growth in its line-of-credit product; outstanding exposure, including loans held for sale, was $29 million against a $40 million limit.
- Liquidity resources included $346 million cash, $502 million available FHLB capacity, $125 million in unsecured lines, and $267 million in unencumbered securities. The loan-to-deposit ratio excluding brokered deposits was 118%. Management expected FHLB borrowing to rise as seasonal TRS tax-refund deposits leave during Q2. Large deposit relationships and potentially higher replacement funding costs are risks; management noted liquidity levels may remain near internal minimums.
- Interest-rate sensitivity is material. Management cautioned that a flatter or inverted yield curve, deposit repricing, or inability to retain deposits at acceptable costs could pressure net interest income. The model projected a decline in net interest income under parallel rate shocks of down 100 or 200 basis points and up 200 or 300 basis points; up 100 basis points showed a modest increase.
- Republic adopted lease accounting in January 2019, recording approximately $40 million of right-of-use assets and $42 million of lease liabilities at adoption. The filing says adoption did not meaningfully affect net income or key performance measures.
- Kentucky legislation enacted in March 2019 transitions the Bank from franchise tax to corporate income tax beginning in 2021; the company recorded a $350,000 net deferred tax asset. A subsequent April law is expected to permit use of certain parent-company net operating losses; management expected to record an approximately $794,000 tax benefit in Q2 2019.
- TRS recorded $500,000 in contingent legal reserves in Q1. The filing describes ordinary-course legal proceedings and states management was unaware of a pending or threatened matter expected to cause a material adverse effect.
- Management gave no specific full-year earnings or revenue guidance. It cautioned that Q1 results are not necessarily indicative of full-year results. It expects TRS activity to be concentrated in the first half, with second-half preparation costs, and notes Warehouse balances are seasonal and difficult to project.
- Other disclosed risks include loan defaults, EA loss-estimate changes, competition, regulatory or tax changes, market and interest-rate fluctuations, cyber and information-security events, and third-party service-provider risks.
Most important facts for investors to verify
- Whether Easy Advance repayments and June charge-offs validate the $13.4 million Q1 provision, especially given the shutdown-related delinquency explanation and revised loan terms.
- Whether the 9% deposit increase is durable: a substantial portion of RPG deposits represents short-term tax refunds expected to exit in Q2, potentially increasing FHLB borrowing needs.
- Whether loan growth, funding costs, and the flatter yield curve sustain or reverse the 16-basis-point year-over-year increase in net interest margin.
- Credit trends in RCS and the commercial real estate and commercial-and-industrial portfolios, including allowance adequacy and delinquency levels.
- Realization and timing of the expected $794,000 tax benefit, and the future earnings effect of Kentucky’s tax-law transition.
- Whether the credit-card portfolio sale gain, legal reserve, and other unusual or seasonal items distort comparisons with future quarters.