Republic Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance sheet comparisons are to December 31, 2016 unless noted. Unaudited consolidated results include the Bank and its subsidiaries. Amounts below are in millions of dollars except per-share data and percentages.
Business context
Republic is a Kentucky-based bank with traditional banking, warehouse lending, mortgage banking, and Republic Processing Group (RPG) operations. RPG includes tax-refund products, consumer credit, and prepaid cards. Tax Refund Solutions is seasonal, with most business in the first half of the year. The Company’s 2016 Cornerstone acquisition expanded its Tampa-area presence; MemoryBank is its national digital banking platform.
Financial results and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $56.4 | $39.4 in Q1 2016; up 43% |
| Provision for loan losses | $12.4 | $5.2 in Q1 2016 |
| Noninterest income | $24.9 | $24.9 in Q1 2016; essentially unchanged |
| Noninterest expense | $38.9 | $32.5 in Q1 2016; up 20% |
| Income before tax | $30.1 | $26.6 in Q1 2016 |
| Net income | $20.0 | $17.7 in Q1 2016; up 13% |
| Diluted EPS | Class A $0.96; Class B $0.88 | Class A $0.85; Class B $0.77 in Q1 2016 |
| Net interest margin | 4.99% | 3.78% in Q1 2016 |
| Operating cash flow | $45.9 | $25.8 in Q1 2016 |
Net interest margin expansion primarily reflected Easy Advance (EA) fees, rather than solely core banking spread improvement. Interest income was $60.9 million versus $44.0 million, while interest expense declined to $4.4 million from $4.6 million. Dividends declared were $0.209 per Class A share and $0.190 per Class B share.
At March 31, assets were $4,664.8 million, down from $4,816.3 million at year-end. Loans were $3,710.4 million, down $100.4 million; deposits were $3,348.8 million, up $188.1 million. Stockholders’ equity increased to $620.7 million from $604.4 million.
Cash and cash equivalents were $206.2 million, down $83.1 million during the quarter. Investing activities provided $51.8 million and financing activities used $180.8 million. FHLB advances fell to $467.5 million from $802.5 million; short-term repurchase and other borrowings were $144.4 million, and the subordinated note was $41.2 million.
The allowance for loan and lease losses rose to $42.4 million from $32.9 million, or 1.14% of loans versus approximately 0.86% at year-end. Nonperforming loans were $17.0 million (0.46% of loans), compared with $16.1 million (0.42%) at year-end. Total delinquent loans were $16.2 million (0.44% of loans), up from $9.0 million (0.24%), largely because of seasonal EA balances.
Material changes and management commentary
- EA interest income rose to $14.2 million from $5.2 million; originations increased to $328.5 million from $123.2 million. RPG accounted for $12.1 million of the $12.4 million total loan-loss provision, including $8.6 million for EA and $3.8 million for Republic Credit Solutions (RCS).
- RPG net income increased to $11.5 million from $9.7 million despite lower refund-transfer revenue; growth in EA and RCS contributed. Traditional Banking net income declined 6% to $6.4 million as expenses increased. Warehouse Lending net income rose 74% to $2.1 million. Mortgage Banking income declined 8% to $1.2 million, with secondary-market originations of $33 million versus $37 million.
- Noninterest expense increased $6.4 million overall. Management cited staffing and other investment related to Cornerstone, MemoryBank, new locations, expanded contact-center hours, and technology and service initiatives. The Company reported 145 more full-time-equivalent employees than a year earlier, including 36 associated with Cornerstone.
- Loans declined primarily from seasonal reductions in warehouse balances and owner-occupied residential mortgages. Warehouse outstandings were $495 million against $983 million in commitments; management said usage for the remainder of 2017 was expected to be lower than comparable 2016 periods, citing projected mortgage rates.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided. Management said it expected FHLB borrowing to increase in the next quarter as short-term tax-refund-related cash leaves the Company. Further 2017 Federal Funds Target Rate increases were considered possible; management viewed near-term increases as potentially favorable, but noted funding-cost and yield-curve risks.
- EA losses depend on the accuracy of refund-funding assumptions. The Company estimates EA losses using prior-year tax-refund patterns; changed funding patterns could produce losses above estimates. EA provision was 2.62% of Q1 originations, and management expected most remaining unpaid advances to be charged off in Q2. EA balances are nonrecourse to taxpayers if refunds are insufficient.
- Liquidity resources included $683 million of FHLB borrowing capacity, $125 million of unsecured lines, and $342 million of unencumbered securities. The loan-to-deposit ratio excluding brokered deposits was 125%. Twenty largest non-sweep deposit relationships represented about 11% of deposits; management noted replacement funding could cost more. The Company was in compliance with Board-approved liquidity policies at quarter-end.
- The Bank was categorized as well-capitalized. At March 31, the Company’s total risk-based capital ratio was 17.09%, Common Equity Tier 1 ratio 15.04%, and Tier 1 leverage ratio 13.23%. Management stated the Company and Bank intended to maintain well-capitalized levels and the applicable capital conservation buffer.
- The filing identifies interest-rate, credit, economic, competitive, regulatory, cyber-security, and acquisition-integration risks. Management reported no known pending or threatened legal proceeding expected to materially adversely affect the Company. Disclosure controls were concluded effective, with no material quarterly change in internal control over financial reporting.
- The Company expected the new credit-loss standard (ASU 2016-13, effective in 2020) to result in a substantial but undetermined increase in its allowance. It was still evaluating other forthcoming accounting standards, including leases.
Most important facts for investors to verify
- EA repayment, charge-off, and loss experience after the tax-refund season, compared with the 2.62% estimated loss provision and prior-year assumptions.
- Whether tax-related deposits run off as expected and how the Company replaces them, including use and cost of FHLB, brokered, and other funding.
- Trends in RCS charge-offs and reserves, nonperforming loans, delinquencies, and the adequacy of the allowance as seasonal EA balances resolve.
- Whether strategic investments and expense growth translate into sustainable core revenue, particularly in MemoryBank, warehouse lending, and mortgage banking.
- Net interest income sensitivity to rate changes, deposit pricing, and yield-curve movements; the filing’s model projected NII increases of 3.1%, 2.8%, 2.0%, and 0.3% under instantaneous parallel rate increases of 100 to 400 basis points, respectively.