Republic Bancorp, Inc. — 2011 Form 10-K
Business context and reporting period. This audited annual filing covers the year ended December 31, 2011. Republic Bancorp is a Louisville-based bank holding company with Traditional Banking, Mortgage Banking and Tax Refund Solutions (TRS) segments. TRS is highly seasonal, with most activity in the first quarter.
Financial results and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $164.9 million | $156.8 million |
| Non-interest income | $119.6 million | $87.7 million |
| Provision for loan losses | $18.0 million | $19.7 million |
| Non-interest expense | $122.3 million | $126.3 million |
| Net income | $94.1 million | $64.8 million |
| Diluted EPS, Class A | $4.49 | $3.10 |
| Net interest margin, total company | 5.09% | 4.65% |
- Net income rose 45%. Total net interest income and non-interest income increased, while loan-loss provision and operating expenses declined. TRS drove much of the improvement: its $67.3 million net income was about 72% of company earnings. Traditional Banking earned $26.5 million; Mortgage Banking earned $0.3 million.
- The 5.09% company-wide margin includes the unusually high-yield, short-term TRS RAL business. Traditional Banking margin was 3.55%, down 2 basis points from 2010.
- Operating cash flow was $123.6 million; investing activities used $279.2 million and financing activities used $267.8 million. Cash and cash equivalents fell $423.4 million to $363.0 million.
- At year-end, assets were $3.42 billion, gross loans $2.29 billion, deposits $1.73 billion and stockholders’ equity $452.4 million. Deposits declined $568.7 million, while FHLB advances increased to $934.6 million from $564.9 million. Nonperforming loans were $23.3 million (1.02% of loans), down from $28.3 million (1.30%); the allowance was $24.1 million, or 1.05% of loans.
- Capital was strong against stated regulatory thresholds: company total risk-based capital was 24.74%, Tier 1 risk-based capital 23.59% and Tier 1 leverage 14.77%. The Bank was classified as well-capitalized.
Material changes and unusual items
- TRS electronic refund check fees increased 50% to $88.2 million; RAL originations fell to $1.04 billion from $3.01 billion after the IRS ended access to its Debt Indicator and the Bank reduced its maximum individual RAL to $1,500. RAL net credit losses/provision were $11.6 million, versus $8.1 million in 2010.
- Traditional Banking provision fell to $6.4 million from $11.6 million, and net charge-offs declined. However, impaired loans increased to $77.2 million from $51.3 million, largely reflecting TDR maturity extensions; TDR balances were $67.0 million, of which $6.4 million were on non-accrual.
- Non-interest income included a $2.9 million gain on the Bowling Green branch sale and $2.3 million of net gains on securities sales and calls. The FDIC settlement reduced a previously accrued $2.0 million civil penalty to $0.9 million, producing a $1.1 million pre-tax benefit in the fourth quarter. Mortgage servicing rights incurred a $203,000 impairment charge.
- Mortgage Banking income declined 33% to $3.9 million; fixed-rate secondary-market originations fell to $134 million from $289 million. Management said it did not expect 2012 mortgage volume to reach 2011 levels.
Outlook, risks and contingencies
- Under its December 2011 FDIC agreement, RB&T may offer RALs through the first-quarter 2012 tax season but must cease the product after April 30, 2012. Management expects this to materially reduce net income in 2013 and beyond; RALs represented about 35% of 2011 TRS net income. Management expects TRS to remain a material contributor, but anticipates increased competition and pressure on ERC/ERD volume and margins. The FDIC-approved ERO oversight plan imposes additional training, auditing, monitoring and approval requirements.
- Management cited continuing downward repricing of loans and investments as a source of pressure on traditional net interest income and margin. Its interest-rate model showed net interest income, excluding TRS and loan fees, declining 2.42%, 4.61% and 4.86% under parallel rate increases of 100, 200 and 300 basis points, respectively.
- Liquidity relies on deposits, brokered deposits, FHLB advances and other borrowing lines. The loan-to-deposit ratio excluding brokered deposits was 140% at year-end. For the 2012 tax season, the Bank had obtained $300 million of short-term FHLB advances and anticipated $200–$300 million of brokered deposits; the filing later reports $252 million of brokered CDs obtained in the first quarter of 2012.
- On January 27, 2012, the Bank acquired selected assets and assumed substantially all deposits and certain liabilities of failed Tennessee Commerce Bank. It acquired about $220 million of assets and assumed about $950 million of liabilities, including $948 million of deposits, with an FDIC payment of $785 million and a $57 million asset discount. The filing says most acquired deposits were expected to leave after repricing; purchase accounting remained subject to finalization.
- A putative class action alleges improper overdraft-fee practices; management could not estimate a potential loss. Other risks include credit deterioration, interest-rate and funding sensitivity, dependence on JH and Liberty (about 60% of TRS gross revenue in 2011), regulatory compliance and the uncertain impact of regulatory changes. The filing reported effective internal control over financial reporting and an unqualified audit opinion.
Most important facts for investors to verify
- How quickly earnings and margins change after RALs cease, and whether ERC/ERD activity retains customers and profitability under the ERO plan.
- First-quarter 2012 TRS results, RAL loss experience and actual short-term funding costs and maturities.
- Deposit stability and funding concentration, including the run-off of brokered deposits and acquired Tennessee Commerce Bank deposits, and the resulting liquidity and borrowing needs.
- Credit trends behind rising impaired loans and TDRs, adequacy of the allowance, and performance of commercial real estate, home-equity and newly purchased loans.
- Resolution and potential financial exposure from the overdraft-fee lawsuit, and continued compliance with FDIC requirements.
- Integration and final fair-value accounting for the Tennessee Commerce Bank transaction, including actual deposit retention and any subsequent credit deterioration.