Republic Bancorp, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the quarter and nine months ended September 30, 2013; balance-sheet comparisons are to December 31, 2012. Republic operates Traditional Banking, Mortgage Banking and Republic Processing Group (RPG), including tax refund services. Figures below are in millions except per-share data and ratios.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $28.5 | $28.6 | $86.4 | $130.1 |
| Provision for loan losses | $2.2 | $2.1 | $2.5 | $13.7 |
| Non-interest income | $7.5 | $34.8 | $40.8 | $155.7 |
| Non-interest expense | $26.3 | $29.8 | $87.3 | $98.4 |
| Income before taxes | $7.6 | $31.6 | $37.5 | $173.8 |
| Net income | $4.6 | $20.7 | $24.1 | $112.7 |
| Diluted EPS, Class A / Class B | $0.22 / $0.21 | $0.98 / $0.97 | $1.16 / $1.11 | $5.36 / $5.32 |
| Net interest margin | 3.54% | 3.54% | 3.55% | 5.11% |
- For the nine-month comparison, 2012 net interest income included $45.2 million from refund anticipation loans (RALs), which were discontinued in April 2012. 2012 non-interest income included $54.7 million in bargain-purchase gains from two FDIC-assisted bank acquisitions. These items materially limit comparability.
- Q3 2013 net income fell 78% year over year, primarily reflecting the $27.1 million 2012 First Commercial Bank bargain-purchase gain. Nine-month net income fell 79%, also reflecting the prior-year acquisition gains and lower RPG revenue after RAL discontinuation and termination of major tax-preparation partner contracts.
- Q3 net interest margin was unchanged year over year. Acquired-loan discount accretion contributed about $2.0 million in Q3 and $5.3 million year to date; management estimated approximately $0.6 million more accretion for the rest of 2013. Management also cited ongoing downward repricing of loans and investments as a source of future margin pressure.
- Mortgage banking income was $1.0 million in Q3, down 55% year over year, but $6.5 million for the nine months, up 16%. Rising long-term rates reduced refinancing applications and the locked-rate application pipeline.
| Balance-sheet / credit metric | September 30, 2013 | December 31, 2012 |
|---|---|---|
| Total assets | $3,331.9 | $3,394.4 |
| Gross loans | $2,553.4 | $2,650.2 |
| Deposits | $2,019.8 | $1,982.9 |
| Stockholders’ equity | $545.5 | $536.7 |
| Cash and cash equivalents | $141.6 | $137.7 |
| FHLB advances | $587.0 | $542.6 |
| Repurchase agreements and other short-term borrowings | $106.4 | $250.9 |
| Allowance for loan losses | $23.5 | $23.7 |
| Non-performing loans / total loans | 0.79% | 0.82% |
| Non-performing assets | $35.5 | $47.9 |
| Other real estate owned | $15.2 | $26.2 |
Cash provided by operating activities was $24.4 million for the first nine months; investing activities provided $56.9 million and financing activities used $77.4 million. Cash increased $3.9 million to $141.6 million. Deposits grew 2% from year-end, while loans declined 4%. The loan-to-deposit ratio excluding brokered deposits was 135%, versus 143% at year-end.
Liquidity included $317 million of additional FHLB borrowing capacity and $166 million of unsecured lines at other institutions. Republic reported the Bank as well-capitalized; at September 30, the parent’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 27.34%, 26.26% and 17.16%, respectively. The Bank’s corresponding RB&T ratios were 21.17%, 20.16% and 13.01%. Management expected to meet Basel III requirements, based on its preliminary assessment.
Outlook, risks and unusual developments
- Management expected continued pressure on net interest income and margin from asset repricing and low short-term rates. Its rate-sensitivity model projected net interest income, excluding loan fees, to decline 1.00% under an immediate 200-basis-point increase and 2.15% under a 300-basis-point increase versus base case.
- Mortgage activity was expected to remain below earlier levels following the rise in rates. Warehouse lending balances also fell as refinancing activity weakened. The bank had closed about $82 million of 15-year fixed-rate commercial real estate loans year to date, then stopped taking applications for that promotional product as market conditions changed.
- RPG faced lower refund-transfer fees, partner revenue-sharing pressure and additional competition after ending RALs. Net refund-transfer fees were $13.8 million for the first nine months, down 82%; management warned revenue could remain pressured beyond 2013. The tax-refund business is seasonal and historically incurs losses in the second half of the year.
- JHI and Liberty contract disputes drove higher legal expenses; arbitration with JHI had concluded with a decision expected in Q4 2013, while Liberty was in mediation. A putative overdraft-fee class action continued on remaining claims after the court dismissed some claims. The filing states management knew of no other pending or threatened matter expected to materially harm the company.
- After quarter-end, Republic withdrew its regulatory applications for an internal bank merger and the proposed H&R Block Bank acquisition; H&R Block terminated the purchase agreement and related discussions. The company also gave notice of planned closures of its Minneapolis and Palm Harbor branches, expected in January 2014.
- New consumer mortgage ability-to-repay and servicing rules were scheduled to take effect January 10, 2014; the company was evaluating operational and cost impacts. Other stated risks include credit quality, interest rates, liquidity and funding concentration, regulation, and execution of business plans.
Important facts for investors to verify
- Underlying earnings trends after separating 2012 bargain-purchase gains, RAL income and related prior-period provisions from recurring results.
- RPG tax-season volumes, revenue-sharing economics, and outcomes of the JHI arbitration and Liberty dispute.
- Loan-loss reserve adequacy and developments in acquired-bank, impaired, non-performing and restructured loans; also monitor the reduction in OREO.
- Deposit concentration and stability, including the uncertain long-term nature of a large deposit transfer, as well as reliance on FHLB and other borrowing capacity.
- Effects of interest-rate changes on margins, mortgage originations, warehouse lines and the fair value of securities and mortgage servicing rights.
- Actual costs and impacts of the branch closures, mortgage regulations and Basel III transition; management’s outlook is subject to substantial uncertainty.