Republic Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; financial statements are unaudited. Republic is a Kentucky-based bank holding company operating traditional banking, warehouse lending, mortgage banking, tax refund products and consumer credit businesses. Unless noted, amounts below are in millions.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $48.3 | $39.4 | $147.9 | $114.4 |
| Provision for loan losses | $4.2 | $2.5 | $21.6 | $9.5 |
| Noninterest income | $10.4 | $11.3 | $48.2 | $47.0 |
| Noninterest expense | $38.0 | $33.5 | $112.7 | $97.9 |
| Net income | $10.7 | $9.8 | $40.8 | $35.9 |
| Diluted EPS, Class A | $0.51 | $0.47 | $1.96 | $1.73 |
| Net interest margin | 4.17% | 3.65% | 4.34% | 3.62% |
- Q3 net income rose 9%; nine-month net income rose 14%. Net interest income increased 23% in Q3 and 29% year to date, primarily from loan growth, higher yields and fee income from consumer credit products.
- Q3 noninterest income fell 8%, mainly reflecting lower mortgage banking income; year-to-date noninterest income increased 3%. Expenses rose 13% in Q3 and 15% year to date, reflecting staffing and growth initiatives, as well as property impairment.
- At September 30, total assets were $4.99 billion, loans $3.96 billion gross, deposits $3.35 billion and stockholders’ equity $633 million. Since year-end 2016, loans increased $147 million, deposits $189 million and equity $29 million.
- Cash and cash equivalents were $330 million, up from $289 million at year-end. For the first nine months, operating cash flow was $67.5 million, investing cash flow was negative $157.1 million, financing cash flow was positive $130.2 million, and cash increased $40.6 million.
- Period-end borrowings included $757.5 million of FHLB advances, $173.3 million of repurchase agreements and short-term borrowings, and a $41.2 million subordinated note. FHLB advances declined $45 million from year-end. Cash, available FHLB capacity of $337 million, unsecured lines of $125 million and unencumbered securities of $313 million were identified as liquidity resources.
- The loan-to-deposit ratio excluding brokered deposits was 132%, versus 138% at year-end. The company said it met Board-approved liquidity policies but expected to operate near internal minimums and could fall short of them at times while managing for earnings.
- Regulatory capital ratios remained above well-capitalized thresholds. At September 30, the Bank’s total risk-based capital ratio was 13.77%, common equity tier 1 ratio 12.83%, and Tier 1 leverage ratio 11.41%.
Material changes and operating trends
- Traditional Banking loans grew 5% from year-end, led by commercial real estate, commercial and industrial, and construction lending; owner-occupied residential and correspondent loans declined. Management’s stated strategy is to shift balance-sheet growth toward commercial lending while also expanding agency-eligible mortgage originations for sale.
- RCS, now a separate reportable segment because of its growth, generated $1.6 million of Q3 net income versus $1.0 million a year earlier. Average RCS loans rose to $48 million from $19 million; the segment’s Q3 provision increased to $4.5 million from $2.1 million.
- Tax Refund Solutions’ Q3 net loss remained approximately $1.1 million, consistent with the segment’s seasonal second-half losses as it prepares for tax season. For the first nine months, Easy Advance originations rose to $329 million from $123 million; related provision expense increased to $6.8 million from $2.9 million.
- Mortgage Banking income was $1.1 million in Q3, down $2.0 million year over year. The prior-year quarter included a nonrecurring gain of about $1.1 million from a bulk sale of $71 million of mortgage loans; lower refinance activity also reduced current-period results. Secondary-market originations were $43 million versus $59 million.
- Company-wide allowance for loan and lease losses increased to $40.2 million from $32.9 million at year-end. Net charge-offs were $14.4 million for the first nine months, versus $6.5 million in 2016; the allowance-to-loans ratio was 1.02%, compared with 0.86% at year-end.
- Asset-quality ratios were mixed: nonperforming loans were 0.41% of loans versus 0.42% at year-end, while delinquent loans 30 days or more were 0.30% versus 0.24%. Nonperforming assets were $16.5 million, down from $17.5 million.
Outlook, risks and unusual items
- Management said further Federal Funds rate increases could support near-term net interest income and margin, but warned that higher funding costs or a flatter yield curve could reduce that benefit. Its model projected net interest income increases across modeled rate-up scenarios through +400 basis points, but results depend on uncertain assumptions and actual rate movements.
- Management expected warehouse-line usage to remain below comparable 2016 levels amid lower mortgage refinance activity and expectations of higher long-term rates. Warehouse commitments were $1.1 billion, with Q3 average usage of 49% versus 62% a year earlier.
- For the 2018 tax season, Republic planned to raise the maximum Easy Advance amount. Management expected this to increase loan volume absent other changes and cautioned that larger volume could heighten credit losses. EA repayment and loss outcomes depend in part on tax refund funding patterns.
- RCS loans generally yield more but carry higher credit risk; a significant portion of customers are subprime or near-prime. The RCS allowance was 22.71% of segment loans at quarter-end, up from 15.40% at year-end, as reserves and historical loss factors increased.
- Unusual or period-specific items included $1.6 million of Q3 accretion from the early payoff of one loan acquired in 2012 FDIC-assisted transactions; $965,000 of Q3 impairment on premises held for sale; and the nonrecurring 2016 mortgage-loan bulk-sale gain noted above. Hurricane Irma did not meaningfully affect reported results, according to management.
- Other disclosed risks include interest-rate and liquidity exposure, loan defaults, competition, changing regulation, cyber and information-security incidents, and the uncertainty of future economic conditions. The filing reports no pending or threatened legal matter known to management expected to cause a material adverse change.
Important facts for investors to verify
- Whether rising RCS charge-offs and reserve requirements continue, and how credit performance develops as the portfolio grows.
- Whether Easy Advance losses remain consistent with assumptions, particularly after the planned increase in maximum advance size for 2018.
- How loan and deposit growth, funding costs, brokered deposits and the 132% loan-to-deposit ratio excluding brokered deposits affect liquidity and margins.
- Whether mortgage originations and warehouse-line usage recover, and how much earnings depend on seasonal tax products and other nonrecurring items.
- The effect of the planned CECL credit-loss standard adoption: management expected a substantial but not yet quantified increase in the allowance.