Republic Bancorp, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Republic is a Kentucky-based bank holding company with Traditional Banking, Warehouse Lending, Mortgage Banking, and Republic Processing Group (RPG) businesses.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $31.4m | $28.4m | $91.5m | $83.3m |
| Provision for loan and lease losses | $2.2m | $1.5m | $3.3m | $1.5m |
| Non-interest income | $7.8m | $6.5m | $40.3m | $36.3m |
| Non-interest expense | $28.2m | $25.2m | $86.5m | $81.7m |
| Income before tax | $8.8m | $8.3m | $42.0m | $36.4m |
| Net income | $5.6m | $5.2m | $27.7m | $23.6m |
| Diluted EPS, Class A / Class B | $0.27 / $0.25 | $0.25 / $0.24 | $1.34 / $1.22 | $1.13 / $1.08 |
- Q3 net income increased 8%; nine-month net income increased 18%. Nine-month non-interest income included $17.3m of net refund transfer fees, versus $16.1m a year earlier.
- Net interest margin was 3.31% in Q3 versus 3.38% a year earlier, and 3.26% for the nine months versus 3.32%. Loan growth lifted net interest income, while lower asset yields and reduced accretion on acquired loans pressured margins.
- Total assets were $4.04bn, up from $3.75bn at year-end; gross loans were $3.30bn, up 8%, and deposits were $2.37bn, up 15%. Non-interest-bearing deposits rose to $638m from $503m.
- Q3 provision rose notably at RPG, reflecting growth in a small-dollar consumer loan program. Nine-month net charge-offs were $0.8m, down from $0.9m; allowance was $27.0m, or 0.82% of loans.
- Operating cash flow for the first nine months was $35.3m; investing activities used $272.6m and financing activities provided $255.2m. Cash and cash equivalents ended at $90.7m, versus $72.9m at year-end.
Balance sheet, funding, and credit quality
- At September 30, liabilities were $3.46bn and stockholders’ equity was $574.7m. Borrowings included $711.5m of FHLB advances, $309.6m of repurchase agreements and other short-term borrowings, and a $41.2m subordinated note.
- The loan-to-deposit ratio, excluding brokered deposits, was 151%, versus 156% at year-end. Available borrowing capacity included $559m from the FHLB and $166m of unsecured lines. Management reported the Bank was well-capitalized; Bank total risk-based capital was 16.28%, common equity Tier 1 was 15.38%, and Tier 1 leverage was 11.72%.
- Non-performing loans were $23.2m, or 0.70% of loans, versus $23.7m, or 0.78%, at year-end. Non-performing assets declined to $26.0m from $34.9m, largely as other real estate owned fell to $2.8m from $11.2m. Delinquent loans were 0.36% of loans, compared with 0.52%.
- Total troubled debt restructurings were $56.4m; $14.9m were on non-accrual. Management stated that 73% of TDRs were performing to modified terms.
Changes, outlook, and material items
- Growth was led by loans, deposits, and warehouse lending. Warehouse net interest income rose 48% in Q3 and 84% year to date, although usage and balances can fluctuate with mortgage-market conditions. Commercial and industrial lending expanded as the Bank pursued a more diversified commercial loan mix.
- Management expects continuing pressure on net interest income and margin from asset-yield compression. The subordinated note repriced from a fixed rate to three-month LIBOR plus 1.42% on October 1; management estimated Q4 interest expense savings of about $445,000 versus Q3, subject to LIBOR.
- RPG’s tax refund transfer business is seasonal and typically incurs losses in the second half as it prepares for tax season. Management cited rising RT volume but lower margins on some newer contracts, with no near-term reversal anticipated.
- After quarter-end, Republic agreed to acquire Cornerstone Bancorp in an all-cash transaction for approximately $32.3m, funded from existing resources. The deal, subject to regulatory and shareholder approvals, was expected to close in Q1 2016. Cornerstone reported approximately $243m of assets and $216m of liabilities at September 30.
- Republic planned to launch “Easy Advance” in Q1 2016: a $750 tax-refund advance, with fees paid by tax providers and no customer recourse if the refund is insufficient. Management said projected volume and credit losses were uncertain; risk depends in part on tax-provider marketing and IRS refund patterns.
- Risks include interest-rate and margin sensitivity, mortgage-market-driven warehouse volatility, credit losses (particularly on Easy Advance and other RPG lending), regulatory and compliance exposure in consumer products, dependence on third-party partners and tax-season processing, and concentrated large-depositor funding. The filing reports no known pending or threatened legal proceeding expected to materially harm the Company. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Cornerstone’s acquisition receives required approvals, closes on schedule, and is funded and integrated as planned.
- Easy Advance launch volume, underwriting performance, IRS repayment outcomes, and resulting provision expense.
- Whether loan and deposit growth can offset continued margin compression, and whether the subordinated-note repricing produces the anticipated savings.
- Credit trends in new consumer lending, TDR performance, and the allowance relative to loan growth and losses.
- Warehouse Lending utilization and funding needs, as well as the stability and cost of deposits, brokered funding, and large depositor relationships.