Republic Bank & Trust

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Republic Bancorp, Inc.(NASDAQ: RBCAA), headquartered in Louisville, Kentucky, is the holding company of Republic Bank & Trust Company (the “Bank”).

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Republic Bancorp, Inc. (“Republic” or the “Company”) is pleased to report third quarter net income of $17.4 million, a 63% increase over the third quarter of 2017, resulting in Diluted Earnings per Class A Common Share (“Diluted EPS”) of $0.83. Year-to-date net income was $60.5 million, a $19.8 million, or 48%, increase from the same period in 2017, resulting in return on average assets (“ROA”) and return on average equity (“ROE”) of 1.57% and 12.23% for the first nine months of 2018.

Pre-tax earnings for the third quarter of 2018 increased 17% over the third quarter of 2017. As with the previous two quarters of 2018, the Company’s performance metrics for the third quarter of 2018 were positively impacted by the 2017 Tax Cuts and Jobs Act (“TCJA”)⁽¹⁾, which, among other things, lowered the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The Company estimates that the lower effective tax rate alone benefitted its third quarter 2018 metrics by increasing net income approximately $1.9 million, Diluted EPS by $0.09, ROA by 0.15%, and ROE by 1.13%. In addition to the income tax benefit received from the TCJA, the Company also recognized an additional $2.8 million in federal income tax benefits during the third quarter of 2018 as discussed later in this release.

Steve Trager, Chairman & CEO of Republic commented, “We remain excited with the continued growth in our pre-tax earnings this quarter and are pleased to optimize the benefits of the changing federal tax regime. While both loan and deposit origination activity remain solid at our Core Bank, the current interest-rate environment has fueled fierce competition for many bank products and will continue to present challenges for all players in the industry to grow in the future. Despite these challenges, we remain optimistic about our ability to grow prudently, while managing both the credit risk in our loan portfolio and the interest rate risk of the organization.”

The following table highlights Republic’s financial performance for the third quarters and nine months ended September 30, 2018 and 2017:

Results of Operations for the Third Quarter of 2018 Compared to the Third Quarter of 2017

Core Bank⁽²⁾– Net income from Core Banking was $15.4 million for the third quarter of 2018, an increase of $5.1 million, or 50%, over the third quarter of 2017. Benefitting from growth in net interest income and noninterest income, as well as continued strong credit quality, the Core Bank’s pre-tax income for the third quarter of 2018 increased $1.6 million, or 10%, over the same period in 2017. Growth in the Core Bank’s bottom line outpaced growth in pre-tax income due to approximately $4.0 million in total benefits recognized during the quarter resulting from the previously mentioned federal income tax benefits.

Core Bank net interest income increased $3.0 million, or 7%, over the third quarter of 2017 driven by an increase of eight basis points in the Core Bank’s net interest margin and further complemented by growth of $188 million, or 5%, in the Core Bank’s quarterly loan average. The table below presents the overall change in the Core Bank’s net interest income, as well as average and period-end loan balances by origination channel:

The primary drivers of the changes in the Core Bank’s average loan balances and net interest income for the third quarter of 2018, as compared to the third quarter of 2017, follow:

• The Traditional Network experienced solid growth in average loan balances of $215 million, or 7%, from the third quarter of 2017 to the third quarter of 2018. This growth was largely concentrated in the commercial loan sector, with average commercial real estate balances growing $101 million, or 9%, and average commercial and industrial balances growing $55 million, or 20%.
• The Core Bank’s 2012 FDIC-Acquired loans contributed $1.7 million less in net interest income during the third quarter of 2018 compared to the same period in 2017, as substantially all of the remaining accretable discount on the acquired loans had been recognized by December 31, 2017.

• The difference between the Core Bank’s net interest margin and net interest spread was 30 basis points during the third quarter of 2018 compared to 23 basis points during the third quarter of 2017. The differential between the net interest margin and net interest spread represents the value of the Core Bank’s noninterest-bearing deposits and stockholders’ equity to its net interest margin. Because of rising short-term interest rates from September 30, 2017 to September 30, 2018, as measured by the increase of 100 basis points in the Federal Funds Target Rate during this period, the contribution of the Core Bank’s noninterest-bearing deposits and stockholders’ equity to the net interest margin increased significantly.
• An internal change in the way the Company assigns a cost of funds to Warehouse Lending (“Warehouse”) through its Funds Transfer Pricing (“FTP”) methodology resulted in the Warehouse segment’s fluctuation in net interest income. Effective January 1, 2018, the Company changed its Warehouse FTP methodology to be more consistent with the FTP methodology used for other Core Bank loan products with similar pricing and duration characteristics. This change in FTP methodology had a $272,000 negative comparable impact on the Warehouse net interest income for the third quarter of 2018 and a corresponding positive comparable impact of $272,000 to the Traditional Network’s net interest income.

The Core Bank’s provision for loan and lease losses (“Provision”) decreased to $513,000 for the third quarter of 2018 from $609,000 for the same period in 2017, with the Provision for both periods primarily reflecting general loss reserves for loan growth with no significant loan-specific losses recorded during either period. Overall, the Core Bank’s credit quality metrics remained strong from period to period, with the Core Bank’s ratios of nonperforming loans to total loans and delinquent loans to total loans remaining near historically low levels.

The table below presents the Core Bank’s credit quality metrics:

Noninterest income for the Core Bank was $9.4 million during the third quarter of 2018, a $1.1 million, or 13%, increase from the $8.3 million achieved during the third quarter of 2017. The following factors primarily drove this increase:

• Mortgage banking income increased $258,000, with secondary market loan originations increasing from $43 million during the third quarter of 2017 to $49 million during the third quarter of 2018.
• Interchange fee income increased $289,000, or 12%, driven primarily by a 10% year-over-year increase in active debit cards.

Core Bank noninterest expenses increased $2.5 million, or 7%, during the third quarter of 2018 compared to the third quarter of 2017. The following primarily drove the increase:

• Salaries and employee benefits expense increased $2.3 million, or 13%, driven partially by annual merit increases, partially by an increase of approximately 87 Core Bank full-time-equivalent employees (“FTEs”) over the previous 12 months, and partially by a $1.1 million increase in incentive compensation, as the Company remained on pace during the first nine months of 2018 to achieve some of its more aggressive budgeted targets for the year, resulting in expected higher incentive payouts.
• New and upgraded technology implemented in the previous 12 months to support several key strategic Core Bank initiatives caused data processing expenses to increase $495,000, or 33%. Such initiatives include improving the Company’s client relationship management system, its online banking functionality, and the overall security of client information and assets.
• Offsetting the increases above, Occupancy expense decreased $493,000. During the third quarter of 2017, the Core Bank recorded a $907,000 impairment charge for a property the Company began marketing for sale. Partially offsetting the impact of this prior-year non-recurring item was an 8% increase in depreciation expense associated with facility expansions and renovations from the previous year.

Republic Processing Group⁽⁴⁾

Republic Processing Group (“RPG”) reported net income of $2.1 million for the third quarter of 2018 compared to $495,000 for the same period in 2017, with the previously mentioned income tax benefits contributing approximately $712,000 to the increase. Strong revenue growth within the Republic Credit Solutions (“RCS”) segment drove the majority of the increase in RPG’s net income for the quarter. RCS profitability remains concentrated in its line-of-credit product, with revenues for this product increasing $1.5 million, or 23%, from the third quarter of 2017.

Partially offsetting revenue growth within the RCS segment, the Tax Refund Solutions (“TRS”) segment of RPG reported an expected net loss of $452,000 for the third quarter of 2018 compared to a net loss of $1.1 million for the third quarter of 2017. The TRS segment of RPG accounts for a significant portion of RPG’s annualized revenues but derives substantially all of its revenues during the first and second quarters of the year and historically operates at a net loss during the second half of the year, as the Company prepares for the next tax season.

Total Company Income Tax Expense

In addition to the income tax benefit received from the TCJA, Republic also recognized additional federal income tax benefits of approximately $2.8 million during the third quarter of 2018 as part of preparing its fiscal-year 2017 federal tax return due October 15, 2018. The Company considers approximately $2.6 million of the $2.8 million in federal income tax benefits to be nonrecurring in nature, with a portion of the remaining benefits to be realizable in the future.

During the third quarter, the Company completed two separate studies and a tax-accounting-method change that positively impacted income taxes for its 2017 federal tax return and amended filings dating back to fiscal year 2014. As it relates to the two separate studies, the Company recorded benefits for both a fixed asset cost-segregation study and a Research and Development (“R&D”) tax-credit study. The R&D tax-credit study resulted in the recognition of R&D credits dating back to 2014. Due to the innovative nature of its business operations, the Company is optimistic that it will continue to qualify for a portion of these federal tax credits annually into the future. The Company also recorded a nonrecurring tax benefit as a result of a cost-segregation study that assigned revised tax lives to select fixed assets based on a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the TCJA rate of 21% it previously expected to receive for these deductions in the future.

In addition to the two studies, the Company also filed for an automatic change in accounting method in combination with its 2017 federal tax return related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The Company estimates that the $2.8 million benefit of all three of these distinct tax-related items also increased its third quarter 2018 Diluted EPS by $0.13, ROA by 0.22%, and ROE by 1.68%.

Republic Bancorp, Inc. (the “Company”) is the parent company of Republic Bank & Trust Company (the “Bank”). The Bank currently has 45 full-service banking centers and one loan-production office throughout five states: 32 banking centers in 11 Kentucky communities - Covington, Crestview Hills, Elizabethtown, Florence, Frankfort, Georgetown, Lexington, Louisville, Owensboro, Shelbyville, and Shepherdsville; three banking centers in southern Indiana – Floyds Knobs, Jeffersonville, and New Albany; seven banking centers in six Florida communities (Tampa MSA) – Largo, Port Richey, St. Petersburg, Seminole, Tampa, and Temple Terrace; two banking centers in Tennessee – Cool Springs (Franklin) and Green Hills (Nashville MSA) and one loan-production office in Brentwood (Nashville MSA); and one banking center in Norwood (Cincinnati), Ohio. The Bank offers internet banking at www.republicbank.com. The Bank also offers separately branded, nation-wide digital banking at www.mymemorybank.com. The Company has $5.2 billion in assets and is headquartered in Louisville, Kentucky. The Company’s Class A Common Stock is listed under the symbol “RBCAA” on the NASDAQ Global Select Market.

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Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in the preceding paragraphs are based on our current expectations and assumptions regarding our business, the future impact to our balance sheet and income statement resulting from changes in interest rates, the ability to develop products and strategies in order to meet the Company’s long-term strategic goals, the economy, the ability for the Company to benefit from future research and development tax credits, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Actual results could differ materially based upon factors disclosed from time to time in the Company’s filings with the U.S. Securities and Exchange Commission, including those factors set forth as “Risk Factors” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2017. The Company undertakes no obligation to update any forward-looking statements. These forward-looking statements are made only as of the date of this release, and the Company undertakes no obligation to release revisions to these forward-looking statements to reflect events or conditions after the date of this release.