Republic First Bancorp, Inc. (FRBK) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to the First Quarter 2021 Earnings Conference Call. My name is Adrian, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, this conference is being recorded. I’ll now turn the call over to Frank Cavallaro, CFO. Frank, you may begin.
Frank Cavallaro: Good morning, and thank you for joining us today. Welcome to the first quarter earnings call for Republic First Bancorp, Inc. Here in the room with me, I have Vernon Hill, our Chairman and CEO; as well as Andrew Logue, our President and Chief Operating Officer. At this time, I’ll turn it over to Mr. Hill.
Vernon Hill: Good morning. Thank you all for joining the call. We’re pleased to report on you – report to you on the financial progress of the Republic Bank. As we’ve said in prior calls as the momentum is building here as the of Power of Red model continues to show strength in every market. Net income for the quarter after tax was $7.1 million or $0.09 a share, up over – compared to $4.1 million in the first quarter of last year and substantially up over the fourth quarter of 2020. The profit includes the expense of a $3 million addition to our loan loss reserve. As we’ve told you in the past we’d like to get the loan loss reserve to about 1% of loans. The growth – we had the growth in the top line, and we continued to enforce our jaws effect with the 53% growth in the top line and non-interest expense for the quarter only grew 8%. Again, deposits grew very strongly. Year-over- deposits grew 48% to $4 billion – $4.4 billion. Again, this quarter, demand deposits are growing tremendously fast. And now – go ahead, Frank. Let’s listen to him.
Frank Cavallaro: On a year-over-year, our non-interest-bearing demand deposits grew over $500 million or 84% on a percentage basis, that’s our fastest-growing segment.
Vernon Hill: And yet those of you who know me know, we love to talk about store growth. Our new stores, the glass cube, in the last 12 months have grown $47 million a store. And when you factor in some of the older stores from Republic, the average is $45 million a store. I could never accomplish that in the old day’s commerce. It’s an unbelievable number. Loans grew 44% year-over-year, and that includes $600 million of PPP. Asset quality is very important to us and remains very strong. Non-performing assets declined slightly to 0.27%. Our total loan deferrals, Frank, totals three loans?
Frank Cavallaro: Three customer relationships for a total of 3 – $2.7 million of loans, far less than – it’s about 0.1% of the total portfolio.
Vernon Hill: And we don’t see any trend of weakening in asset quality. And I’ll take a few minutes and go through some of the pages in the press release, where it’s easy to read. On Page 2, just shows you the growth in assets loans and deposits, quarter to – year-over-year, if I’m reading this right. Without PPP, deposits grew 48% and loans grew 44%. On Page 3, we’ve shown you the quarterly net income back to the first quarter of 2020 through the first quarter. And you can see the progression of the bottom line. We’ve had five straight quarters of up. PPP was a very important part of what’s happened in this bank, not only in what we learned, but the transformation of the brand. Frank, why don’t you highlight that?
Frank Cavallaro: Yes. And as we reported previously in the first round of PPP last year, we originated about $680 million in loans through March 31 of this year. In the second round of PPP, we’ve done another $240 million in PPP loans. That number continues to grow. By the end of this, we expect to have originated nearly $1 billion in PPP loans for our small business customers.
Vernon Hill: And as you said, we said in the last call, and it’s still true, 50% or more of the PPP loans, rounds 1 and 2, are new customers to the bank as we fill the void that the very large banks have created. We have $16 million in deferred fees from PPP 1, and we’re getting additional fees from PPP 2. Is that right?
Frank Cavallaro: Yes, the combined deferral as of March 31 is $16 million, which we’ll carry forward over the life of these loans until they’re paid off.
Vernon Hill: On Page 4, if you have the press release, we laugh about the loan deferrals. It was such a big deal last quarter. As Frank said, we have three relationships filled in $400 million? No.
Frank Cavallaro: You forgot the peak, we had a – we’ve reached a peak of nearly $444 million, and that’s come all the way down to $3 million at the end of this quarter.
Vernon Hill: On three wide level relationships. Let me just hide the highlights. The margin increased this quarter – some of that was the PPP fees. I think those are the highlights – have I forgotten anything, Frank?
Frank Cavallaro: No, I want to talk about CECL. We continued to defer the adoption of CECL as we’re allowed to do under the Economic Aid Act that was approved in December. We will most likely wait until January 1, 2022 to adopt the CECL guidance for the allowance calculation.
Vernon Hill: Okay. We’ll open it up. Fire away.
Operator: And our first question is from Brian Schiraldi from Piper Sandler. Your line is open.
Frank Schiraldi: Hi, it’s Frank Schiraldi. Good morning, everyone.
Vernon Hill: Hi, Frank.
Frank Schiraldi: I know banks are seeing – and you guys are obviously seeing super strong deposit growth. I wonder if you could just give a little more color on the drivers. I recognize it’s just likely a combination of stuff, but what’s the primary story? Is it PPP and borrowers bringing over funds? Is it new retail relationships? Is it higher balances given the stimulus? What’s the primary driver been?
Vernon Hill: Yes, yes and yes. The PPP had an important effect on this bank. We’ve gathered a lot of midsized actual accounts from the big banks that had an effect, and we see it every day. PPP loans we made a year or so ago are resulting in new relationships now. So we see it all the time. So that’s driver number one.
Frank Cavallaro: Yes, even in the first quarter of this year, which is typically a slower quarter for us as far as deposit growth, because of customer needs, we grew $350 million in deposits, and more than half of that was driven by new account relationships, new deposits into the bank.
Vernon Hill: Yes. And New York, over time, what – will become more important all the time. We’re not building another branch right now in New York till we see what’s happening. But the commercial side of the business is very strong.
Frank Schiraldi: Great, thank you. And then, Vernon, you mentioned the 1% level in terms of, I guess, the reserve to loan ratio that you’re striving towards. Just wondering, given the strong revenue trends and the PPP income, do you think you get there over the next couple of quarters? Or do you get there with CECL? What’s the general time line on that?
Vernon Hill: Yes. And the 1% is just a range. I guess it’s my old habits where everybody had reserves at #% of loans. Let’s just get us through, 20? 28 or something like that?
Frank Cavallaro: If you take out the PPP impact, which we think will run off over the remainder of this year, we’re in the 80 to 85 basis points range. It will be driven by growth. It will be driven by what happens to the economy, even at CECL. We continue to run CECL parallel to our current model. And as of March 31, we say in the release here that as of March 31, we would not be required to increase our reserve due to CECL. So we’ll just manage it and monitor it according to it.
Vernon Hill: And Frank, we’re a little vague. We have room to add more to reserve, but you’ve got to predict the loan growth number. So it’s hard to give you a number, but 0.8% to 1.0% is a good range for us. You remember the old days of commerce, we were growing so fast and you always – you always had this question. But I think this is a good number, from here to 1% is probably the range of what you’re going to see us in.
Frank Schiraldi: Okay. And then, Frank, just for modeling purposes, can you give the PPP contribution to NII this quarter, maybe versus what it was last quarter?
Frank Cavallaro:
Vernon Hill: So it was about $3 million more in the fourth quarter. But remember, we put an extra $3 million in the reserve so it’s almost a watch.
Frank Schiraldi: Got it. Okay, thank you.
Vernon Hill: Thank you, Frank.
Operator: And our next question comes from Michael Perito from KBW. Your line is open.
Vernon Hill: Hi, Michael.
Michael Perito: Hey, Vernon. Hey, Frank and Andy. How are you guys.
Vernon Hill: Good, Michael.
Michael Perito: Good. Thanks for taking my question. Just had a couple I wanted to add. On the – clearly, a good production from the PPP here. And curious if you guys have any additional stats you’re willing to share and kind of the conversion rate of these 50% of which are potential new clients or any kind of deposits account opened or anything like that?
Vernon Hill: Well, the 50% is not a projection. That’s what’s happened, right, Frank?
Frank Cavallaro: In the first wave, the first round last year, more than half of those applications that we got were from non-customers at the time.
Vernon Hill: And what you’re seeing, as I said earlier, Mike, there’s a tail here. Even though we did a PPP loan on somebody last fall, they’re just getting around the moving. So the – since going to have a long-life, I think. And what was the other thing you asked?
Michael Perito: Well, yes, I was just curious, on that point, if you guys had any kind of early indications or early stats about what that kind of conversion rate has been, right? So of the half that were new customers have – half open deposit accounts at 20 – is it anything like that or not yet?
Vernon Hill: No. No. These are 50% of the PPP customers have moved their deposit and their borrowing accounts to us. Is that right, Frank?
Frank Cavallaro: No. I think Mike’s question is, so half of the applications were from non-customers. The conversion rate – we got to drill down on, we don’t have that readily available, but I could follow-up on that for you and call you back at another time.
Vernon Hill: We’ll try to disclose it to everybody. It’s hard to actually track because sometimes they open accounts in different names, and it’s not that easy to track. But that’s the sense we’re getting. And when I’m out – the new business, I hear about PPP, every visit.
Michael Perito: Yes. No, that would be great. If that’s something you guys could drill down on and share in the future just because it feels like it should be a pretty powerful number. So it would be great to have some more specifics around it. Secondly, I was just curious, the expenses continue. You guys continue to do a nice job there. I think I saw in the release, there are a couple of new stores coming down the pike. Just wondering if you have any update on kind of how we should be thinking about expense growth over the near future here.
Vernon Hill: Yes. Non-interest expense is basically flat and even compared to March of last year, it’s up 8%. So how should you model expense growth?
Frank Cavallaro: Yes. Obviously, the new stores will have some impact. First quarter, we typically see merit increases in salaries, but we continue to monitor all of the expenses. So I would…
Vernon Hill: Remember – talk to him about commission income.
Frank Cavallaro: Yes. The – so as you’ve probably seen, the trend in our open mortgage – the revenue from the residential mortgage business has grown, with that, the commissions and the payouts grow there. And that kind of tails off slightly, you’ll see declines there. So the pluses and the minuses in the expenses should maintain single-digit growth year-over-year even with the new stores.
Michael Perito: Okay. Is there anything that could accelerate that? Because I’m just – from my perspective, it really feels like the M&A-related disruption in your core markets is on a high trajectory here. I think we’ve already seen quite a few large transactions in both the Philadelphia, New Jersey, New York marketplaces, but it feels like there could be even more to come. I mean, this – how do you guys kind of manage that balance, right, of taking advantage of the growth? I mean – or is there any thoughts around that, that you guys are willing to expand upon or share?
Vernon Hill: Yes. We want to take advantage of it every chance we get, in all the markets. Every merger helps us in every market that we’re in. You don’t see – you’ll see new stores being built, but not like the old age, but you see it in recruiting commercial loan teams when these banks get merged. So you’ll definitely see some growth from us there.
Michael Perito: Great. Excellent. Thank you for taking my questions guys. Appreciate it.
Vernon Hill: Thank you, Mike.
Operator: And our next question comes from from CPA Partners. Your line is open.
Unidentified Analyst: Hi, thanks for taking my questions, gentlemen. Just to clarify things, were there any PPP fees within the first quarter?
Frank Cavallaro: Yes. The answer that we provided earlier, the $7 million worth of PPP fees that were amortized into income during the quarter.
Unidentified Analyst: Okay. Great. And going over your net interest income. I noticed there was like a 60 bp increase in loan receivables. Can you tell – from December 31 to March 31, can you give more color on why you were able to get a better yield on your loan receivable portfolio?
Vernon Hill: Well, included in that are the fees from the PPP loans. So interest – PPP fees are recorded as interest income in loan – in the loan line. So that’s the big driver there.
Unidentified Analyst: Okay. So if you were looking at your non-interest income, which I thought what the fees were, you also had a very good increase. What was that increase from?
Frank Cavallaro: Primarily residential mortgages. We’re also seeing some additional revenues from the new Visa deal that we announced last year. We converted this quarter. So there’s revenue enhancement there. They’re the primary drivers. And then in addition, the service fees on deposit accounts as deposits continue to grow, there’ll be fee-based revenue that comes along with that.
Vernon Hill: And most of you know, commercial deposit accounts produced at low fees, which are cash management services. And the demand deposit growth is probably in commercial accounts, primarily, right? Frank?
Frank Cavallaro: A lot of it is, yes.
Unidentified Analyst: Yes. Okay, great. Thanks.
Vernon Hill: Thank you.
Operator: And our next question comes from Bill Collins, Private Investor.
Vernon Hill: Hey, Bill.
Bill Collins: Hey, how are you doing?
Vernon Hill: Doing great.
Bill Collins: Vernon, from the beginning, my mother used to work for you, Lillian, for Commerce Bank. I’ve been in the bank a long time. I’ve lost a lot of money. I continue to – I try to accumulate. Is there anything we could do to make this more attractive and get any – I hear the same thing every earnings call. We beat all the estimates, top, bottom and the stock still – it’s up $0.05 today. It’s…
Vernon Hill: Yes. No, it’s our job to perform at the bank level. It’s our job to tell the stock story. I agree the stock is selling under what we think its real value is, and it’s my job to go out and get it up. So no one agrees with you more than me.
Bill Collins: All right. Sounds good. Thank you.
Vernon Hill: Thank you.
Operator: And we have no further questions. I’ll give the call back over for final remarks.
Vernon Hill: All right. We’re all done.
Frank Cavallaro: We are.
Vernon Hill: Thank you all.
Frank Cavallaro: Thank you.
Operator: Thank you, ladies and gentlemen. This concludes today’s conference call. Thank you for participating. You may now disconnect.
